Amazon spent the first phase of its life building up its online retail presence, causing problems for many brick and mortar outfits along the way. Amazon has branched out and recognizes the value of brick and mortar, and the company’s physical retail push includes bookstores, pop-up retail shops, and now grocery stores.
GeekWire previously reported on Amazon’s push to open drive-up grocery stores in Seattle and the San Francisco Bay Area. The immediate question that comes to mind is, why? Why is Amazon diving in to the brick and mortar side traditionally dominated by large grocery stores?
An article originally written by Brittain Ladd in 2013 and available online and on LinkedIn lays out the case for Amazon’s grocery arm, AmazonFresh, to invest in brick and mortar. Physical grocery stores have the potential to bring in new customers who don’t want to buy their groceries online. We’ve seen it before with Amazon Prime, where the company has added a buffet of benefits to get the largest subscriber base possible. Now Amazon appears to be following a similar blueprint with AmazonFresh.
Though many details of Amazon’s Seattle grocery stores remain unknown, the concepts look eerily similar to those laid out by Ladd years ago. Ladd, who was with management consulting firm Deloitte when he published the article, went to work for Amazon after he was recruited last year, and now he works on the global expansion of Fresh. Ladd declined comment for this story.
Ladd’s model uses game theory and recommends a mix of digital and brick and mortar retail for AmazonFresh. This blend is en vogue right now with retailers big and small. Walmart has gone from pure brick and mortar to having a big online component, as evidenced by its $3.3 billion acquisition of Amazon competitor Jet.com. Now Amazon is in the middle of transforming from an entirely online retail company to building stores in a few cities.
In his article, Ladd envisions a multi-store model with several locations where customers can hand pick some items like fruits and vegetables and use an app, virtual wall or kiosk for the rest. The goal is to give customers options. Do they want to have food delivered? Pick it up out on their own? Have it ready when they arrive and brought out to the car? All of those options would be possible.
“Amazon can leverage the stores for in-store grocery pick-up, drive thru grocery pick-up where possible, and even leverage the stores for Amazon Locker locations,” Ladd wrote. “In essence, AmazonFresh becomes an ecosystem of channels centered on food and groceries capable of meeting the needs of all customers.”
Online grocery sales make up only about 2 percent of the grocery market, according to a recent report from Morgan Stanley. Ladd argues in his article that there are two issues online grocers struggle with when trying to become profitable: demand and density. If an online service like AmazonFresh has more customers in an area it can save money on shipping and delivery costs by hitting multiple residences in a neighborhood on a single delivery. For example, an AmazonFresh truck delivering 10 orders in a 60-mile radius is going to take a lot longer, and cost a lot more, than delivering 10 orders to people in a five-mile radius.
Grocery stores increase that density even more. At one of Amazon’s pick-up locations, hundreds of customers per day can put in orders, and then trucks can ship in the groceries from nearby fulfillment centers. Dropping off orders at a central location costs significantly less than trucking them out to peoples’ homes.
Irv Grossman, executive vice president for the Americas at supply chain consulting company Chainalytics, said density of delivery can help cut down on shipping costs and make deliveries easier and more predictable. AmazonFresh is a tough model because it relies on timely deliveries to make sure items remain fresh, Grossman said. So adding the option to pick up an order versus having it delivered can make things easier on Amazon and for the consumer. And in today’s competitive markets, customer-centric options can help companies stand out.
“Our supply chain was usually dealt with on the suppliers term, being the manufacturers and distributors, and now our supply chain is a lot more designed around the customer’s preferences, working with the customer on their terms. Those that have addressed it actually have a good chance of winning the market,” Grossman said.
Having multiple stores in the same city is another customer-centric move by AmazonFresh. As shown by traditional grocery stores, people like to shop near their homes. By having locations in both Ballard and Sodo, Amazon could get customers from both north and south Seattle. With just the one location in Ballard, Amazon might lose customers from the south part of town who don’t want to slog through downtown traffic to get their groceries.
“At the end of the day, Amazon Fresh will only succeed as a grocery retailer if they can sell more groceries,” Ladd wrote. “Additional Prime memberships may generate revenue for Amazon but if Prime members do not turn to Amazon Fresh for groceries, there is little positive impact for AmazonFresh. My multi-format store concept would allow anyone to shop at AmazonFresh without paying any membership fees.”
This is one way Amazon Fresh’s current setup differs from Ladd’s model. This week, Amazon changed up how it charges its $299 annual Prime Fresh subscription fee that the company rolled out last year. Instead, AmazonFresh will be $14.99 per month, available only to Amazon Prime members.
Adding in the $99 annual cost of Amazon Prime, the new annualized cost is still only about $20 less than the previous yearly fee. But the monthly pricing is likely to make it far more palatable than the $299 per year option. And with an estimated half of U.S. households already Amazon Prime members, many people are already paying that part of the cost anyway.
The company has experimented with a variety of different pricing, delivery and subscription approaches for AmazonFresh over the years. The rollout of the $299/year subscription last year sparked a backlash from longtime customers. The sting was especially sharp for some customers in the Seattle area, many of whom had been using AmazonFresh without an annual subscription fee since Amazon started testing the service in the region back in 2007.
In addition to drive-up grocery stores, Amazon is reportedly considering other retail formats that would sell items like produce, milk, meats and other perishables. This again, is very similar to the model favored by Ladd.
“Ideally, Amazon would invest in designing and building their own retail stores that would carry the 20 percent of lines that generate 80 percent of sales in a traditional supermarket: dairy, meat, fruits, vegetables, and breads.”