Amazon's stepped-up grocery drive to accelerate online space race

According to an article published a few days ago in the WSJ that has attracted a lot of attention, Amazon is planning to open convenience stores selling perishable items such as milk, meat, fruit and vegetables. Customers will also be able to order packaged goods with longer shelf lives for same day delivery, using their mobile phones or possibly in-store touch screens. The report, whose main source is "people familiar with the matter", notes that these stores may take a year or more to open while the company scouts locations and the plan (known internally as "Project Como") could be shelved because of financial or operational concerns. 

That Amazon wants to test brick and mortar locations to help expand its Fresh business should not come as such a surprise. Previous reports earlier this year already identified two locations in California (Sunnyvale and the Bay area) where Amazon appears to be developing drive-up grocery pickup locations, and according to the WSJ article one such site is due to open in Seattle (where Amazon Fresh was first launched) in just a few weeks time. Enabling pick up at or delivery from physical sites near customers' homes is the best way for Amazon to lower last mile fulfilment costs and to try to eliminate one of traditional supermarkets' main advantages over pure online.

The very limited rollout of Amazon's lockers in 7/11 stores in the US suggests this model is not working particularly well, for non-perishables at least. Nor is it very scalable, given the stores' tiny size. However, combining online orders with walk-in sales from custom-built stores is already a profitable model for California-based hybrid supermarket chain There could be significant potential advantages from configuring sites and managing inventory in a way that leverages Amazon's particular logistical capabilities and customer insights. What is not yet clear is the part that Kiva, the robotic picking company Amazon bought four years ago, will play in assembling online grocery orders more efficiently and the extent to which this activity may be automated at the store level. 

What is clear is that this latest news, coming on the heels of a shift in Amazon Fresh's pricing model for home delivery from a yearly subscription of $299 (including Prime) to a monthly fee of $14.99 (on top of $99 a year for Amazon Prime) and the recent integration of Amazon Fresh into's main website, signals an acceleration in the online grocery space race in the US. The online giant's moves coincide with Walmart's aggressive rollout of free curbside pickup and last week's statement by its new head of e-commerce Marc Lore: "We're going to be really focused on winning in fresh and consumables over the next couple of years."

The US market is entering the phase where downward pressure on service fees and much greater availability and quality of online fulfilment options combine to drive greater customer take-up for online grocery. While this is good news for time-pressed grocery customers, it presents a major challenge to grocers' profitability, as the subsidy they will have to pay just to keep their valuable multi-channel shoppers rises.

The desire to maintain profitability in the face of rising e-commerce costs is one of the reasons the UK's major grocers (including Asda, a Walmart subsidiary) failed to cut prices in time to slow the growth of hard discounters Aldi and Lidl. It will be interesting to see how US grocers deal with the twin threat that is now headed their way. 

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