Dive Brief:

• Amazon has plans to open 20 physical grocery stores in major U.S. cities over the next two years, with ambitions to open as many as 2,000 over the next decade, according to internal company documents obtained by Business Insider.

• Half of the first 20 Amazon Fresh-branded pilot stores will offer minimal 'click-and-collect' grocery pickup services, like the e-commerce giant's “Project X” store in its native Seattle, while the other half will offer more traditional grocery merchandise, services and store layouts. 

• A section of the Amazon documents labeled “risks/concerns” spotlight internal discussions on subjects like whether the stores would be open to the public or just to Amazon Fresh grocery delivery customers who pay $15 per month for the program. Business Insider notes that Amazon didn’t respond to a request for comment.

Dive Insight:

Amazon is increasingly making news with its brick-and-mortar plans, which also include bookstores, convenience stores and about 100 pop-ups in malls nationwide. But these rumored 2,000 grocery stores also could underline its need to refine the Amazon Fresh program.

Certainly, more Americans are turning to Amazon for groceries: While Amazon accounts for less than 1% of total U.S. grocery sales, a recent survey from financial services firm Cowen & Co. found that 18% more people shopped for groceries and other consumable goods on Amazon in the first quarter of 2016 than did in the year-ago period.

Amazon has also launched its own private-label food assortment, and earlier this month, the company eliminated Fresh’s $299 annual price in favor of a monthly fee for members of its $99 Prime product delivery service. Fresh is now $15 per month and doesn’t include Prime; moreover, non-Fresh members can access the service for $10 per order, the latest in a series of pricing changes since the effort launched.

It’s not a surprise that Amazon would need to experiment with its mix of fees and services as it scales a program that is new to the retail landscape. But some of its challenges likely include getting a handle on costs — figuring out what they entail, how they change (or don’t) with scale and how to mitigate them without turning off customers. 

In any case, by opening grocery stores (especially traditional ones), Amazon is entering a retail market already saddled with thin margins that could get badly shook up in the near future with the arrival of German grocer Lidl and the U.S. expansion of its rival Aldi (which also owns Trader Joe’s). Those no-frills grocery stores are a hit in Europe and have roiled the grocery market in the U.K., where there’s been a price war raging for years. Their approach is minimalism and low prices — as much as a third cheaper than traditional grocery stores.

That means that those German grocery companies could disrupt the market, much like Amazon did with book sales (and eventually retail in general) 20 years ago. It’s not clear that Amazon is ready for that, especially in light of evidence that its fulfillment and delivery costs are rising faster than its sales.