Amazon Freshens up for New Venture

First Amazon became the world's biggest bookseller. Then it came the world's largest online retailer.

Can this success translate to groceries?

The company is in the process of finding out with its trial of AmazonFresh, Amazon's online venture to deliver a full range of groceries, including perishables, to customers' doors. AmazonFresh has been in test market in Seattle, Amazon's home city, for about five years, and established a second test market in the Los Angeles area this summer. Tests in San Francisco and other cities reportedly are in the works.

It's an interesting proposition. Amazon has the world's most extensive online delivery system for durable goods, which now includes non-perishable foods ranging from candy to wine. But perishable goods are a different game, with several current players–and several failed former hopefuls.

One of the most famous flameouts was Webvan, which went public to great fanfare in 1999 only to fold two years later. Interestingly, Amazon has recruited several high-level Webvan executives and purchased Kiva, Webvan's warehouse-robotics technology spinoff.

Even though Webvan failed, it makes sense for Amazon to recruit its personnel, says Keith Anderson, VP and senior analyst for RetailNet Group.

"These are some of the most experienced and sophisticated logistics executives in the industry, and I think Amazon is a logistics company as much as they're a retailer and technology company," Anderson says. "So I think building a bench of the world's best logistics talent makes all the sense in the world."

In any case, Webvan's was not a failure of talent per se. It was ahead of its time and tried to expand too quickly, observers say.

"The world has fundamentally changed since Webvan was around," says Kate Wendt, an analyst in grocery and specialty retail for Wells Fargo. Consumers were not used to buying online, and slow dial-up modems were the norm. Webvan also made the mistake of growing faster than its information technology and logistics systems could handle.

Amazon has assembled a fleet of trucks for its full-service grocery markets, instead of depending on commercial delivery services like UPS.

FRESH START

Amazon isn't repeating that mistake. The Seattle rollout has been gradual, and the Los Angeles one even more so. The L.A. test has a significant restriction: To sign up for AmazonFresh, consumers must pay a $299 fee up front (after a 90-day free trial). This is not applicable to any purchases; it's simply a membership fee, for the privilege of ordering groceries through Amazon, although once it's paid, delivery is permanently free.

The $299 fee "is cost-prohibitive for many and means that customers who enroll will likely hold AmazonFresh to a very high standard," says Carelton English, COO/portfolio manager for Belus Capital Advisors. The upside is that it will restrict the customer base to people who are serious about getting their groceries online; someone who pays that much for a service is more likely to use it regularly.

"They've learned that when a consumer makes an upfront commitment like that, they tend to shop with you a lot more often and a lot more in terms of dollars," Wendt says.

Changing consumer behavior is going to be a major challenge for AmazonFresh. The vast majority of consumers are not used to buying food online except for the occasional specialty or gift item. Getting people to trust pixels instead of their senses, especially with items like fresh produce, is asking them to make a leap of faith.

"You're already requiring somebody to change their behavior in terms of ordering online versus going to the store in a category that's maybe not initially logical for consumers to do," Wendt says. "So if you forget an item in their order or if something comes and it's spoiled, you don't get a lot of chances with that customer because then that means they have to go back to the store anyway, which is the last thing that you want."

The key is for Amazon to emphasize the inherent advantages of centralized online distribution, which may not be apparent to consumers, English says.

"One thing to point out (which is true of most online grocers) is because the food is stored in a warehouse (a hyper-controlled environment), food freshness can be guaranteed longer," she says. "And let's be honest, fewer customers squeezing through a whole crate of fruit is probably also better for quality. Another thing that Amazon has been great at is featuring local brands [as part of] their offerings, which adds a personal touch to their selection."

PLAYING IT COOL

Amazon also is finessing some of the usual difficulties involved with food delivery. AmazonFresh customers in Seattle have the option of having their groceries delivered in totes packed with dry ice, which will keep them chilled up to eight hours for unattended drop-off.

"To me they're doing things in how they combine grocery with their existing assortment that gives them a potential advantage," Anderson says.

When it comes to online retailing in general, Amazon has a great deal of experience, a huge customer base and a massive existing infrastructure. That means they're already in a position to offer many more SKUs than the average grocer.

Amazon offers some 500,000 SKUs of general merchandise, significantly more than the 160,000 or so total SKUs sold in a Walmart Supercenter, Anderson says. That gives Amazon an advantage because it has so much to offer in addition to the 30,000 or so food SKUs available through AmazonFresh. Amazon can stock more SKUs because they don't have any retail store floors to keep supplied, which means that for many products, they can get by with smaller quantities per SKU, Anderson says.

"The argument for Walmart would be, they've got more stores in more places, they can get product to you faster," he says. "And I think that will be true in many cases, but what they will be challenged to do is beat Amazon on assortment, because Amazon facilities are configured to store product that never has to see a sales floor in a store, and that means they can stock smaller quantities of more items."

VIABLE VARIETY
In addition, the sheer quantity of all kinds of goods, durable as well as grocery, that Amazon carries may well give it an advantage over other online grocers.

"Amazon can compete here by offering a greater diversity of products," English says. "Peapod and FreshDirect are mostly limited to food and sundries, but AmazonFresh can tap into their warehouses to also offer books, DVDs, and toys. AmazonFresh can even package these items and experiences by offering everything you need for a BBQ, pool party, baby shower, etc., all delivered within a few hours. True one-stop shopping without having to leave your house!"

Most likely, Amazon will continue to be selective with its next rollout markets.

"The best spots for AmazonFresh to grow are urban-sprawl areas where there are young (and tech-savvy) families," English says. "Seattle was the first for obvious reasons, Los Angeles and San Francisco would be logical moves followed by Austin and Atlanta."

Wendt, on the other hand, believes that Amazon's choice of rollout markets is deliberately counterintuitive. The logical choices were high-density, highly sophisticated markets like New York, Chicago and Philadelphia, but Amazon chose sprawling areas like Seattle and Los Angeles as a challenge.

"I think they wanted to prove out the concept in some less logical areas versus starting in Manhattan and saying, 'Hey, this works, so we can roll it out everywhere,'" she says.