Amazon.com plans to dramatically expand its online grocery business, which some financial experts claim will be one of the largest retail sectors yet in the e-commerce market.
AmazonFresh plans new warehouses with refrigerated areas for food, but also space nearby to store up to one million general merchandise products, in some cases.
Amazon experimented for 5 years with AmazonFresh in Seattle, and now plans to expand its grocery business outside Seattle starting with Los Angeles and then later this year in the San Francisco Bay Area.
Writing for Reuters, Alistair Barr claims if those new locations go well, the company may launch AmazonFresh in 20 other urban areas in 2014, including some outside the United States.
Bill Bishop, a prominent supermarket analyst and consultant, said the company was targeting as many as 40 markets.
“Amazon has been testing this for years and now it’s time for them to harvest what they’ve learned by expanding outside Seattle,” said Bishop, chief architect at Brick Meets Click, a consulting firm focused on retail technology.
“The fear is that grocery is a loss leader and Amazon will make a profit on sales of other products ordered online at the same time,” he said. “That’s an awesomely scary prospect for the grocery business.”
If Amazon’s online grocery venture proves to be successful, the company may invest in a broad-based delivery service employing Amazon trucks to deliver directly to homes, which would affect other companies such as UPS, FedEx and other package delivery companies that currently ship Amazon goods.
But this is a bold move for Amazon, since, as Barr points out, groceries have proven to be one of the most difficult sectors for online retailers to crack.
“One of the most richly funded start-ups of the dot-com era, Webvan, was a spectacular failure as the cost of developing the warehouse and delivery infrastructure proved overwhelming.”
Roger Davidson, a former grocery executive at Wal-Mart and Supervalu, believes Amazon will fail. Davidson says Amazon will struggle to make money from AmazonFresh because fresh produce can easily go out of date in storage warehouses and get damaged during delivery. “The reasons these businesses have failed in the past have not gone away.”
Wal-Mart is also entering the online grocery business, and is testing same-day and next-day delivery of online grocery and general merchandise orders in the San Francisco Bay Area. Wal-mart also operates a grocery delivery business in Britain.
“We are ready and able to expand grocery delivery in the U.S. as the market demands,” Wal-Mart spokesman Dan Toporek said.
Peapod claims it is the largest Internet grocer in the United States, delivering more than 23 million orders across 24 markets.
Davidson claims Peapod struggled to make money for most of its existence. “But he believes it now turns a small profit due to supply chain efficiencies, population density in Chicago and its connection to brick and mortar stores on the east coast.”
Davidson favors a strategy he called “Click and Connect.” Customers order food online and choose a time to pick up the produce from designated areas outside the company’s stores. There is a $4.95 service fee.
“Traditional grocery retailers will likely fight back against Amazon with Click and Connect,” he added.