Discussion Articles

[7 comments]

Is Amazon Ready to Deliver Groceries Beyond Seattle?

By George Anderson

January 31, 2013

It seems as though every couple of years we report on rumors that Amazon.com is getting ready to take its grocery delivery service beyond the company's Seattle test market to other cities across the U.S. So far that hasn't happened, but according to a Seattle Times report, that may be about to change as Amazon's rapid rollout of distribution centers has put it in a position to deliver groceries to customers in densely populated markets such as New York and San Francisco.

While Amazon's goals have always been big for any business in which it operates, there remain questions as to whether the company has found a way to make bottom line sense of a grocery delivery service.

"It's not like they're pricing things to win market share, which usually is Amazon's M.O.," Sucharita Mulpuru, a Forrester Research analyst, told the Seattle Times. "The fact that they've been so slow to push it out of Seattle is a testament to how challenging the business model is."

Few companies have been successful with online grocery. Many supermarkets now provide store pickup services as a compromise solution that offers customers the convenience of online shopping while reducing the costs associated with home delivery.

Among those that have managed to make a go of home delivery is Peapod, which currently has around half-a-million customers and a goal of reaching $1 billion in sales as early as 2015.

Fresh Direct competes with Peapod in the New York metro area, including parts of Connecticut and New Jersey. The service emphasizes perishables and restaurant quality prepared foods as a means to grow its share of the market among affluent households.

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Discussion Questions:

Is Amazon ready to deliver groceries beyond its Seattle home? What will it need to do to make home delivery of groceries work for it and its shareholders?

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Instant Poll:

How confident are you that Amazon will succeed with home delivery of groceries should it roll out the service to markets outside of Seattle?

Comments:

Can Amazon deliver groceries beyond Seattle? Yes. Can they make money by doing that? No, not with current business models.

Amazon, to make home delivery of groceries work for it and its shareholders, must stay in areas of high density vertical living; where discretionary incomes are higher; and where consumers' time values are are in higher esteem than their interest in shopping.

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Gene Hoffman, President/CEO, Corporate Strategies International

Yes, I am a skeptic when it comes to grocery deliveries. I can't imagine there is a market large enough to make this venture profitable. How does one take into account a person's taste when it comes to selecting vegetables, meats and fruits? Staples, I can understand. A can is a can. But not when it comes to other items.

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

It can only work in high-income, densely populated ares, and it will still be tough to make money at it.

People are really picky when it comes to getting perishables, which by the way are usually the most profitable part of the order. If they don't like the steak or roast they got, than what? The costs of delivering food products far outweighs the profit margin, as our traditional low margins in our industry, will not allow for any price gouging.

Good luck Amazon, as you may make this work, but profitability is going to be very thin, unless you stick to the higher income cities.

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Tony Orlando, Owner, Tony O's Supermarket & Catering

Moving grocery shopping to a delivery service has a lot of hurdles. I can see where it is very helpful for the professionally run home where a dedicated worker is able to use the Internet to do the household shopping without leaving the premises, but for the average homeowner it is more complicated.

First of all, the potential market is segmented between those with high speed internet and those without. While this is becoming less of a hurdle, it also requires computers, tablets, smart phone or other hardware to conduct the shopping. The person has to be home when the delivery arrives or have other arrangements to maintain the "cold chain."

Destination points have to be concentrated enough that delivery costs can be contained. The online experience has to be satisfying and profitable, although the potential for targeted promotions is very appealing. In general, it means changing people's shopping habits and this often takes a long time. Even today, there are people who won't give their credit card number over the Internet. The challenge becomes "how do you ramp up" when it may take a long time to utilize an infrastructure.

Here is where technology might satisfy a big need. Will the driver-less car be the answer to home delivery?

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Bill Bittner, Principal, BWH Consulting

Make it "work" as in making money and gaining more than a <1% market share? Probably won't happen. Make it "work" as in generating enormous amounts of publicity—as if they need any—with teaser "rumors" (or at least being the beneficiary of such rumors)? It already IS working.

'notcom'

Density is one element that is key to making this potentially work as is income and time pressure. As far as the concern about perishable quality, it depends how this is positioned AND delivered upon. If you shortcut the time the product sits in a back room or warehouse and can efficiently deliver it faster, the product is not as old which may mean it is fresher.

However, will there be quality standards to make sure that only the best perishables are picked and delivered? What is the guarantee? If not, perishables certainly could be a disaster. And the delivery and profitability of the model is certainly still unproven.

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Brian Numainville, Principal, The Retail Feedback Group

Everyone is so convinced that Amazon is not going to deliver groceries beyond Seattle that it's tempting to play contrarian and take the other side of the trade. But these are BrainTrust Panelists so probably not a good idea. Like home delivering groceries when there are more profitable businesses to be in....

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Phil Rubin, CEO, rDialogue

You better believe it's coming, especially if you're a traditional grocer, or maybe even more so if you're Walmart and Target. 54% of Walmart's business is in food, and that doesn't include all the cross selling after the groceries are shopped—so you know they're going to protect that business as if their lives depended on it.

I.e.: if Amazon starts to deliver groceries on a mass scale, so will Walmart. They have to.

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Lee Peterson, EVP Creative Services, WD Partners