Amazon might be on the verge of dominating a $795 billion industry

AP Photo/Matt Rourke

Amazon's grocery sector is experiencing tremendous growth.

Even though traditional retailers like Walmart and Target are selling groceries online, more customers than ever before are turning to Amazon for food purchases.

According to a new survey from Cowen and Company, the number of people who participated who shop for groceries and other consumable goods via Amazon increased 18% in the first quarter of the year, compared to the same period in 2015.

Meanwhile, the number of Walmart grocery shoppers fell close to 5% year-over-year, while Target's grocery sales decreased nearly 4%, according to the same survey.

Cowen's monthly consumer survey is based off of responses from 2,500 US consumers, and it has charted Amazon's swiftly growing grocery business for the last two years.

The financial services firm believes that this is just the beginning for Amazon's increasingly prominent position in the grocery industry.

Flickr/Jason Walsh

"Amazon will be a top-10 player in the approximately $795 billion US Food & Beverage Grocery market by 2019… driven by its multi-platform Prime offering and a generational shift of rising online food and beverage spend, led by millennials," Cowen analysts wrote in a note on the topic in March.

However, despite recent growth, Amazon still lags behind competitors when it comes to market penetration. Fewer than one in five respondent had shopped for groceries using Amazon in the most recent quarter. Meanwhile, 54% had made a grocery purchase at Walmart, and 48% percent had shopped for food and other consumables at Target.

A number of analysts are skeptical that Amazon can make a dent in the online grocery business, as competition heats up from both traditional retailers investing in digital initiatives as well as tech startups committed solely to breaking into the food and beverage industry.

Amazon's grocery arm, AmazonFresh "will have to duke it out in the highly competitive urban market against cheaper options like Instacart, increasingly popular meal delivery services like Blue Apron, and dozens of traditional grocery chains," Jeremy Bowman recently wrote for The Motley Fool, noting that Amazon makes up just 0.8% share of total US grocery sales. "With a $299 annual fee and little traction after nine years, that's going to be a tough sell."

REUTERS/Rick Wilking

Other analysts have questioned the online grocery business more generally.

"We remain unconvinced of long-term viability of home deliveries for grocery," HSBC retail analyst David McCarthy wrote in a recent note that called the category the "emperor's new clothes."

Customers value lower prices over delivery of online grocery, McCarthy argues, noting that the online grocery market continues to grow at only half the rate of discounters that aren't online, like Aldi and Lidl.

On the other hand, Cowen argues that as millennials become a greater portion of American grocery shoppers, these trends will change. The firm estimates that close to half of older millennials will shop online for groceries in the future, as they purchase homes and form families of their own.

Getty/Alex Wong

Target and Walmart have both already seriously invested in the online grocery business.

In October, Walmart announced it would invest $900 million in its web development, with plans to spend $1.1 billion in the coming year, working to expand online grocery and scale its online assortment. Target is planning on spending even more, announcing in an analyst call in March that the company planned to spend $1.8 billion this year and $2.5 billion next year on supply chain and technology.

However, despite these efforts, Cowen argues that with the growth of Amazon Prime, Prime Now, and Prime Pantry in addition to Amazon Fresh, Amazon will be one of the companies best prepared to offer customers what they want from their online grocery experience.

In the past two years, Amazon grocery shoppers have increased on average by about 26% year-over-year every quarter, according to Cowen data. For comparison, Walmart purchasers have declined 3% year-over-year on average, while grocery shoppers at Target have declined by about 1%.

Disclosure: Jeff Bezos is an investor in Business Insider through hispersonal investment company Bezos Expeditions.