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(CNN Business) —  

Walmart, Amazon and grocery chains like ShopRite hope to tap into a lucrative new market: Food stamp recipients who want to shop for groceries online.

For the first time, the US Department of Agriculture has given the green light for recipients of the Supplemental Nutrition Assistance Program, or SNAP, to use their benefits to buy groceries online and get them delivered to their homes, the agency said Thursday.

The retailers are kicking off a two-year pilot in New York that will enable some of the state’s 2.7 million SNAP recipients to use their benefits for online grocery orders.

ShopRite and Amazon (AMZN) will service the New York City area, while Walmart (WMT) will cover upstate locations. The USDA said FreshDirect, Safeway, Hy-Vee and Dash’s Market will join the New York pilot, and the test will eventually expand to other parts of New York, as well as Alabama, Iowa, Maryland, Nebraska, New Jersey, Oregon and Washington. It’s not yet clear which other grocery chains will be involved.

The USDA says it eventually wants the more than 38 million Americans on food stamps nationwide to be able to make online purchases, which will make it easier for some working moms, as well as the elderly and disabled, to buy food. But the move also opens up the market to online retailers.

“People who receive SNAP benefits should have the opportunity to shop for food the same way more and more Americans shop for food — by ordering and paying for groceries online,” said Agriculture Secretary Sonny Perdue. “As technology advances, it is important for SNAP to advance too.”

Online shopping makes up a tiny fraction of grocery purchases today, but analysts expect the market to grow. Amazon, Walmart and others are trying to edge out each other as buying meat and produce online becomes more popular among both high and low-income shoppers.

Tapping into the $63 billion food stamp market could give retailers a big boost in that arena.

Food stamp recipients currently buy a lot at big box stores and grocery chains.

Nearly $52 billion, or 82% of all food stamp dollars, were spent at these retailers in 2017, according to the most recent USDA data.

Walmart, Amazon and grocery chains hope to tap into a lucrative new market: Food stamps recipients who want to shop for groceries online.
Walmart, Amazon and grocery chains hope to tap into a lucrative new market: Food stamps recipients who want to shop for groceries online.
PHOTO: Patrick T. Fallon/Bloomberg/Getty Images

“It was only a matter of time before we saw SNAP benefits start to impact the online grocery world,” said Tory Gundelach, analyst at Kantar.

Key customers

SNAP recipients are already an important customer for Walmart and other grocery stores. Some 4% of Walmart’s sales in the United States come from food stamp purchases, estimated UBS analyst Michael Lasser in a report last year. Walmart declined to confirm that number.

Even small changes to food assistance benefits can impact retailers’ sales. During the government shutdown earlier this year, February benefits were handed out early, which lifted sales at Walmart and Dollar General.

“There is a lot of money that is pumped into the food store system via SNAP, so retailers are going to try and maximize that,” said Elizabeth Racine, professor of public health at the University of North Carolina Charlotte, who studies food assistance policies.

Yet Walmart and big box retailers have lost food stamp market share in recent years to convenience stores, pharmacies and dollar stores, which are rapidly opening new locations and expanding their grocery selections. Dollar General, for example, is adding produce sections to hundreds of stores in rural and urban food deserts.

Walmart, Amazon and others hope that offering food stamp recipients the opportunity to buy online will help them stand out against convenience and dollar stores that don’t offer delivery.

Prep work

The new online shopping program has been in the works for a while. The 2014 Farm Bill called for the USDA to pilot online purchasing.

The USDA is using the pilot announced Thursday to further test technical and security issues before it rolls out the program nationwide. Online purchases using food stamps require a higher level of security to prevent and detect misuse. Food stamp participants can use their benefits to buy eligible items online, but not for delivery or services charges.

Walmart (WMT)and Amazon (AMZN) also have been getting ready for online ordering to become a bigger part of the food stamp program.

Since 2017, Walmart has been testing a separate pilot at that allows customers to use food stamps to order their groceries online and then pick them up at stores. It’s currently available at 40 stores. But delivery was not an option in its pilot.

In the newly announced New York pilot, Amazon is waiving its Prime membership fee for food stamp customers who want to shop for groceries and household staples through AmazonFresh and Prime Pantry.

“What we’re trying to get out of it is furthering our commitment to making food accessible,” said Kristina Herrmann, who oversees Amazon’s participation in the USDA pilot.

Herrmann did not say how big she expected the market for using food stamps online to become, but Amazon has spent the last two years preparing for the launch of the USDA pilot. It had to build technology to accept food stamp customers’ payments and create new web features for shoppers using the program.

Delivery obstacles

Buying groceries online could appeal to food stamp recipients who live in food deserts in urban and rural areas, said Racine, the University of North Carolina professor. It could also work well for customers who don’t have reliable transportation to get to grocery stores.

However, retailers will have to overcome several obstacles before they enter this market.

Amazon and Walmart will face delivery hurdles shipping fresh produce to low-income areas, according to analysts.

“The online grocery industry already struggles with delivery of perishable goods, so that won’t go away with the acceptance of SNAP,” said Kantar’s Gundelach.

Herrmann, however, said Amazon will be able to use its existing delivery network to reach food stamp recipients in New York City neighborhoods and in rural areas in later stages of the pilot.

There are additional challenges for retailers, including finding secure places to drop off customers’ grocery orders, according to experts. Herrmann said that Amazon will offer food stamp customers several different delivery options.

Lack of internet access in rural and low-income communities could also limit food stamp recipients from ordering groceries online.

“Low income people are less likely to have reliable internet access or computers,” Racine noted. “The online ordering tool has to work well on a cell phone.”