DISCUSSION

What's the Motivation Behind AmazonFresh?

April 30, 2013Written by Tom Ryan

According to RetailNetGroup, AmazonFresh, the online giant's grocery business that's been tested in the Seattle market since 2007, isn't about "competing with a small market with razor-thin margins and a checkered history." It's all about helping Amazon gain enough scale to support its ambition to build a national same-day delivery shipping model.

"Our interviews with AmazonFresh insiders suggest that Amazon's internal target for expansion was break-even, and that it's motivation for investment is more strategic than profit driven," wrote Logan Gallogly, a research analyst at RetailNetGroup.

Ms. Gallogly listed several reasons why establishing online grocery is essential to its same-store delivery proposal.

First, as a standalone business model, it's challenging to make money delivering "low-dollar, low-margin, and occasionally heavy CPG products to doorsteps one or two items at a time." Adding full-basket grocery would drive more economies. Relatedly, adding grocery delivery helps Amazon "justify" its own fleet of temperature-controlled trucks set to roam urban cities.

Finally, Amazon views steady grocery delivery as a "powerful way to drive frequent customer interaction," and opens up avenues to entice consumers to shop for other products with each order.

Although no plans have been formerly announced, RetailNetGroup "strongly expects" AmazonFresh will expand to Los Angeles by June and San Francisco by October. Amazon has reportedly told vendors that it could roll out to 40 U.S. markets by the end of 2014. The report comes amid other reports that Amazon is adding refrigeration to some of its nearly 90 warehouses beyond Seattle.

Writing on his blog, Mark Heckman, principal of Mark Heckman Consulting and a RetailWire BrainTrust panelist, said, if the report is accurate, AmazonFresh could be the online grocery service that finally breaks through to critical mass, all helped by its lack of financial burdens and mastery of logistics.

Mr. Heckman added, "It could also mean that delivery fees are lower, order size minimums are waived, and it certainly could mean that home delivery and in-store pick up will never pay out using traditional metrics and full allocated costs."

Asked last week on a conference call about reports of an AmazonFresh's expansion, Amazon's CFO Tom Szkutak said, "Nothing to announce here. We are very pleased with what we've seen in the Seattle area. It's certainly something that we see that customers love the experience. The challenge has always been in making sure we get the economics right and that is something we will continued to focus on."

Discussion Thread0