The Salt
5:25 pm
Wed June 5, 2013

Amazon's Grocery Delivery: A Trojan Horse To Get In Your Door

Originally published on Wed June 5, 2013 7:16 pm

Amazon already delivers everything from toothpaste to televisions to your doorstep. Now, it wants to bring your berries and beer, too.

The online retailing behemoth is planning a major expansion of AmazonFresh, the home delivery service of meat, dairy and other fresh and frozen foods that it has been field-testing in Seattle since 2007. The service could launch in Los Angeles as early as this week, and delivery in San Francisco is on the horizon for later this year, according to Reuters. By 2014, the company could expand grocery delivery to as many as 40 major urban areas.

So why would a heavyweight like Amazon bother diving into the grocery business, with its notoriously razor-thin profit margins? After all, the online grocery business has become a sort of Bermuda Triangle for many companies, including Webvan, one of the most spectacular failures of the dot-com era at the turn of the 21st century.

But home grocery delivery could prove to be a Trojan horse for Amazon to get inside your home more frequently, says Justin Bomberowitz, a senior analyst with RetailNet Group, which released a research note on AmazonFresh in April. (The firm shared the note, which requires registration to access, with The Salt.)

"What this does is give Amazon the opportunity to connect with customers on a more frequent basis," he tells The Salt.

Right now, Bomberowitz says, most Amazon customers tend to make small purchases, one or two items at a time. But if Amazon can bundle your bananas with your books and batteries, it can make that stop at your door all the more profitable.

As for the grocery biz itself, it doesn't need to be a cash cow for Amazon right away. So can Amazon afford to lose money on grocery delivery?

"Absolutely," Bomberowitz says.

For now, analysts say the goal is really to break even with grocery delivery while also using the service to grow Amazon's same-day-delivery service.

In the past, distribution logistics have been one of the major stumbling blocks for online grocers, says industry analyst Bill Bishop of the consulting group Brick Meets Click. "Grocery products are heavy, large and bulky and expensive to distribute, but there isn't much money in the cost to cover that distribution," he told NPR's Audie Cornish.

But Amazon, Bishop notes, has been busy building smaller distribution centers in more populated areas to stock items for same-day delivery. Amazon hopes that grocery delivery will get its trucks in these denser neighborhoods on a daily basis, RetailNet Group's report notes.

Same-day service, says RetailNet Group's Bomberowitz, "has proven popular enough in Seattle that Amazon is expanding it."

Indeed, part of the reason Amazon spent so many years testing the AmazonFresh concept in Seattle is that it wanted to get the model right, analysts say.

The service, says Bomberowitz, is designed to deliver "ultimate convenience" and includes features like no minimum order, pre-dawn delivery (the most popular option) and the ability to choose the time when your food shows up. You can also opt to have your groceries dropped off in a chilled tote bag. (And as we've previously reported, there's also the benefit that such services can be more environmentally friendly than schlepping to the store yourself.)

In Seattle, at least, the service also includes delivery of goods from a select group of "favorite" local vendors, from artisan breads and doughnuts to craft beers from the famous Pike Place Market, plus deliveries from local restaurants. RetailNet Group analyst Logan Gallogly says she expects AmazonFresh to offer a similar local component as it expands into LA and San Francisco.

So who are the likely shoppers for this service? This is not for the people who find joy in squeezing avocados to find the best one in the bin. But it is for busy, moneyed professionals who will happily delegate that task to someone else, Bishop says.

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