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Does Amazon Need a Grocery Delivery Subscription Offering?
Amazon, aligning closer with competitor grocery delivery options, is testing a $9.99 monthly subscription model earning Prime members unlimited delivery on Amazon Fresh and Whole Foods orders over $35.
Under the program being tested in three cities — Sacramento, California; Denver, Colorado; and Columbus, Ohio — subscribers also receive unlimited 30-minute pickup on orders of any size. The monthly fee comes on top of the cost of Prime membership ($14.99 per month or $139 per year).
The subscription simplifies the current grocery delivery setup, which calls for:
- Amazon Fresh: $9.95 delivery fee for orders under $50; $6.95 delivery fee for orders of $50 to $100; free delivery for orders over $100.
- Whole Foods: $9.95 delivery fee for all orders.
- Quick pickup: A $4.95 fee is charged at both Amazon Fresh and Whole Foods for rush pickup orders (30 minutes or less from order to pickup).
“We’re always experimenting with features to make shopping easier, faster, and more affordable, and we look forward to hearing how members who take advantage of this offer respond,” said Tony Hoggett, Amazon’s senior vice president of worldwide grocery stores, in a media statement.
Among recent changes to its online delivery proposal, Amazon in February of this year hiked the minimum purchase required for Prime members to earn free deliveries on Amazon Fresh orders from $35 to $150, citing the need to hold prices down amid investments. In early October, the threshold was lowered to $100.
In August, Amazon began offering its Fresh grocery delivery service to customers who aren’t Prime members for the first time. Non-Prime customers pay $4 more per delivery order than Prime members.
Grocers continue to grapple with a variety of schemes to cover the costs of grocery delivery, especially managing logistics around perishables.
Other subscription programs include:
- Walmart+ ($98 a year) offers free same- or next-day grocery delivery with a minimum purchase of $35.
- Kroger’s Boost ($99 annually) offers free same-day delivery on orders of $35 or more. Boost members OK with getting next-day delivery of their groceries only pay $59 a year.
- Target’s Shipt ($99 annually) offers free same-day delivery for orders over $35.
- Albertson’s FreshPass ($12.99 monthly or $99 yearly) offers complimentary delivery for orders over $30 plus special credits and rewards tied to purchases.
- Instacart+ ($9.99 per month or $99 per year) offers free delivery on orders over $35, 5% credit back on eligible pickup orders, and reduced service fees on every order.
Discussion Questions
Do you like Amazon’s move to explore a monthly grocery delivery subscription offering? If the program expands across the U.S., do you think it will help Amazon compete with other grocers? Will e-grocery profitability likely have to rely on a subscription model, or does that only complicate grocery delivery for consumers?
Poll
Loading …BrainTrust
Mohamed Amer, PhD
Independent Board Member, Investor and Startup Advisor
Dick Seesel
Principal, Retailing In Focus LLC
A lot of grocers are trying to decode the formula for successful subscriptions, the attraction of a steady baseline income source is too enticing to ignore. But few of those same grocers have been able to make it work because, at its heart, grocery shopping is an emotional experience that can’t be replicated via home delivery. There is a convenience factor in ordering food while at work, but the majority of consumers are finding that convenience is cancelled out by the frustration of product substitutions, out of stocks, and lack of trust in having a store picker selecting your fruit and vegetables. If Amazon can find a way to expand their Whole Foods physical stores to pair home deliver of routine products with an exceptional in-store experience for specialty and personalized products they might fare better for expanding this program sufficiently to make it profit positive and customer satisfactory.
Amazon is right to explore and experiment with ways to simplify its grocery delivery matrix so it protects its existing share and encourages more volume from Whole Foods. Going to a flat subscription fee eliminates the matrix juggling of the existing structure and better matches competing offers. It also motivates more Whole Foods orders by eliminating the $9.95 fee per order but maintaining a $35 minimum order size.
Amazon, like Walmart, Target, and others, are seeing that convenience in grocery is multi-faceted, and pricing can and will be a hurdle they must negotiate. This is a smart move by Amazon, which they’ll tweak over time from their three-city pilot.
It’s a fair bet that Amazon (and other digital grocery retailers) will try to continue to experiment with delivery subscriptions until they land on the optimal fee structure. Just a hunch, but I think the answer will always be a moving target.
There are so many variables in the pricing formula beyond the actual cost to serve. Paid subscribers will rightly expect a high level of service quality across several key dimensions – timeliness, order completeness/accuracy, substitutions, condition of delivered food, etc. (It is worth considering that a single missing item from an order can eradicate the convenience of a remote ordering experience if it forces the shopper to make an unplanned trip.)
Then there is the behavior modification aspect to consider. The Law of Divided Loyalty states, “All shoppers are split shoppers.” Since most of us stock our pantries with purchases from more than two different food stores, it may feel onerous to pay multiple subscriptions to avoid delivery fees from several different grocers. This forces digital food shoppers into an uncomfortable choice.
Of course that may be Amazon’s (and the others’) intent – to maneuver shoppers into what I call “pseudo-loyalty,” a form of coerced repeat purchase behavior that actually comes with little or no emotional connection.
Amazon has made great strides in grocery, but it still has a long way to go in terms of becoming a powerhouse. In online, it plays second fiddle to Walmart. In physical retail, it remains relatively niche. The most important aspect of the new subscription model is that it simplifies existing subscriptions and brings together Amazon Fresh and Whole Foods under one service. We will see a lot more of this unification in the coming year. Rather than Whole Foods being out on a limb, Amazon wants to bring all of its grocery and consumable offers together so that consumers can shop seamlessly across its banners and channels. This should help to create a stronger grocery proposition.
A monthly grocery subscription will encourage Prime members to add more food to their carts. Lowering the minimum order threshold to $35 makes Amazon groceries accessible to more consumers. It’s closer to rivals’ pricing models.
A national rollout would help Amazon compete by deepening loyalty and gaining new insights to fuel CPG retail media ad sales.
Grocery’s low margins make a subscription model helpful for grocers but consumers make not want to commit or feel locked in.
I think an Amazon grocery delivery subscription makes perfect sense, especially since it covers Amazon Fresh, Whole Foods, and the quick pickup options. The cost is certainly reasonable, if you’re a weekly shopper, and they’re clearly trying to lock in their over 200 million Prime members to increase their Amazon market basket.
The only challenge I see is, perhaps, just the way we shop. There are a significant number of products we don’t buy from Whole Foods, like paper products and other staples found in more traditional grocers. An option to add these items would increase RFM and order size.
On top of Prime membership? I don’t think that will be embraced by shoppers at all. Yes, they’ve under-priced Walmart by $2.50, but I think Walmart+ gives you a broader assortment.
I don’t see it succeeding, really.
In order to compete with the top grocery delivery companies (Walmart, Kroger and Target), Amazon should have a delivery subscription option. It is surprising that it has taken this long. The challenge for all grocers is to make grocery delivery profitable. While a subscription pricing model is nice, it may be more valuable to the consumer than the retailer. There are significant costs to picking and delivering orders and if a customer orders a few times a week with orders that aren’t a lot over the order minimum, the fulfillment costs will lead to unprofitable orders for the retailer.
Success or failure here depends on the assortment offered. And how nice of a home you live in 🙂 – nice homes = “let’s just order in” Average, boring homes = “let’s get out of here and shop”…
This program essentially doubles the price of an existing Prime membership, and might run into resistance from customers who expect it to be covered by the fees they’re already paying.
Trying to figure this out makes a lot of sense for Amazon. That said, getting Americans to buy groceries online is an uphill battle, so I wonder how much potential is here anyway.
I think the operative words here are, “We’re always experimenting…”. The recurring revenue model of groceries is impossible for Amazon to resist, so they are looking for a model that works. I’m guessing that they are also on the prowl for a major grocery acquisition at the same time. Groceries = irresistible. Just ask Target and Walmart.
Grocery continues to be a challenge for Amazon. This move does two things: 1. Reinforces the value of Amazon Prime, 2. Simplifies its myriad of delivery pricing options. Amazon is the king of testing new concepts & ideas. This is simply one more test to determine market acceptance.
In short…yes.
Amazon Prime Membership is as much about loyalty and engagement as it is about membership income. Grocery is a weekly opportunity to engage a loyal customer, and grocery retailers, as well as mass retailers, are excelling at capturing the share of wallets available for consumer’s most critical shopping purchase activity.
Beyond the revenue and consumer share of wallet opportunity, Amazon’s retail media business, which is quite successful, would continue to benefit from increased synergy with the consumer’s weekly grocery shopping. When basic purchases are addressed via a subscription service, that provides the consumer with an opportunity to research other purchase ideas on Amazon’s platform, as well as the opportunity to respond to display and search ads that expose them to new product ideas.
In short, yes…this adds to the synergies of the Prime Membership and bolsters its value equation in the eyes of the consumer.
A good move by Amazon, because it simplifies what they’ve tested and tried so far, which has seemingly been all over the board. This approach is more in-line with a customer centric approach, because for many, they want to see Amazon, Amazon Fresh and Whole Foods operate more like one platform.
The minimum $35 threshold for delivery might be a little too easy to hit from a Whole Foods, compared to Albertsons, Walmart, or Kroger. They could easily charge $50 as the minimum to ensure a bit more of a slim profit and not miss a beat.
I believe Amazon’s exploration of a monthly grocery delivery subscription is a logical move. The streamlined cost structure, coupled with additional benefits, certainly enhances the appeal for Prime members. If expanded nationwide, this initiative could significantly strengthen Amazon’s competitive position against other grocery retailers with similar subscription models.
While subscriptions may play a crucial role in e-grocery profitability, it’s essential to carefully manage pricing to prevent over-complication of the delivery process for consumers. Ultimately, striking the right balance between fees and benefits will be crucial to ensure widespread adoption and long-term success in online grocery retail.
Similar to Costco, grocery is still something that is a convenience purchase and the cost of delivery outweighs the benefits for many. The subscription model seems to be the best opportunity for this to be profitable and ensure consistent revenue. However, the subscription model could complicate grocery delivery for consumers who prefer flexibility. Ultimately, success depends on consumer preferences, as some may prefer a subscription for regular, planned grocery needs while others may favor pay-as-you-go models for more flexibility. Competitors’ responses and market dynamics will also influence this model’s effectiveness.