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From SCDigest's On-Target E-Magazine

- June 5, 2013 -

Supply Chain News: Amazon to Make Major Push Into Grocery Business

Test in Los Angeles Coming Soon; 20 Markets Opened in 2014? Should Brick and Mortar Grocers be Scared?


 SCDigest Editorial Staff

As continues to grow at impressive rates, leading the overall rapid rise in ecommerce spending and putting fear into many brick and mortar retailers, news this week that the on-line behemoth has plans to roll out a grocery offering as well.

Amazon has sold groceries in its home Seattle market for more than five years, but Reuters reports this week that the company has been working on a plan for building a national grocery business for a number of years, and plans to add the service to the Los Angeles market as early as this week, and San Francisco not long after that.

SCDigest Says:

The other big question is whether anyone can really do this profitably, as delivery charges for everyone seem low at this point versus the cost of "picking" the orders in store and running the trucks
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The service will called AmazonFresh. Sources tell Reuters that as Amazon continues to build distribution centers at an incredible clip, its new DC designs include refrigerated space. Whether that includes freezer space as well is not clear.

Ultimately, Amazon is considering selling groceries on-line in as many as 40 markets, Bill Bishop, a supermarket analyst and consultant, told Reuters, but it is not clear how Bishop knew of the plan'
s details. Reuters said if the two new test markets are successful, Amazon may launch the service in another 20 markets in 2014.

Amazon acquired and in recent years, giving it some experience in the consumer packaged goods sector, but managing and delivering perishable items such as meats, produce and more would be a whole new ball game. The service will offer same day delivery in each market as well, something the company is currently piloting in some markets already for non-food items.

In those pilots, however, Amazon uses traditional home delivery carriers such as UPS and/or FedEx to get the orders to customers' homes. However, those carriers do not - for now at least - have the capability to deliver groceries generally, let alone items that require refrigeration and even potentially freezer storage.

So will Amazon need to build out its own fleet of trucks and drivers to provide the home delivery? That is what it has been doing in the service in Seattle, but whether that is how it would play out nationally is not clear.

And would those trucks also be used for home delivery of non-grocery items as well, either for customers who order both grocery and non-grocery items, or just non-grocery by themselves? These are the multi-million dollar questions, for several reasons: the cost for Amazon to build out this capability nationally, the potential impact on UPS/FedEx in terms of lost volumes, and the notion being promoted by some that Amazon could profit in the notoriously low margin grocery business by using it as a "loss leader" to sell electronics and other higher margin items.

Of course, on-line grocery has been tried before, initially with little success. A company called Webvan spent millions of dollars in the late 1990s to build automated distribution centers to support its service, but the whole business came crashing down and went bankrupt just a few years later.

Slowly but surely, the concept has started to catch on, with companies such as FreshDirect and Peapod, among others, having some success in select metro markets. In the UK, grocery chain Sainsbury's is seeing rapid growth in its on-line grocery, which includes having delivery drivers bring the food items right into a customer'
s kitchen.

There is also a service called "Click and Connect" from East coast grocer Harris Teeter, in which customers order on-line, and the grocer delivers to a secure storage location for later customer pick-up, similar in a sense to Amazon'
s own "Locker" strategy for regular merchandise, at a cost of $4.95 per order. Walmart's test of same day delivery on-going in the San Francisco area is said to include grocery items.

(Distribution/Materials Handling Story Continues Below )


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According to market research firm IBISWorld, on-line grocery shopping is estimated to grow by 9.5% annually and is on track to become a $9.4 billion industry by 2017. That compares with estimates of an overall $568 billion in US grocery sales in 2012 - giving Amazon a large target to fuel its growth, which fell to 22% in Q1 versus the high 20-percent range in late 2012 and the 40%+ range not long before that.


AmazonFresh for the Seattle Market



So should grocery chains and mass merchants be scared they will also be "Amazoned?" That's not clear yet, as details are few and Amazon as usual is saying nothing. Certainly grocery operators outside of major US metro areas probably shouldn't see a threat, and the pace of the rollout likely will give other grocers some time to think about their own on-line services, as some have already done.

But no doubt Amazon's entry will accelerate those efforts, as the details of the program - from costs to approach to logistics - filter out with the new Los Angeles test.

The other big question is whether anyone can really do this profitably, as delivery charges for everyone seem low at this point versus the cost of "picking" the orders in store and running the trucks. Peapod, delivering to 24 markets, has lost money for most of its life but is now believed to be eking out a small profit. The company, however, may be of interest to a large grocery chain to acquire the capability and the know-how that it could leverage.

Roger Davidson, a former grocery executive at Walmart and Supervalu, agrees that Amazon will struggle to make money on the venture by itself, since fresh produce can easily go out of date and be damaged during delivery.

"Will it work? I would bet against it," Davidson told Reuters. "The reasons these businesses have failed in the past have not gone away."

Our question is: if Amazon builds it, will that cause the customers come?

What do you think of Amazon's push into grocery? Will it work? Why or why not? Let us know your thoughts at the Feedback button below.

Recent Feedback

With so many opportunities for Amazon to increase revenues (i.e. global/domestic expansion, B2B expansion, 3P services, technology, etc.), I find it unusual for Amazon to launch a strategy that aims to capture market share by leveraging a notoriously low net margin sector.  In the Grocery industry, successful supermarket companies make a 2 - 3% net margin if they are good and many make 1% or less.  I am convinced that home delivery is the highest cost business model for bringing food to the consumer. I understand that Amazon may be looking at Grocery as a loss leader to generate increased sales volume for general merchandise but it's a risky strategy at best.  

The way to make real money in the grocery business is to buy in large volumes at the lowest bracket price and to take out all the touch labor throughout the supply chain.  This is why Costco has been such a successful company  - because they've figured it out.  Buy pallets in truckload quantities as much as possible, cross dock them, and stick them into the store as pallets - minimal touch labor - that's the secret sauce to getting the cost out so that you can make a few points of profit.  Even if Amazon throws Kiva Robots at these facilities, there is still a high amount of touch labor expense being incurred to service smaller more frequent home delivery orders and this implies low net margins at best.  This is why the internet grocery concept has never been a clear winner and also why this is not a crowded market place. 

What is clear to me is that Amazon is setting up a grocery home delivery network to boost volume through its general merchandise network because that is where the real money is.  Increasing volume through its existing DC network will enable the company to generate more profit which is necessary to finance its rapid infrastructural expansion.  The risk in all of this is whether or not its grocery business will break even or worse, generate a drain on profits that in turn hurt the profitability of the business.  Getting into the grocery game is not without its capital investment requirements because (a) you need to obtain multi-temperature storage facilities (ambient, cooler, freezer) positioned close to highly populated urban markets; and (b) you need a dedicated multi-temperature truck fleet that is optimized such that deliveries are very close together.  My bets are off on this one since the ROA generated from selling on-line groceries is too low to bother with. In my opinion, Amazon is much better off investing into expanding its core competencies into new geographical markets - at least at this stage in the company's evolution.  Hopefully I am wrong about this one but only time will tell.

Marc Wulfraat
MWPVL International Inc.
Jun, 06 2013

I think Amazon can do it for sure, it's just a matter of patience, and they have plenty of that. I would rather wonder if the consumer is ready to change it's habits and the seduction of the purchasing personal experience for the on-line purchasing experience.

Rafael Moreno
Distribution & Logistics Mgr
Jun, 11 2013

 If shared standards can prove adequate to all parties--even eventually the customer--it will work wonderously: since newer techniques of handling and shipping will evolve to meet the occasion!

Stanton Kaye
Infratab inc.
Jun, 13 2013

Amazon's, and even moreso, Google's, entry into any business sector could present serious threats to that sector's leading participants!

But while I have absolutely no problem instructing Amazon to send me by book orders by next- or second-day delivery, I still prefer (note I said "prefer," not enjoy) "eyeballing" my fresh meat and produce selections before taking them home.  My goodness, that's why I alone visit our best-of-class meat markets, rather than sending one of our household staff to do that shopping.

And just who will make all those possible deliveries for Amazon?  Surely not hourly or salaried paid Amazon employees.  No doubt Amazon believes it will succeed in recruiting, enrolling, and retaining a vast nationwide field force of vehicle-owning "independent contractors," those such folks every trucking and delivery company in North America lusts after but cannot find, and those same such folks every State revenue and labor regulator now seeks to be no longer classified as "independent contractors."

Go figure ... 

Thom A. Williams
Managing Director
Jun, 13 2013