Photo: Getty Images/krblokhim
What does Amazon know about delivering groceries that others don’t get?
It’s going to become more expensive for Amazon Prime members to have their groceries delivered by Amazon Fresh.
Prime members who have gotten their groceries delivered for free with a minimum purchase of $35 will now have to spend at least $150 if they want to avoid paying a fee starting on February 28. Amazon Fresh will charge $9.95 for orders up to $49.99. Those placing orders between $50 and $99.99 will pay $6.95, and orders between $100 and $149.99 will come with a $3.95 fee.
An Amazon.com spokesperson said the company is making the change in order to hold down the prices of items it sells online and to help cover the costs associated with the service, such as investments in technology and equipment.
“We will continue to offer convenient two-hour delivery windows for all orders, and customers in some areas will be able to select a longer delivery window for a reduced fee,” the spokesperson told The Wall Street Journal.
The move is another public acknowledgement by Amazon.com that it does not see a way to deliver groceries profitability without fees. Amazon-owned Whole Foods has been charging Prime members $9.95 for deliveries in as little as two hours going back to 2021. The chain provided the same rationale for its delivery charge.
Prime members who buy their groceries from Amazon Fresh and who are enrolled in SNAP (Supplemental Nutrition Assistance Program) will be able to continue shopping on the site but may find it prohibitively expensive since they will have to pay for delivery out-of-pocket instead of using their electronic benefits transfer cards, Engadget reports.
The added grocery delivery fees for the Fresh service follow Amazon’s decision last year to raise the price of an annual Prime membership to $139 from $119.
The retail and technology giant recently introduced RXPass, a new subscription plan that enables Prime members to buy generic prescription medicines for more than 80 common health conditions and get them delivered to their homes for $5 a month regardless of the amount ordered.
A Walmart+ subscription from Amazon’s rival costs $98 a year and offers free same- or next-day grocery delivery from local stores with a minimum purchase of $35.
Kroger’s Boost subscription program offers free same-day delivery on grocery orders of $35 or more for $99 annually. Boost members okay with getting next-day delivery of their groceries pay $59 a year.
- Amazon Raises Price Minimum for Free Online Grocery Delivery – The Wall Street Journal
- Amazon to start charging Prime members for Amazon Fresh grocery deliveries under $150 – USA Today
- Why Amazon’s grocery shoppers have to spend more for free delivery – Quartz
- Amazon Fresh will soon require a minimum order of over $150 for free delivery – Engadget
- Whole Foods goes from free to $10 grocery delivery fee for Amazon Prime members – RetailWire
- Amazon looks to undercut rivals with monthly Rx prescription plan – RetailWire
- Amazon Frequently Asked Questions (SNAP) – Amazon.com
- Meet Walmart+ – Walmart
- Kroger Boost – Kroger
Discussion Questions
DISCUSSION QUESTIONS: How do you expect Prime members will react to Amazon’s new requirements for free grocery delivery? Will other grocers need to raise delivery fees and minimum purchase requirements if they want to be profitable?
Poll
Loading …BrainTrust
Gary Sankary
Retail Industry Strategy, Esri
Patricia Vekich Waldron
Contributing Editor, RetailWire; Founder and CEO, Vision First
Reality is setting in and it’s time to pay. No company can afford to provide services and lose money – not even the mighty Amazon. As all retailers tighten their belts, eventually this gets reflected in higher prices and fees charged to consumers. Amazon is a price leader, and so I absolutely expect that other retailers will also increase fees in pursuit of profitability.
Amazon “does not see a way to deliver groceries profitability without fees.” Boom. Simple. And I think every grocer has similar if not identical awareness. So once again Amazon leads the way and pioneers an effort other retailers can copy. Only this time it’s about adding fees rather than going down the “free” rabbit hole. I can almost hear the audible sigh of relief coming from the retail community. And customers will of course be outraged, but I think will soon realize how good they had it there for a while. Once again it turns out that free is not free. And convenience can be somewhere between expensive and very expensive. “Free” was a great customer acquisition and retention tool for a long time, but the math of profitability cannot be repealed indefinitely.
Today it also had the cheek to ask Whole Foods Vendors to lower their prices since inflation is over. Why doesn’t the company just sell a couple of those planes?
Cheek? Amazon is alone is seeking out lower prices as inflations ebbs? Think maybe Walmart and a couple of other retailers might be out there doing the same thing?
And I’m guessing the planes are money makers.
The “final mile” continues to be a profitability and logistics channel for all retailers. While Amazon has developed its delivery platform, the costs of doing so are prohibitive. Obviously, some Prime members may discontinue their plans, however, I expect most will stay. The one limited attribute we all share is time. The Prime convenience will trump the added fees.
For other retailers, this issue is already present. While many of these retailers invested in technology to allow for home delivery, they cannot escape the rising costs. In fact, Amazon raising prices will give them permission to do the same.
This surprised me. Amazon, for the first time I can remember, is now not the most competitive player in a business they’ve been trying to build out for a while. Many grocers, most notably Walmart, now have membership plans that provide grocery delivery for free, at a far lower threshold than Amazon. Will these services also raise fees to match Amazon, or will they keep their pricing and aggressively promote their offer? There might be some opportunity here to take market share from Amazon, which is not something that happens very often in many categories.
Delivery has always been a negative drag on profitability for grocery chains, even Goliath Amazon. I’m not surprised by this and you’ll see others jump on this train quickly. If you shop Kroger and don’t mind next day day delivery, the Boost $59/year program is enticing. Assuming you buy twice per month, you’ll only pay $3 for delivery on every one of your orders (assuming you purchase more than $35/order, which is not hard to do given today’s inflated product prices).
Grocery is a different animal from online. Everyone has figured that out. Everyone can now raise their prices.
We all know it’s easier to lower prices than to raise them and raising them from FREE will likely cost Amazon some customers. However, we need to understand the composition of their grocery customer base. Are they predominantly Prime Members? If they are, the alternatives aren’t comparable because Amazon Prime offers more than just groceries.
Ultimately, Amazon has proven its expertise and dominance in fulfillment and I wouldn’t bet against its calculations. I would guess that other grocers will follow suit unless they’re willing to continue funding a loss leader or have finally beaten Amazon at its own game.
Prime members’ initial disappointment may inspire them to fill their grocery baskets to keep their deliveries free.
Amazon knows its numbers, so this move is telling. If Amazon is increasing delivery fees, rival grocers are likely to follow.
It will be interesting to see if Prime users push back on this … they seem willing to absorb cost increases so far. At what point does frugality win over convenience?
Amazon has scale in its delivery business. I imagine Amazon has realized that grocery delivery cannot be scaled like the balance of their business. The logistics of delivery call for a company to increase their 25 parcels on the last mile to 50 … for the same cost. This is impossible with the grocery business.
Amazon knows — as does every retailer — that online grocery has, at best, extremely weak profitability. In some cases, it is loss making. The amount of work needed to pick, pack and deliver groceries is enormous and the fees consumers currently pay in no way reflect that effort or cost. Economic realities are now setting in for Amazon, and for others, as costs rise and profitability wanes. The adjustment will be painful: consumers won’t like paying more after years of being subsidized by grocers.
The inconvenient truth is that much of last mile grocery delivery is wildly unprofitable. And the problem with the race to the bottom is you might win. The era of subsidizing bad business models is finally picking up steam.
The new minimum purchase requirement may come as a surprise, but it won’t stop people from having their groceries delivered. People will pay for convenience, and for less than $10, someone won’t have to get in a car, drive, find a parking spot, get their items, stand in line to check out, and then drive home. (I’m sure I’ve left some steps out, but you get the idea.) This is a small fee to pay for convenience. Nothing was really ever free. It may have appeared so, as some retailers (including Amazon) didn’t charge extra for for shipping or delivery. How? That fee was/is built into the price. When Amazon makes a change like this, it is just a matter of time before other retailers follow.
This may be a bargain. My local grocer charges a similar fee to shop online and pick up the order yourself.
Prime members will react to this the same way they’ve reacted to overall Prime price increases: meh. Amazon knows their customer inside and out and besides, it’s kind of a no-brainer that should’ve been implemented a long time ago by many.
This move seems as simple as Amazon using what it knows about its shoppers to optimize their grocery delivery business. Online grocery orders are usually much larger than in store orders from the same shoppers. Over $100 for an online grocery order is common. Adding these fee tiers moves the cost of small order delivery onto the shoppers making these orders rather than spread across all shoppers. I would bet it won’t effect many Amazon online grocery orders and may have even less impact on the top Amazon shoppers who always make larger orders. Intelligent move likely data driven.
You can deliver your groceries for slightly more than the gallon of gas you’d be extinguishing. The tiered pricing suggests they want to tamp down on smaller, impulse orders (the same way apparel wholesalers dislike the high cost per invoice selling to specialty stores and charge more to discourage that). Sure, some customers may long to continue to get it free, but the majority may not be affected — have you examined your weekly grocery bill total recently?
Instacart must be loving this!
I don’t think they will react: most WF shoppers are there by choice, not because it’s the most competitive option out there; a small increase in a portion of the bill — or more precisely a large (infinite?) percentage increase in a small part of the bill — isn’t going to send people fleeing for the exits.
As far as other grocers: they may well do something similar — certainly I’d welcome it — but I wouldn’t call it “following Amazon’s lead” … I’d call it facing a reality that too many have too long denied.
Market share to wallet share is a rare shift for Amazon. Prime members already buying groceries in larger quantities will not flinch, but everyone else will. This is designed for grocery buyers already in the loop. Other grocers might take note, but their strategies will run separately. This will diminish new adoption of grocery delivery. It also suggests that they don’t plan on driving or owning this business space going forward, except for existing customers.
This is another example of retailers rethinking their business model and category strategy. It’s not profitable to offer free delivery, especially on small(er) orders. I expect customers will seek out other places for groceries, particularly those that don’t have the need or ability to raise basket size from $35 to $150.
Comes down to financial reality now that the cost of capital as increased with interest rate, and the financial market is looking for payback from the investments by companies subsidizing the customer to build/grow market share. Increased fuel and labor cost simply makes it unsustainable, you have to satisfy your customers “profitably.” Being a leader in a money losing business is not a good thing.