Jeff Bezos, the founder and chief executive officer of Amazon.com, is accustomed to breaking new ground. And now he is attempting to do that in the online grocery business.
Bezos, 49, who started Amazon.com as an online bookseller at the dawn of the Internet age in 1994, has turned the site into the world’s largest online retailer, selling practically every consumer good, including many non-perishable grocery items. He turned his attention to all groceries in his home market of Seattle with the launch of AmazonFresh.com in August 2007.
After fine-tuning and growing AmazonFresh for almost six years there, Amazon announced the expansion of the service into the Los Angeles market last month, and is expected to enter the San Francisco market in October. Amazon is reportedly preparing for a rollout of AmazonFresh to as many as 20 additional markets over the next few years.
Observers wonder whether AmazonFresh’s performance in Seattle justified further expansion. Amazon would not comment for this article but "many people familiar with AmazonFresh characterize it as having a difficult [economic model]," said Keith Anderson, vice president, RetailNet Group, Waltham, Mass.
But Bezos, at the Amazon.com annual shareholders’ meeting in Seattle in May, said AmazonFresh has "made progress on the economics over the last year," according to reports.
Moreover, the service is considered strategically important enough that the criteria for expansion — if only in the California markets — may be "achieving break-even as opposed to profitability," Anderson said.
Analysts warn conventional grocers not to underestimate Amazon, which has been a successful first-mover with such programs as predictive merchandising and free shipping. In L.A., it is pushing the envelope again, offering same-day delivery for AmazonFresh customers for orders of $35 or more placed by 10 a.m.
Amazon has also introduced a novel payment plan in L.A. whereby AmazonFresh customers must be a member of Amazon Prime, which charges an annual $79 fee for free two-day delivery; Prime members receive the grocery service for no extra charge for 90 days, after which they are upgraded to Prime Fresh membership and charged $299 annually.
The new fee structure has raised some eyebrows. "You’re never going to get a big population charging $300 for grocery delivery," said Anderson. On the other hand, once AmazonFresh attracts customers, a significant percentage of their grocery spending shifts to the service — from the "low- to mid-double digits for loyal households," he said.
Bezos’ ultimate strategy behind AmazonFresh, noted Anderson, may be to use it as a "Trojan Horse," paving the way for same-day delivery of its vast inventory of higher-margin general merchandise items.
For the time being, though, given its high fees in L.A., AmazonFresh "will not have a high impact on mainstream or discount grocers," Anderson said. "It’s targeted more at Whole Foods and Costco shoppers. I would worry more if I were at the higher end."
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