What’s the Motivation Behind AmazonFresh?

Discussion
Apr 30, 2013
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.

[Image: AmazonFresh]

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."

How important will groceries be to Amazon’s same-day delivery model? What advantages/disadvantages will Amazon have compared to others in the grocery delivery space?

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9 Comments on "What’s the Motivation Behind AmazonFresh?"


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Bob Phibbs
Guest
6 years 7 months ago

Amazon stockholders are able to subsidize most anything Amazon does these days. It wasn’t that long ago I read a report that said Amazon made as much profit in its entire existence as Apple made in the last quarter of ’12. “Getting the economics right” is an understatement.

Li McClelland
Guest
Li McClelland
6 years 7 months ago

I have heard people say that the problem of theft off porches and from apartment lobbies is, and will likely be, much greater for Amazon grocery deliveries than for their other products.

Paula Rosenblum
Guest
6 years 7 months ago

No one has cracked the nut of grocery home delivery in the U.S. The low margin nature of the business, coupled with the need for fuel-guzzling refrigerated vans and trucks, make it very hard to do — and that’s in “easy” cities, which means relatively new homes, no 5 floor walk-ups or winding stairways.

I suppose if anyone can do it, Amazon can. But without grocery, same-day delivery is very niche. I don’t see a huge market for it. With grocery? Boom. Big winner.

Ed Dennis
Guest
Ed Dennis
6 years 7 months ago

Groceries are only a means of acquiring scale. Groceries are a weekly purchase; books a monthly purchase; electronics, clothing an annual purchase. The move to groceries scales up the Amazon product delivery system and the test phase allows Amazon to determine the best way (reliable and quick) to develop this model.

The advantage Amazon has in the grocery delivery space is that they have a delivery base to build on and they can deliver more than groceries. The average grocery cart contains only 80% groceries; the remainder is in household items. Too often grocery delivery concentrates too much effort on refrigerated and frozen, and not enough on household items.

The key to grocery deliver is quality selection of perishable products. Almost everyone examines produce before they put it in the cart. Anyone delivering groceries must find a way to insure that nothing gets delivered to a customer that you wouldn’t accept in your own home.

Lee Kent
Guest
6 years 7 months ago

Offering same-day delivery is a great option to have for any product but, folks, to me, an ‘option’ does not a business make. I am still asking myself how big this niche is — even for groceries.

For staples, I can wait a few days. Many of my staples are household products and other such items that do not require refrigeration. As for the perishables? My husband usually likes to get inspired at the grocery store — or see what is interesting on the manager’s special table. Are we really getting so lazy that we don’t want to pick out our own fruits and veggies, steak and fish?

With Amazon’s delivery capability, they can make this work, but at what cost? Let them continue to test this market then let’s talk about the pros and cons with some real input.

Shilpa Rao
Guest
6 years 7 months ago

Same-day delivery might not make as much sense for any other product category as it would for grocery. Grocery comes with its unique set of challenges when it comes to distribution and, if they are able to sort that out, the model will surely work.

Mike Spindler
Guest
Mike Spindler
6 years 7 months ago

Every household buys groceries, every week. Groceries are the second largest retail business which is why everyone covets a substantial position. Retailers such as Walmart and Amazon want the basic revenue, the upsales on GM and books, etc., and the advertising opportunity.

Online grocery shopping using a pickup model is generating up to 20% of those stores’ volume at the moment. The same is true for B&M retailers offering delivery in cities such as Boston, New York and other markets where doormen are common.

For Amazon to succeed in this, they need a pickup option. It might be the lockers they have been experimenting with or it might be a more direct partnership with C-stores such as Wawa or a big drug chain.

One more element is that there are two sides to these economics. For every box of Pampers Amazon sells, some B&M retailer loses that customer transaction and the expense cover the transaction offered. Cripple the profits of the tiny margin physical grocer and you gain access to all their customers

Ed Rosenbaum
Guest
6 years 7 months ago

If same-day grocery delivery is to succeed, Amazon will be the one to make it happen. That is a big “if”.

I am a skeptic when it comes to grocery ordering/delivery online. How will Amazon or any large scale grocer know which package of hamburger I prefer or which bags of grapes? But I can see where a small local grocer would know how to select the packages I prefer. There is much to be resolved before this succeeds.

Herb Sorensen
Guest
6 years 7 months ago
Globally, retailing is being driven by immediacy. When shoppers need something NOW, they want it NOW. However, as more than one retailer has told me, “Our target demographic is the stock-up shopper!” Never mind that the “stock-up” shopper is in the store several times between “stock-up” trips to buy only one or a few items. The point of all this is that grocers spent at least 20 years sucking their thumbs while the C-store industry ate a VERY profitable slice of their lunch. And now they look at Bezos and ask, how can he make any money doing this? Bezos doesn’t have to make money. He has proven over and over that his moves are strategic, and he will defer profits while he is working out the business. God help the thumb suckers on this round because nobody on earth is going to help them. Same story, different flavor, for all those grocers so sure, 20 years ago, that Walmart would never make it big in groceries — now the #1 grocer. None of these… Read more »
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