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Who's Afraid of AmazonFresh?

Written by George Anderson

The big question facing all companies in the online grocery/home delivery space is whether they can earn enough money in this low margin business to make it work. The difficulty in making a profit is often referenced in discussions where the demise of early pioneers such as Streamline (ceased operations in 2000) and Webvan (2001) are still brought up to this day. To be fair, there are companies such as Peapod and others that have made a go of the business, but it remains a niche market with growth limits that go with it.

There has been some trepidation that AmazonFresh, Amazon.com's nascent same- and next-day grocery delivery service, would expand beyond its first test market in Seattle and sweep into other metropolitan areas leaving the carnage of other grocers in its path. The thinking behind the fear was that Amazon would follow its traditional game plan and forego profits to gain market share. With its low overhead, Amazon as it has done in the past, would undercut existing competition.

A USA Today report, however, suggests that Amazon may be taking a different approach. The article cited a market basket study by RetailNet Group, which found that AmazonFresh's prices were higher than those charged by Walmart To Go, Instacart and physical stores. Amazon's prices were lower than Safeway's home delivery service.

Amazon is also charging an annual fee of $299 for consumers who use its Fresh service. Included in the fee is an annual membership in Amazon Prime as well as the perk of no additional charges on any grocery orders of $35 or more.

Tom Furphy, CEO of Consumer Equity Partners, helped run AmazonFresh for about four years.

"They will serve a less price conscious and time-starved customer," Mr. Furphy told USA Today. "They want people to feel good about the prices, but it's about convenience rather than the lowest prices."

In a RetailWire discussion in June, Richard George, professor of food marketing at the Haub School of Business at St. Joseph's University, said AmazonFresh had achieved about a five percent share of market in Seattle during the five years the service had been in test there.

Interestingly, along with news of AmazonFresh came another report that Amazon plans to launch a new service next year for Prime members called Pantry. The idea is that the company will deliver items in large set-sized boxes. A USA Today report suggested that the move would take direct aim at warehouse clubs. The service would pull together a selection from about 2,000 typical center store items, packaged in a box not to exceen a specific weight limit.

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