Who’s Afraid of AmazonFresh?
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.
- Amazon drops low-price strategy in grocery expansion – USA Today
- AmazonFresh starts same-day grocery delivery in S.F. – San Francisco Chronicle
- Is Amazon Ready to Deliver Groceries Beyond Seattle? – RetailWire
- Will L.A. Love AmazonFresh – RetailWire
- Amazon said to launch Pantry to take on Costco, Sam’s – USA Today
Are you surprised that Amazon.com appears to be going off its typical script with its AmazonFresh service? How likely do you think it is that current Amazon Prime members will become AmazonFresh customers as the company enters new markets?
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17 Comments on "Who’s Afraid of AmazonFresh?"
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In case you’ve been under a rock, Amazon is selling delivery, not convenience as evidenced by the greatest PR stunt ever pulled last week with floating the idea of Amazon drones.
Whole Foods and any upscale food retailer should be worried – Amazon hasn’t tripped yet.
Those who wish to reverse engineer Amazon strategy may find a “typical script.” However, Amazon develops individual strategies and tactics to fit the marketplace and consumer.
Their experience in Seattle is in part an exploration of what works and what does not…for Amazon. It is not surprising that they will develop new and improved opportunities for Prime members and general Amazon customers. And of course these services are aimed at growing Amazon business in whatever ways create long term profit for Amazon.
I don’t think there is anything to gain in attempting to dilute Amazon’s direction by saying it’s off script. If anything, the company is on script to find the best possible solutions…for Amazon as well as its customers and prospective customers.
Amazon is about offering almost everything a consumer could want at a reasonable price, delivered to your door quickly. This is supported by an amazingly easy ordering system and backed by great customer service. By sticking with this core story Amazon has been able to build a reservoir of goodwill and consumer trust.
Not every one of its businesses must sell at the best price. Many of wag.com’s products can be purchased for less at discount pet stores. It’s about convenience. Amazon is betting that consumers will pay a bit more for convenience.
I look forward to seeing how AmazonFresh grows and how Bezos and company use those delivery trucks to link with other Amazon brands.
I don’t think Amazon is going off script with AmazonFresh. I believe Tom Furphy best stated the companies strategy. AmazonFresh represents the new value paradigm: benefits received divided by burdens endured. The benefit of convenience, not to mention a customer centric approach with the freshest offerings, outweigh the the burden of slightly higher prices.
Regarding the Pantry program, Amazon is constantly testing options to further delight its customers. Recall it experimented with almost 20 different “final mile” delivery alternatives.
Amazon Prime is the drug of choice for frequent shoppers. I know, I am such an Amazon Prime shopper. I believe this addiction will reduce the barriers to trial of AmazonFresh. Notwithstanding Jeff Bezos’ drone delivery predictions, these latest Amazon initiatives are real, purposeful and immediate.
The growth rate for Amazon’s quick reaction order delivery services shows all it is not going viral as many anticipated. This is largely because they have only limited expertise in logistics and less in distribution. Perhaps if they considered a routine delivery service to specific geographical areas in and close to current service areas, there would be an ease in delivery costs as well as better enrollment.
The service should be continuously monitored and tuned up at regular times for improved market acceptance and customer service. A survey of the existing customer base will give them the initial consumer feedback needed to begin the plan for an enhancement of the current services, as well as providing a tested script for new market areas.
Selling what consumers are willing to pay for is a good practice in difficult markets. Asking the base is a good place to start the search for what that is.
I am not surprised that Amazon has used a differing strategy for this complex market filled with expensive failures. The low margins of the grocery business inherently do not provide much room for payback on an investment spend approach. Rather, Amazon has done a high service concept targeting convenience oriented customers.
If Amazon is able to leverage grocery to drive more .com sales for their business, then an investment approach may make sense, but until then, a cautious approach to work out logistics and expense seems warranted.
Amazon can and will gain market share in the larger cities, just in name recognition alone. That being said, fresh is not easy to do, as customers get real finicky about what they choose on the perimeter of the store. Bacon, hot dogs, and brand-name heat-and-eat stuff is fine, but what about the lady that needs a 6 lb. rolled and tied top round roast for her dinner, and other custom cut meats she is accustomed to getting from her favorite store?
The threat is real for Amazon to gain major shares of grocery, but the niche (meats, deli, bakery) to fill will also remain big as well. Take away the staples, and what’s left is there for the very best stores who handle custom orders better than the competition.
Can’t stop this train; it will get real interesting to see which players remain strong, as the battle for business heats up.
It’s all about costs. If/when Amazon figures out how to reduce the variable costs of picking and delivering grocery orders, then its Fresh service will become more price competitive and mainstream. The UK’s Ocado has shown it can be done – after over a decade of R&D and nearly $2bn in capex and operating losses – and is now eying the US market. Kiva is one of the stepping stones for AmazonFresh.
As others enter the same-day delivery market at competitive prices, Amazon is actually the one being challenged. It is now in the position of defending its Prime membership fees and continually adding value to justify them. That said, the pantry concept is pure genius. Amazon is literally fighting the big boxes with…a big ol’ box!
So AmazonFresh has discovered something that the online grocery industry has known since the era of Webvan and Streamline in 2000:
Online grocery shopping is not and cannot be about price.
It’s about pantry management, time-and-effort-saving convenience, and maybe a little bit of social status.
Oh – And utterly reliable fulfillment and delivery.
Amazon is diving deep into the realm of service quality with this one. It may yet reinvent the standard, and its ultra-deep pockets may let it succeed where others have failed, but this is a very different business from books.
Why should anyone be surprised? Amazon was built on asking the question, “why do we do the things we do and what would happen if we do them differently?”
The fact of the matter is, this is the question that every retailer needs to be asking every day. Why are we doing the things we are doing and why are we doing them this way?
Amazon is a force to be reckoned with and they are relentless from a customer-centric point of view. They are constantly looking for new and better ways to do things and this will be no different. They have been testing grocery delivery for quite a while and as they scale this up to new market areas, they already have brand recognition and many loyal customers. And unlike traditional grocery retailers, their business is spread across many other classes of trade, so they can experiment, learn and grown. Stay tuned….
I too question whether this is really going “off script.” The whole point of “forgo(ing) profits to gain market share” is that you reach a point where sufficient economies of scale are realized that the pricing model IS profitable; but if you’re in a niche market, that point will never be reached. So let’s see this as a teachable moment: maybe even Amazon realizes – or at least thinks – that not everything in the world (e.g. groceries) will move online, and a niche it will remain. (On a side note, I ordered an in-stock item from Amazon yesterday a.m. and was told the delivery ETA was between 12/23 and 12/27…yes over 2 weeks! If Amazon is about, as Max describes it, “everything…delivered to your door quickly” then THAT’s off script.)