Amazon Expands Fresh Test
Based on the fact that it is expanding its coverage area, it would appear as though Amazon.com’s test of a grocery delivery service is going well.
AmazonFresh, as the service is called, has been quietly expanded in the Seattle area and the company’s pricing strategy and free delivery offers suggest it is serious about gaining market share. What isn’t known at this point is whether the company believes it has a viable model that can be rolled out in places other than its own corporate backyard.
According to a report on the Seattle Post Intelligencer website, AmazonFresh offers free bags of produce for first-time customers, and free shipping on orders of at least $25 or $50 depending on the time of delivery. The company recently added beer and wine delivery to its service. An adult consumer must be at home to sign for the order.
The service’s pricing is competitive, according to the report, with a gallon of reduced fat milk recently sold at 35 cents below Safeway.com. Interestingly, AmazonFresh operates out of a Safeway warehouse although the operation, including product, is totally separate from the grocer’s business. The Post-Intelligencer reports that AmazonFresh is running about a dozen trucks for the service first started in 2006.
Discussion Questions: What do you think Amazon is learning from its AmazonFresh test? Do you believe that the service has the potential to go national? What hurdles will it have to overcome to expand in major markets across America?
At a minimum, Amazon is learning a lot about its customers, which it does better than anyone. Accordingly, if anyone has the ability to do this nationally, it should be AMZN. Whether they can handle the additional “moving parts” of home delivery, and maintain service, quality and competitive pricing (and of course profitability), it is difficult to say.
Unlike their neighbor Starbucks, who did not stick close enough to its knitting, I’d suggest AMZN is doing something very strategic and with a much higher probability of success.
Sales tax is 10.25% in Chicago. That is why I shop at Amazon. I don’t buy books or CDs or DVDs. I buy toothpaste, deodorant, shampoo, soap, laundry detergent, paper towels, toilet paper, sponges…anything I need, I check first at Amazon. Every $100 order I place with Super Saver shipping, I save $10 in sales tax. It adds up very quickly. Same with Zappos for shoes and clothing. I can’t even remember the last time I bothered to go to Target or Kohl’s or Carson Pirie Scott.
Were Amazon to open a facility in Illinois to expand its grocery business to Chicago, it would have to charge sales tax on everything it sells, including all non-grocery items. It would lose a huge competitive advantage. Amazon isn’t stupid. I don’t see it expanding its grocery offerings beyond where it already has facilities.
An always interesting subject:
Former President (from inception through profitability) current share owner and board member of MyWebGrocer, which is the largest online grocery marketer in the world with about 4,000 grocery stores using one service or another.
So lets deal with the myths vs. the facts of online grocery.
1. Peapod didn’t work? I suggest someone talk to Andrew or Thomas Parkinson or to Ahold (their owner). First guy in the business in the late ’80s, expanding every year, and making money.
2. Delivery trucks, temperature zones etc. Two answers;
A.) lots of folks figured out how to deliver without temperature zones and do quite nicely and…
B.) the majority of customers today (depending on market) drive to their supermarket, hit a call button from the comfort of their drivers seat and the clerk brings out the groceries, pats the kid on the head and gives the doggie a treat, while the appreciative parent drives off $200 lighter in the wallet….but with an additional 60 minutes to spend on other things.
3. People like to pick their own produce? Not in Chicago, or Austin or Winston-Salem or Cincinnati or Newark, or the other 20 towns I have visited and store walked in the last 10 months. At least not if they were under 45 and were in a hurry.
4. Profitable: For the most part yes, particularly if the operator runs a bricks and mortar store and uses store-pickup vs. delivery. Very…and the service is effective at creating loyalty, incremental basket size and oh yes…incremental customers.
5. Dense population. Always a good thing, but North Carolina is successful and dotted with Lowes Foods and Harris Teeter stores offering the service. Benicia California…Dayton Ohio…and on and on.
Now, can Amazon be successful in this venture?
Sure, if they deal with the four keys to success in this business.
1. Their website must “hunt.” Now one would think this would be a no brainer….but no. The site that serves with distinction for books, music, clothing, specialty food and other items will fail miserably in grocer. Making repeat purchases needs to be a snap. Absolutely no question about this.
2. Assortment and pricing. If I cannot find my favorite brands or if they are OOS 2-3 times then…you will lose the customer. If they have to pay more for milk than at the local store…not a good thing. But customers ARE willing to pay a fee for pickup at the store, and a bigger fee for delivery. Absolutely.
3. Customer service. Prompt, predictable, polite experience…every time. This includes the site, the stocks and prices and the people.
4. Cost controls. Easier for a bricks and mortar store who is either gaining leverage from their merchandising department (Safeway, Ahold) or their Wholesaler. Stand alone guys can get killed because of the volume issue. They can also get killed because they have no walk in business from which to build incremental volume.
Deal with these effectively and Amazon can offer real competition. Don’t deal with them…particularly the first three, the the streets will be littered with the remnants of former customers.
The list of road blocks is too great to mention. Each of them has been found by most to be insurmountable. Just as the list of road blocks is long, so is the list of those littering the highway that had attempted this on any scale.
My last two experiences with Amazon have been promising. My previous had been, well, not good. I would be skeptical of anyone entering this endeavor and my skepticism is even greater with Amazon as the named contender.
My comments are not intended to raise the question whether or not Amazon itself is either good or bad at what they do. Very simply, the endeavor is ill advised for anyone to enter. Their resources and capital are much better spent on improvements of what they have and expanding their offerings into other areas much more feasible. You needn’t look far to find them. Almost anything would be more advisable than home food delivery.
Good luck Amazon. I just can’t resist asking “What were they thinking?”
Only in the upscale urban area will this work, as many two income families can afford the extra charges needed to keep this afloat. Rural, low income areas can not afford this, as they drive around for the best prices. No one can replace a well run store that offers great deals, with personality.
I agree with Art Williams, this appears to be viable only in very large urban markets with sufficient grocery distribution infrastructures in place to support it.
Picking customized orders of grocery items will be much more costly and inefficient than hard and softgoods offerings online. In addition, it is unlikely that existing distribution infrastructure (appropriately sized truck fleet and personnel) have the capacity to service this on a very large scale.
Home delivery of grocery product has been tested many times and has never achieved the scale to make it a large scale business. However as fuel prices rise, it may provide the catalyst for some successful regional or urban market success.
Delivered food has huge value to consumers. It saves time and gasoline. Success in this business model is dependent on a few things: having enough customers in a relatively small geographic area to make the cost of delivery worthwhile, having customers that are organized enough to create accurate shopping lists (thereby negating the need to rush out to the store for missing ingredients) and reasonable pricing.
When Amazon first entered the grocery delivery business, I questioned the move. I still question it. I don’t see it being profitable outside a handful of urban areas.
There are a bunch of things that come to mind from reading this article and the accompanying article on Amazon’s implementation of “Cloud Computing,” which we discussed several months ago.
Brick and mortar retailers better start “hearing the footsteps.” The impact of gas prices on the overall cost of living and the hassles of making a stop at the supermarket are going to take their toll. Smaller footprint stores that offer quick service and are linked to the Internet for home purchasing are going to be the wave of the future. The technology is available and it keeps getting cheaper. The next generation has been raised with the Internet. With virtual reality and custom fitting for everything from clothing to your choice of vegetables, the online experience is poised to overtake the “chore” of going shopping. Sure, some people will go on shopping excursions to meet friends and browse stores but this is not when the bulk of sales will be made.
One question I had, and one of the users alluded to Amazon paying the sales tax, is does Amazon have to collect sales tax? The whole concept of “nexus” gets crazy here because although they don’t have a retail outlet their distribution center is in Washington. I don’t know what the rules are, but it seems by that one shopper comment that at least the consumer is not paying sales taxes.
Saving time and gas is a really nice concept, but not practical in the real world. With this service, you will eventually pay the gas money for delivery money. Plus, studies have shown that consumers will not purchase fresh produce or meats form DDD firms as those are touchy-feely kinds of items, so we will still go to the store and if we spend 10 fewer minutes, how much time does that really save us?
As far as the delivery end–forget it. To set up a national distribution system would be nearly impossible in today’s economic climate. Well, unless they buy FedEx. We can get our groceries and mail all at once!
The challenge in online grocery management is cost of distribution,real estate, transportation and service levels. While Amazon would understand the market from service levels very well, only volumes would justify the cost associated with leasing/owning DC for grocery orders. Safeway currently fulfills from stores only and hence, the first 2 costs are already managed within its supply chain network.
While I wish them well, this is a very hard business to operate. To start with, the number of consumers that want this type of service is limited. Secondly, the logistics of offering a viable assortment at a competitive price is extremely difficult if not impossible.
With the price of gas so high these days it should encourage more people to try this service but it also raises their cost of delivering it. This will only work in highly populated areas with decent transportation access. That alone leaves out the majority of the U.S.
I have a hard time believing this will work. Even safeway.com is a small part of their business, and they have all the advantages of picking off the shelf. This just doesn’t seem like the way consumers want to buy fresh items, apart from a few exceptions. It’s one thing for Amazon to add on additional small product served in Amazon’s current distribution infrastructure. But how can an entire infrastructure be justified by this level of consumer demand?
I think Amazon is on the right track. I’m surprised that grocery stores have not implemented this yet. You can order Omaha steaks or Schwan’s ice cream online, but to have everything you need in one place is great.
I think Amazon’s problem will be logistics. The trucks will have to have varying temperatures for frozen items, refrigerated items and shelf items. For orders that have everything from ice cream to aspirin, The delivery people will have to be very organized to make sure they get the complete order together. It will be time consuming. Add to that transportation costs and I think the prices will have to be significantly higher. However I think that busy people would be willing to pay a premium for this service. Another issue they will have is assortment. The assortment right now is limited. Getting the right products in inventory and coordinating those logistics is yet another hurdle.
The challenge they will have is logistics. What Peapod, the concept forerunner, learned was that it is expensive to have fleets of trucks, drivers, pickers, data processors and managers. So expensive in fact, that it didn’t work.
The notion of delivered food is of huge value to consumers and has the potential to shift the grocery business forever. The real question though is, will consumers pay for it…as it’s not possible to incur profits without that acceptance.
In the early ’50s, I remember being at my aunt’s house in Paterson, New Jersey. Every Saturday morning John Standard, the grocer, would make his delivery of the week’s groceries that my aunt ordered on the phone the previous day. Of course, that was before the great suburban expansion and the explosion of grocery offerings and the 2-car families.
Last night my wife sat down at her computer, logged on to Fresh Direct and ordered the week’s groceries. They will be delivered tonight when one of us is home.
Amazon will be successful, particularly in more urban areas. My wife could have even made her order at the office. The convenience is extraordinary versus actually making a shopping trip. Technology has made it all possible. While we still make fill-in purchases at the supermarket, there are no more major shopping trips.
Amazon (like Fresh Direct) will save consumers TIME, money, and gas. And the greatest of these is TIME.
Certain retail strategies just don’t make money, yet they never go away because someone’s always trying. Will there be an eventual breakthrough, with broadly-based adoption? Or will tests and niche players be the only examples for decades? Not just online grocery shopping with home delivery, but RFID, custom tailored clothing sized and constructed by computers at mass market prices, robot bartenders, vending machines for categories other than snacks, etc.
Great profitable retail concepts catch on quickly in America. Money-losers are tried again and again but never get wide adoption.