The grocery retail sector is one of the last major sectors that Amazon (AMZN) wants to conquer, not controlled by e-commerce. It has quietly been developing plans to roll out a large online grocery business. Can Amazon do it successfully?
"AmazonFresh" is the enterprise Amazon is using and the company's been testing this concept for about five years in Seattle, where it has been delivering things like eggs, strawberries and meat but it's been using its own fleet of trucks. In the future it plans to expand to Los Angeles, and then up to San Francisco.
In the United States alone, the grocery business generated $568 billion last year. If Amazon can tap into this market successfully, there is no telling where the stock can go!
There is a reason the retail grocery business has yet to be conquered by e-commerce. Profit margins are tight and delivering fresh food can pose insurmountable problems as it is very easy for food to go bad in storage, or even be damaged in delivery. Many delivery companies like this have tried to develop them online and failed, and the reasons for that failure have not gone away.
These failures are things that Amazon's going to have to face and it's not going to be easy.
While it is true that this is a great challenge, Amazon is not the only company interested in online grocery sales. While Amazon is testing this market in Seattle, and planning to expand the test market the San Francisco, Wal-Mart (WMT) is already there testing the waters.
There's another company called "FreshDirect" that delivers food now to homes and offices in parts of New York City, and is going to expand its business into the Bronx soon. As a guideline the minimum order for delivery is $30 and there is a delivery fee which ranges from $5.99 to $8.99 depending on where the deliveries are taking place. Delivery time is flexible also and it only takes one day. As long as the times are open, consumers can pick delivery times from 6:30 AM to 11 PM at night. The company claims the prices are the same. There is a question on its website that goes like this: Is FreshDirect more expensive than a regular grocery store? Here is the answer the company gives online:
"Surprisingly, it's not. Our prices are about the same, PLUS you won't need to hunt through stores for sale items or things [like] President's Picks, and you'll always find this week's new and in-season items in the What's Good? Department."
Selling convenience may be important here if this is true. As a consumer I don't mind going in and walking through the store and looking for items myself, in fact I like the idea of me looking at something and choosing it myself. If prices are "the same" then I guess companies like this would have to sell the concept of convenience.
Buying meat from a grocery store online is different than buying a digital camera. I don't "feel" the digital camera for freshness like I would observe a piece of meat. If convenience is the selling point here, I guess this would be a market for busy people who don't have time to do their own shopping. This may work well in areas of the country where people have very hectic schedules, but I'm uncertain if "convenience" is a large enough motivator to have an impact on a $500 billion industry.
How Retailers can fight back
There's a strategy that retailers can use to flight back that may not be quite as convenient as having something delivered straight to your door, but it's the next best thing instead of having to go straight into the store. This is a shopping strategy known as "click and connect" whereby customers can still order food online but instead of having it delivered to the customer's house, the customer picks a designated time to pick up the groceries right outside the store.
I still believe the question that must be answered by all these companies when dealing with groceries is this: How can we make the online grocery business profitable?
When you have a retail sector that has such small profit margins, this makes it hard. Stores like Safeway and Wholesale Foods Market do not operate on huge margins when consumers come into their stores and pick the stuff they want off the shelves.
If Amazon or Wal-Mart make this business successful, it seems that they would have to eliminate the costs that a local retail outlet would have, which would include things like retail space, retail employee costs, and other various costs associated with a retail location. Delivery and store stocking wouldn't take place but you still have stocking and warehouse.
My simple observations and experience in business would have me conclude this: The difference between the cost of warehousing the food (where consumers don't come to buy) and the cost of delivery when a consumer buys online must be less expensive than the cost of filling a retail grocery space and having the consumer buy food from there and take it home themselves.
This answer has yet to be revealed to us by either of these large corporations. But one way costs could be lowered is by combining grocery delivery with other "high-margin" products.
Finding a way to get a consumer to go online and buy more than groceries and have those items delivered to the house is going to be the key to the success of this idea. If a consumer looks for certain types of food but also buys something like a digital camera and has that delivered, this bumps up the profit margin, and this is exactly what these companies need to do. I'm sure my insight is no revelation to them. I am assuming they're working on this same type of strategy as I write.
The market is huge and I can understand why large businesses would put research money into exploring whether this is a viable moneymaking market for them. I can't answer that, but I am pessimistic. Knowing how tight the profit margins is for retail groceries, my personal conclusion is this: Unless these companies can figure out how to combine higher-margin merchandise with groceries, then I don't think it'll work. Whether I am right or wrong, time will tell as we watch how this new frontier develops.