Amazon Beta Tests Grocery Delivery Service
Amazon.com has changed the way people think about buying books and it may soon be trying to accomplish the same feat in the grocery business with its new Amazon Fresh home delivery service.
The internet giant that has offered shelf-stable items and gourmet foods for sale on its website is beginning a beta test of a next day home delivery service of fresh items on Mercer Island in the state of Washington. The company is also offering a customer pickup service in Bellevue and Kirkland.
“It’s just starting out, and it’s very small. We are in the early-stage beta test, and it’s a better way to serve our grocery customers,” Craig Berman, a spokesperson for Amazon told the Seattle Post-Intelligencer. “We are offering a great selection and great prices at a really convenient experience.”
According to Mr. Berman, Amazon would offer items found in local grocery stores. Customers place orders online and have them delivered by Amazon Fresh refrigerated trucks during a prearranged hour on the following day. He also said the company was offering a “sleep tight” service where goods would be delivered in a temperature-controlled tote by 6:00 AM the next morning.
If Amazon should succeed with this service and expand it, the company would go head-to-head with similar services offered by Safeway and Albertsons in Washington State.
The choice of Mercer Island to conduct the beta test was done, said Mr. Berman, because, “It’s right in our backyard, and it’s a market we know. This is a great location for starting small. Starting in our backyard affords us the opportunity to evaluate how it’s going.”
Amazon sought to recruit Terry Drayton, the founder of long defunct HomeGrocer, to help it launch its home delivery service but the parties could not reach a deal.
Mr. Drayton expressed optimism that Amazon would succeed with its new venture even without him although he did question one aspect of the company’s plan. “I can’t believe they will do a local pickup. That’s one of those things everyone thinks is a great idea except the customers,” Drayton said. “People want you to deliver to their kitchen counters… What (customers) really want is the store to come to them.”
Discussion Question: What do you expect from an Amazon.com grocery home delivery service? What will it mean for Amazon and its competitors in the grocery market?
Is it possible that we are missing the point?
Amazon is the tech piece that is missing in many grocery chains. Tie the two together and perhaps the evolution has us buying online through Amazon and delivered by Kroger or….
I know that Kroger has all my buying information for the past several years. This piece of information (which is currently being put to no use) to Amazon, creates an immediate grocery list from which I can: go online, pull my list, check what I need, hit send and I’m done. To acquire this list in any other fashion will require the customer to do too much work and for Amazon, too much time to get patterns and habits.
I believe it is possible that Amazon is building a model and this is a test. In a year, the headlines will read “Amazon signs agreement with…to provide online shopping.”
The larger possibility involves brick and mortar and a rethinking of the basic business…a subject too large for this posting.
Hopefully Amazon has a better business model then past online grocers. Here in Canada, there hasn’t been much success with online groceries but the U.S. is a different market and it could work if done correctly.
Amazon has the advantage of a huge logistic network to leverage here, but this will be a real challenge.
First, if as it appears they are getting into foods that require refrigeration, that adds a ton of complexity and cost.
Second, the grocery business is a low margin business. While Amazon’s margins are also somewhat thin, they are better than grocers. How will Amazon deal with this? One answer is to try to focus on only specialty/gourmet items that carry higher margins, but whether this can build a business in any meaningful way is not clear.
It has also been very unclear how much of a delivery charge home delivery customers will bear.
Amazon has the scale, presence and current customer relationships to give a serious run at this, if they choose to. But the logistics challenges and market dynamics will make it very difficult even for them nonetheless.
It’s certainly an interesting test and clearly they are reinventing the business model. I admire Jeff’s passion for finding new ways to serve his customers, increase his share of their wallet, and–if he’s lucky–deliver earnings to his shareholders. Fresh Direct in the Metro New York area has been delivering premium groceries for several years with great success, which is proof that grocery delivery businesses can succeed, even in an industry known for its slim margins.
No matter how well-funded and large Amazon is, it’s hard to repeal the law of gravity. Warehousing, picking, packing and delivering groceries is a no margin business. No one has been able to make mass market online grocery shopping profitable. And very bright folks with outsider backgrounds as well as classic supermarket backgrounds have tried for more than 10 years, with huge financial commitments and excellent marketing programs. Every successful retail innovation gets copied dozens of times very quickly, by multiple competitors.
I am not sure this spells success. First, Amazon’s brand equity isn’t in grocery. Second, consumers are moving more toward urgent trips (not type & wait), ready-to-eat foods (fresh not stable) and local goods (not national).
That said, Amazon may succeed in offering center store items, that is replenishment goods, for delivery. The trick is in keeping the integrity of the business model. Webvan failed in part, because it assumed a level of volume that never materialized. Alternatively, they could’ve charged higher margins for delivery. As it was, they didn’t get the margin or the volume and failed.
One issue is the shipping mode. Shipping bottles of cleaning products (mostly water) is heavy and expensive. Consumers are accustomed to getting these items cheaply. The shipping can be more expensive than the product. Therefore, the consumer’s total ring must be high and Amazon’s delivery mechanism near-perfect.
Good Luck with that.
Amazon does a great job at the acquisition and management of customer data. They are a technology company first, and a retailer second, and the fact that they sell their technology to other online sellers is indicative of that. What they are not is a logistics company.
Companies are always looking at ways in which they can own “the last mile” between their organization and the customer. If Amazon wants to grow their grocery business, they are in a prime position to do so, knowing as much as they do about their customers. But they should leave the home delivery to companies that have this as their core competency.
Amazon’s foray into grocery home delivery is a strategy worthy of close observation. The concept has had relatively limited success over the past decade, and the road Amazon is heading down is littered with failed attempts. Webvan, Kozmo and Streamline come to mind, having invested over $2 billion before closing their doors. The momentum Amazon has going for it includes an unmatched technology and logistics infrastructure, coupled with a loyal customer base who will likely be more forgiving of any initial challenges. Amazon has adopted a smart strategy of starting small, very small, and waiting to grow based on the success of the Mercer Island test market.
Whether it’ll be successful or not depends on how you define success. But online groceries make perfect sense as part of the universe of options. One way of looking at this is to answer the question, “Where is your pantry?” That is, where is most of the food you will eat in the next week or two parked now? In densely packed urban areas, in many cases the answer would be at the local deli/grocer/etc. That is, purchases are conveniently made, frequently, nearby, so there is no need for a well stocked larder at the manse.
Interestingly, this parallels the situation with traditional retailing in the developing world where economics (or lack thereof) make a well stocked pantry impossible for billions of people, so they literally live hand-to-mouth, as we used to say, purchasing only the bare minimum they need for nearly immediate consumption.
What we have with internet purchasing/delivery is the possibility for the economically prosperous to practice the same food acquisition habits as do the economically deprived, in less developed markets. It is the working size of the pantry or larder that is the real issue here. That, coupled with the cost of bulky deliveries vs. frequent delivery/pickups.
Clearly, for densely populated areas with affluence, internet grocery retailing makes a lot of sense. Success will depend on execution (Amazon is good at that) and not over-reaching as the market moves their way. But at the same time, phenomena like MediaCart will continue to move the internet into traditional retailers, effectively merging online and offline retailing. It’s going to be a great ride!
It bears repeating that the business model here is home delivery–“online” is just a merchandising and order entry methodology. That said, I’m not sure what Amazon brings to this party. There is no doubt that the consumer benefit of this model is convenience–the modern day equivalent of Eddie Haskell helping Mrs. Cleaver put the groceries away after he carried them to her house from the supermarket. It has always seemed to me that FedEx or UPS have more of the functional expertise to make this model a success than any retailer–online or otherwise.
Amazon has been offering non-perishable grocery, gourmet and pet supply items on its site for a year or more, so it has already accumulated some experience with the marketing, sale and delivery of consumables.
Of course perishable foods are another discipline, with special handling and consumer behavior challenges that must be understood and met. The online-order home-delivery grocery business has so far met with only limited success precisely because of this complexity.
Back when Amazon.com was young, founder Jeff Bezos was fond of saying that his vision was to sell just about everything to just about anybody (or words to that effect). The Wall Street Journal asked, in a famous 1999 story, “Will Amazon.com be the Wal-Mart of the Internet?”
Interesting question still. Amazon certainly is making systematic efforts to offer virtually every type of merchandise. As Wal-Mart recognized earlier, grocery is more than a half $trillion opportunity. The size of the prize is too massive to ignore.
As a provider of UPC Data, I have YET to see any success in delivering FRESH Products on the part of my clients. packaged goods and staple items, absolutely. But purchasing fruit, vegetables, meat, seafood, chicken, etc. requires tactile feedback–something a web site (even Amazon’s) cannot provide.
What I do see is the ability to USE sales data (which Amazon does incredibly well) beyond most retail grocery stores (think Long Tail), and to turn that sales data into something that generates considerable revenue (by selling the “results” to major brands).
Other POS vendors are starting to sell their “SCAN” data directly to manufacturers, bypassing the likes of IRI and Nielsen. Amazon may be next.
What I don’t see is the “partnership” opportunity (as someone alluded to earlier)–Amazon taking the order and Kroger delivering. Most of the major retail grocery stores have had little if any success at grocery delivery.
Future thought–grocery inventory. If you can track the items being purchased, and you can track the time span between purchases of those same items, you can begin to “estimate” usage. Armed with that information, you could (theoretically) create an inventory model that would “suggest” orders.
THAT would be neat.
Success won’t be easy to achieve based on the history of past companies who have tried and failed at home delivery. But Amazon’s focus on their customers should be a big advantage.
Beyond the local online-grocery services that exist in some markets, there is another model for delivering perishable goods from online orders: Oberweis Dairy, at http://www.oberweis.com.
That company operates in a good swath of the Midwest, and while I don’t know of any competitors, I’m sure there are some.
They have customers sign up for weekly deliveries, so it’s not as freewheeling as online merchants typically are. But it is a model that seems to work.
I was there in New York in ’98 at a hotel luncheon when PriceLine.com announced the expansion of their airline and hotel bidding model to include the grocery business. The audience was comprised of e-commerce professionals. I must have been the only one in the room with a grocery background, because I was the only one who snorted champagne out of his nose.
From others’ comments regarding Amazon’s grocery initiative, some lo-fat, no-foam, half-caf mochaccinos must have exited through a few nostrils. The deal with delivering groceries is making a choice between using the excellent delivery services that already ply every neighborhood every day (FedEx, UPS, and DHL), or financing your own. Safeway financed their own because they needed absolute control over the delivery of perishables. Smart yet expensive move. I know, I use ’em. Amazon, probably the largest user of non-UPS home delivery services, is testing an approach that might combine both types of delivery. A thoughtful approach, and it enables their perishables trucks to hop from delivery to delivery faster because the drivers won’t have to mess with shelf stable stuff. Picture an Amazon perishables delivery truck at the mercy of the Seattle ferry system, and you’ll see what I mean.
My advice on this one is to stifle your snorts for the time being.
Amazon is a remarkable company. My admiration is expressed with ever increasing numbers of purchases. I have noticed that Amazon has forged business links to many retailers. In fact, the last few purchases I made were not sold by Amazon but by another retailer through the Amazon site. The development of these alternate sources via the Amazon site has done two things: 1. Increased competition. 2. Kept Amazon honest.
Now ask yourself, why would a giant like Amazon allow competition in the door? I supposed that there are several possible answers–all of them probably right. But, I believe that Amazon knows that the key to the future is managing the traffic. This allows them to hold or reduce inventory cost while expanding their product base. Additionally they get a part of every sale and hold down web based competition. Now they will repeat the model the began with books and adapt it to the grocery industry. While they might initially buy some trucks and/or contract delivery to learn the business and adapt their systems, I believe this will evolve into a service that conventional grocery retailers will use to provide delivery service. PeaPod has enlisted the likes of Giant in the DC area to handle their delivery and the service is co-branded.
I can imagine ordering Orange Juice on Amazon and being told that others who looked at this product bought Minutemaid because if was on sale, or FCOJ rather than refrigerated because it is more nutritious. I don’t think this is going to be easy, but I also don’t think it’s impossible. Amazon has the intellectual muscle to make this happen. It will be fun to watch!
Amazon is providing a great service, especially for the elderly.
Several times a year, I order a case of Campbell’s Low Sodium Vegetable Beef soup for my mom. I get a great deal and she gets a welcomed gift of soup. I also order other hard-to-find food items from them like apple cider mix packets.
With free shipping on a qualifying order, this service can’t be beat. This way, my mom can still buy fresh from her local grocery, Super Fresh, and have the convenience of home delivery for these bulky items, that are difficult for her to carry.
Bravo to Amazon.
Amazon successful in the grocery business? I suppose it is possible indeed, but difficult. As noted above, Amazon has the advantage of a huge and mostly successful logistics network. And, as James Tenser notes, they already sell non-perishable food. So, they are not coming into this without experience.
However, the road to success is challenging, even with experience. Such a low-margin business would require a real glaring consumer advantage, as very few have been successful. Very few people I know, including myself, have found reason not to go to the local store to get instant satisfaction.
If Amazon can pull it off, good for them. I can’t wait to see how it is marketed!
It is my opinion that the demand for home delivery is still thin. Any company entertaining the idea of delivering groceries to the home should be aware that they are hiking up a trail of broken dreams.
The reason for getting into the business should be for reasons other than getting a direct return on the business. I suspect that most of the urge to get into the business is an irrational gut response to competition. Many a marriage has been hastened by creating a rival. Be cautious on home delivery, for while there are many bees buzzing around the home delivery flower, it contains little nectar.