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Amazon’s Next Mountain to Conquer: Delivery

It has been a busy month for the evolution of Amazon’s digital grocery strategy and its home delivery plans.

First, in late January, Amazon opened its AmazonGo, cashier-less store to the public. Then Amazon announced a pilot to deliver groceries from Whole Foods stores to consumers in two hours or less (two hours for free on orders of $35 more, one hour for a $7.99 delivery fee), with the service initially be available in select markets, including Austin (where Whole Foods is headquartered), Cincinnati, Dallas, Virginia Beach, and most recently, Atlanta and San Francisco. To accomplish this, Amazon merged its Prime Now Delivery Service (two-hour delivery of general merchandise), with Amazon Fresh (its decade-old $14.99 per month grocery delivery service).

Next, the Wall Street Journal reported that Amazon was preparing to pilot a service called “Shipping with Amazon” (SWA), package delivery service for businesses that directly competes with UPS and FedEx. SWA will use Amazon’s own delivery infrastructure and employees. Amazon expects to roll out the delivery service in Los Angeles in the coming weeks.

In preparation for this announcement, Amazon also expanded its “FBA Onsite” program, which allows merchants to sell their goods to Amazon Prime Members with free two-day shipping. These sellers can now save costs by bypassing Amazon warehouses and shipping direct to customers’ homes.

Finally, Amazon announced that Amazon Prime members now earn 5% cash back when shopping at Whole Foods Market using the Amazon Prime Rewards Visa Card.

What do these announcements mean? Amazon has found its next battle to win, its next mountain to conquer. Let’s take a deeper look.

Whole Foods delivery

With this announcement, it became clear that Amazon ultimately wants to leverage all Whole Foods locations for home delivery and/or curbside pickup. How fast they try to scale will depend mostly on how extensive the first market test is. Here are some of the things to watch once the test is live:

  • Will Prime Now be delivering the complete inventory of the local Whole Foods, or a select subset? The Whole Foods in-store inventory isn’t currently online, so this would be a meaningful infrastructure enhancement (that likely signals Amazon has bigger plans).
  • Will pricing be the same as stores? Obviously, it’s very expensive to deliver fresh items to a consumer’s home. Amazon said two-hour delivery will be free for Prime members, but will they try to recover some delivery costs by charging more for items, as most competitors do?

It may be that Amazon can only afford to offer this level of service in densely-populated areas (where a driver can make multiple deliveries in a short period of time). Don’t be surprised if we see curbside pickup offered as the alternative in more rural areas.

Ultimately, the biggest constraining factor in a broader roll-out may be Whole Foods’ existing agreement with Instacart. Prior to the Amazon acquisition, Instacart may have had an agreement to be the exclusive delivery service of fresh products from Whole Foods in particular markets. Amazon may need to find a way to get out of those agreements or wait for them to expire. It will be interesting to see what happens.

Clearly Amazon didn’t buy Whole Foods without the intention of integrating the chain into the Amazon ecosystem and allowing consumers to shop the assortment digitally, so integrations like the store delivery service and the cashback rebate certainly won’t be the last moves we are likely to see.

Competing delivery service

Developing its own delivery service is also not a surprising move from Amazon. UPS/FedEx/USPS simply aren’t growing capacity as quickly as Amazon needs it, so Amazon has been building up their own capacity for a while, including a $1.4B airport hub in Cincinnati that will eventually encompass 1000 acres supporting more than 100 Prime Air jets. As with many other aspects of Amazon’s infrastructure that was built for their internal use, they will scale and leverage it by selling their extra capacity to third parties, as they have done with Amazon Web Services and Fulfillment by Amazon services.

Amazon is growing at roughly 25% per year, while UPS/FedEx capacity typically grows at 8%, so clearly Amazon needs to increase delivery capacity to support its own growth. As UPS and FedEx capacity gets more constrained, they raise their rates, and as a result, shipping costs have become one of the fastest-growing expenses for Amazon.

If Amazon is able to get scale behind SWA, it will be another huge competitive advantage versus the rest of the market — and another compelling reason for sellers to sell through the Amazon Marketplace. This could also open the door for many other service offerings for Amazon. For example, the online retailer could improve the Prime free shipping promise from two days to one day for most items, which would be a very expensive proposition for other retailers to match. They could also leverage their drivers to provide reverse logistics services, dramatically improving the customer experience for returns and lowering the cost of those returns.

Finally, by integrating their own software and services into seller’s warehouses, there is potential for Amazon to enable their customers to rent extra capacity, effectively turning the entire supply chain into another highly-efficient Amazon marketplace.

From these moves, it appears Amazon is primed and ready to change the way delivery is done. Will it succeed as well as it has in other facets of business and daily life? Only time, and testing, will tell.

Source

ChainStoreAge.com

Publish date

March 9, 2018

Author

Jason Goldberg