Inside This Issue - News
Next up for Amazon
June 10th, 2013
SEATTLE – Online retail giant Amazon Inc. is taking on a new set of brick-and-mortar competitors. The company is reportedly expanding its online grocery business to include the delivery of perishable products, including produce, dairy and meat.
The Reuters news agency reported that Amazon, which has been testing a service called AmazonFresh in its home market of Seattle, intends to expand it to the Los Angeles market and then, later this year, into the San Francisco Bay Area. If those efforts are successful, the company could launch the service in as many as 20 other urban areas in 2014, including some outside the United States, the report said.
Amazon.com, which launched as an online bookstore in 2000, has steadily expanded into new product categories over the years. It began selling gourmet food in 2004, and then in July 2006 launched the Amazon.com Grocery store, promising that it "brings together a large, in-depth selection of dry grocery products the Amazon way — one convenient destination, easy navigation, a single shopping cart and candid customer reviews." All the grocery items have been available for free shipping.
Amazon’s grocery offering has grown significantly and now includes meat, seafood, dairy and eggs, albeit all in shelf-stable versions. The company’s egg offerings, for example, include mainly powdered eggs and egg substitutes.
AmazonFresh takes grocery sales a step further, with Amazon making use of its own fleet of trucks to deliver fresh food directly to consumers’ homes.
Reaction to the news that Amazon plans to expand the service has been mixed.
Roger Davidson, a former grocery executive at Walmart and Supervalu Inc., told Reuters that he expects Amazon’s online grocery business to fail.
"The reasons these businesses have failed in the past have not gone away," he said, pointing out that grocery is a low-margin business, and that adding perishables to the mix will lead to losses due to shrink from food spoiling or being damaged during delivery.
Some pundits have pointed out that Amazon has not shied away from low-margin businesses in the past.
"As I’ve said time and time again, the worst thing that can possibly happen to anyone’s business is for Amazon to enter the market as a competitor," Matthew Yglesias wrote on Slate.com. "They don’t make money, and they don’t care. Now here they come to destroy the supermarket industry."
Yglesias argued that Amazon has focused for years on top-line growth rather than on profits, and its shareholders have backed that approach. "If I were a supermarket executive, I’d be trembling with terror right now."
One concern is that Amazon will essentially use groceries as a loss leader to boost sales of other, more profitable products that can be delivered at the same time. And developing the fulfillment centers and delivery infrastructure needed for grocery delivery could allow Amazon to expand its ability to ship other goods to more consumers the same day they order it, eliminating one of the remaining advantages brick-and-mortar retailers have over the online retailer.
Amazon is building larger warehouses that could be designed to support this kind of expansion. The company opened a large distribution center — about 1 million square feet — just east of Los Angeles last fall, and two distribution centers are slated to open just east of San Francisco later this year. Large warehouses are currently under construction in Texas as well.
In Seattle, AmazonFresh customers can combine their food orders with purchases of general merchandise and other items ranging from video games to motor oil, and many items can be delivered the day they are ordered.
As this article went to press, Amazon officials had not commented on their plans for expanding AmazonFresh.
During a first quarter conference call in April, Amazon chief financial officer Tom Szkutak was asked whether reports of refrigeration equipment being installed in fulfillment centers in Seattle indicated there are plans to expand the AmazonFresh program.
"Nothing to announce here," Szkutak replied. "We are very pleased with what we’ve seen in the Seattle area. But again, it’s been a test, and we continue to monitor that test carefully. It’s certainly something that we see that customers love the experience. The challenge has always been in making sure we get the economics right, and that is something we will continued to focus on."