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Retail: Bezos's big gamble: Amazon makes a play for online grocery trade, but can it deliver?: $100bn online company expands again, with the giant Walmart in its sights
[August 16, 2014]

Retail: Bezos's big gamble: Amazon makes a play for online grocery trade, but can it deliver?: $100bn online company expands again, with the giant Walmart in its sights

(Guardian (UK) Via Acquire Media NewsEdge) The bright green trucks have become familiar sights in Seattle, San Francisco and Los Angeles, they have just appeared in San Diego, and they may eventually trundle around the world, transforming grocery shopping.

At first sight the expansion of Amazon's grocery service, AmazonFresh, across California signals an audacious gamble to seize a share of the US's $1tn (pounds 600bn) food market and turn the online retailer into an even bigger behemoth.

Amazon revenues are set to breach the $100bn barrier for the first time this year but that hardly satisfies the Seattle-based company's founder, Jeff Bezos. He reportedly hopes the move into groceries will help him catch up with Walmart, which has sales of $475bn.

For Bezos, food is another sector to be conquered in a quest for retail domination that has hit several bumps recently, including a fight with the Hachette Book Group over ebook pricing which is turning into a PR fiasco. But Bezos is undeterred. "We'll continue our methodical approach - measuring and refining AmazonFresh - with the goal of bringing this incredible service to more cities over time," he told shareholders this year.

The green fleet's arrival in San Diego last month followed a phased roll-out in LA and San Francisco after a five-year trial in Seattle. For a $299 annual delivery fee customers can order from a range of 500,000 products - including milk, bread, lettuce, steak, toys, electronics - and expect the goods to arrive the same day or early the next morning.

Bezos, a Star Trek fan who initially wanted to call his company after Captain Jean-Luc Picard's catchphrase, apparently considers groceries, especially perishables, one of online commerce's final frontiers.

If that is the case, expanding from rainy Seattle down to the sunbaked Mexico border is just the beginning.

But there is a problem: groceries may be a financial black hole. Some analysts warn Amazon could haemorrhage cash and credibility by entering a complex, costly sector with razor-thin margins. "AmazonFresh is an enormous money pit, that's my opinion. At best a money pit, at worst a path to bankruptcy," said Sucharita Mulpuru, an e-commerce expert with Forrester Research. "It's a tough, tough business. I don't know if it's a business that makes sense for them." Scepticism about AmazonFresh's viability has fuelled speculation that its real purpose is not, in fact, to turn the company into a mega-grocer but to cement customer loyalty and test-run speedier delivery, honing Amazon's edge in other areas.

"They're just not a very good grocer," said Terry Drayton, the former HomeGrocer chief executive, who pioneered online groceries in the US in the 1990s. He estimated AmazonFresh's average order value at less than $50, versus $120 for HomeGrocer back in 2000. Drayton, who said he turned down the chance to lead AmazonFresh in 2006, faulted the product selection as limited, the perishable goods as often poor quality, and the lack of refrigerated trucks.

"You have to be a complete alternative to the bricks and mortar grocery store. I find it hard to believe they've spent this amount of time just to be a mediocre grocery business. I think it's really a way for them to test out same-day and next-day deliveries." The move into food comes at a delicate moment for Amazon. Last month, it reported a 23% rise in revenue, to $19.34bn, for its second quarter. The prospect of drone delivery - it is seeking permission to test models that can fly at up to 50mph and deliver packages weighing up to 5lb (2.3kg) - continues to generate a buzz.

But problems are mounting. Despite the sales rise it posted a $126m loss for its second quarter and warned of further losses of up to $810m in the coming quarter - compared with a $25m loss in the third quarter last year - sending its share price tumbling. Early sales figures from the just-launched, whistles and bells Fire phone appear weak and the Hachette confrontation is underscoring Amazon's reputation for commercial aggression.

The move into groceries dates back a decade, according to Brad Stone's book The Everything Store: Jeff Bezos and the Age of Amazon. "In order to be a $200bn company we've got to learn how to sell clothes and food," the CEO reportedly said in 2007. The $200bn figure referred to Walmart's sales at the time.

Online food retail had a cautionary tale in HomeGrocer. Drayton's startup raked in more than $1m daily in 2000, a dotcom star, before being sold to Webvan for $1.2bn in 2000, after which the wheels fell off - one of the era's most spectacular busts.

Amazon hired Doug Herrington, a former Webvan executive, to lead Fresh's foray into Seattle, a slow, gradual expansion around the city, followed by parts of Los Angeles since last year, then San Francisco and San Diego. Recent market research studies are bullish about the industry's potential. IBISWorld forecast that an improving US economy would boost online grocery sales by an annualised rate of 9.2% over the next five years, from $6.5bn to $10.1bn.

Amazon declined interview requests for this article, along with a request to visit a distribution centre, but emailed a statement which gave a hedged vow about continued expansion.

"As a company policy, we don't disclose our product roadmap or discuss financials. What I can tell you is that we've been very pleased by the feedback from customers who are saving time by combining grocery and other shopping into one seamless experience," said a spokeswoman, Nell Rona.

For Drayton, the serial entrepreneur, AmazonFresh will serve a useful purpose if it paves the way for same-day and next-day deliveries, giving Amazon the speed and dexterity to outpace all bricks-and-mortar retailers, not just grocery stores.

"Strategically they're just too smart to be farting around. It doesn't jive with their vision and all the things they're good at. The value of same-day delivery far outweighs anything they do with groceries." Captions: The fleet of green AmazonFresh delivery vans is already fanning out across California, trying to grab a slice of the $1tn US food market Photograph: Joe Nicholson/AP Jeff Bezos, Star Trek fan and Amazon founder, sees groceries as one of the final frontiers for online traders (c) 2014 Guardian Newspapers Limited.

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