Will Amazon Succeed in Groceries?

Reuters and others are reporting that Amazon will within days be launching the Amazon Fresh grocery delivery service in Southern California, to be followed closely by Northern California.  The service will use Amazon’s two new warehouses and deliver using Amazon-branded vehicles.  Amazon Fresh has been operating as an experiment for the last five years with service only to a handful of Seattle zip codes.

Internet groceries were some of the biggest and most spectacular failures of the first dot-com bubble.  Webvan was named by CNET as the single largest dot-com disaster, having gone from being a 1.2 billion dollar company with 4,500 employes to liquidation in less than two years.  Many of its assets were picked up in the liquidation by Amazon to start the Amazon Fresh service in Seattle.

Southern California has been a tough place to try to enter the supermarket business. British international food conglomerate Tesco PLC has yet to find a buyer for its Fresh and Easy chain, for which it recently took a $1.8 billion write-off when they announced that they were going to abandon the attempt at entering the US grocery business.

So will Amazon be able to succeed where there have been so many high profile failures?  I am not going to predict, but if they do it will be for the following reasons:

  1. Amazon has the best warehouse automation and inventory control on the planet.  Groceries are low margin, so sneaking out every penny of efficiency is essential.  Amazon’s purchase of Kiva Systems gives them the best fulfillment center robotics available.
  2. Amazon plans on delivering more than just groceries.  The Amazon Fresh service will give them the critical mass of trucks daily traveling to every neighborhood to offer same-day delivery of nearly everything for free.  That will cut out one of the remaining advantages of retail stores (having it now) while giving it a huge advantage over online retailers using UPS, FEDEX or USPS who would have to charge a lot for next day delivery.  Even if they only break even on the groceries themselves the competitive advantage in free same day delivery will be immensely valuable.  I had previously analyzed how Amazon’s selection of the two warehouse sites puts all of the state’s densely populated spaces within a three hour drive time and the possible implications.
  3. With all these delivery vehicles traveling to every neighborhood each day, and otherwise returning empty to the warehouse, Amazon can well offer free at-your-door pickup of merchandise wanting to be returned.  This too would represent a great competitive advantage over retail stores and traditional online retailers.
  4. Amazon knows what to do with Big Data.  As the old saying goes, you are what you eat. Amazon’s signature skill has been predicting what you will want to buy before you realize that you wanted to buy it.  I am not sure how predictive food choices will be to purchases of other things except possibly for kitchen equipment, but Amazon will certainly put a lot of effort into it.
  5. Amazon has a good reputation and a massive customer e-mail list.
  6. Thanks to Target, Walmart, Costco and others, consumers no longer regard groceries as a separate specialty needing a separate specialty retailer, as they once did.

We will never likely know specifically whether the Amazon Fresh venture in Southern California is a success since Amazon does not publicly announce profits by business line.  The only clue will be how quickly afterward they expand to other markets.  The Reuters article reports that the company is considering as many as 40 metro areas to eventually be part of the service.

UPDATE:  The service is now available, and if the grocery chains were worried about their big new competitor at least for now their fears are unfounded.  The service requires a upgrade to a ‘Prime Fresh’ account from the normal Prime membership.  The Prime Fresh membership costs $299 per year.  The selection of food is premium both in branding and price.  It looks as though Amazon has decided to deliberately make this something that only a very few people will try at first, sort of as a beta test.

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