1. AmazonFresh is Coming – Here’s What You Need to Know
by Logan Gallogly, Friday, Apr 12, 2013
Though nothing has been formally announced, RNG DIGITAL strongly expects that Amazon will expand its AmazonFresh
full-basket (and general merchandise) delivery service to Los Angeles by June 1, 2013 and San Francisco (October
2013). The expansion has implications for the grocery and CPG market online and offline, but could also be Amazon's
Trojan horse for same-day delivery in the US.
Background
AmazonFresh has been operating in Seattle since 2007. The service is currently fairly small - RNG estimates it at $66
million in sales in 2012, equivalent to less than 3% of the Seattle grocery market.
l The site is located at http://fresh.amazon.com and is currently open only to Seattle residents
l AmazonFresh's temperature-controlled delivery fleet delivers an assortment of approximately 15,000 frozen, chilled
and shelf-stable grocery SKUs plus another 100,000 general merchandise SKUs
l Though there are similarities between Amazon.com and AmazonFresh, the user interface for Fresh looks and feels
different, its assortment is distinct from Amazon.com's, and its marketing and merchandising programs are very
different as well
l Delivery is handled by a fleet of Amazon trucks
Why Invest In Grocery Delivery?
For Amazon, full-basket grocery delivery is about much more than competing in a small market with razor-thin margins and
a checkered history. In fact, our interviews with AmazonFresh insiders suggest that Amazon's internal target for expansion
was breakeven, and that its motivation for investment is more strategic than profit-driven. Grocery delivery is key to
Amazon for several reasons:
l As a standalone business model, it represents an economically viable alternative to Amazon's core national shipping
model. It is difficult to make money delivering low-dollar, low-margin, and occasionally heavy CPG products to
doorsteps one or two items at a time. Amazon and its vendors will likely find more economies over the long term if
full-basket models like Fresh scale.]
l It's a powerful way to drive frequent customer interaction
l It helps Amazon justify its own "last-mile" logistics fleets in major urban centers, putting Amazon trucks in high-density
neighborhoods on a daily basis, and potentially changing the eocnomics of same-day delivery
To this end, AmazonFresh pushes general merchandise delivery heavily. Customers can order more than 100,000
Amazon.com SKUs through AmazonFresh for delivery with their grocery orders at no extra charge. That option means that
AmazonFresh customers can place orders as late as 6pm and have their groceries and more delivered to their doorsteps
the next morning.
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2. After proving that the model incubated in Seattle can successfully travel to San Francisco and LA, RNG expects Amazon
to expand aggressively. Our analysis suggests that the company's major capital investments in its "Forward Deploy"
logistics network over the last 18-24 months already include the space and temperature controls to accommodate
AmazonFresh in several major markets.
l In meetings with vendors, Amazon is claiming the service could roll out to as many as 40 US markets by the end of
2014. RNG DIGITAL's analysis suggests around 20-25 addressable markets.
l Still, the service won't be truly "national" because density (particularly of high-income households) is key to the
business model - our analysis suggests that a market must have a population of at least 2 million people at a density
of ~600 per square mile to be viable
l Regardless, any expansion represents an important market development
AmazonFresh Versus Competitors
Online grocery delivery models differentiate themselves on 3 core competencies - marketing, merchandising and logistics.
l Amazon sees itself as unmatched in terms of merchandising and logistics - AmazonFresh requires no minimum order
and offers 100k SKUs of general merchandise with grocery orders. It was the first to unattended delivery and its pre-
dawn doorstep delivery is its most popular option, accounting for 50-60% of orders. According to former
AmazonFresh executives, Amazon also considers its picking and delivery efficiency to be world-class, superior to
both long-time incumbents like Peapod and newer depot-picked models like Ocado.
l Interviews with former executives also indicate that AmazonFresh's customer retention rate is very high and that once
acquired, customers shift large shares of their grocery wallet to Amazon. That said, customer acquisition has always
been Amazon's biggest hurdle for Fresh, and RNG expects AmazonFresh to put major emphasis on customer
acquisition in their imminent expansion. Expect deals on initial orders, IP-address targeted ad space on Amazon's
main page, direct mailings, local out-of-home media campaigns, and more. RNG also expects Amazon to ask large
vendors for support.
l Though Peapod and FreshDirect are perhaps the more obvious competitors Amazon may face as it expands to new
markets, RNG DIGITAL considers Walmart the most significant. Walmart has been quietly incubating its own grocery
delivery service in the Bay Area and now Chicago, led by a former ASDA executive with considerable experience in
the space. If Amazon expands as aggressively as it is posturing to, and if full-basket delivery is as strategic as RNG
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3. believes it could be, Walmart is the US retailer best positioned to respond. Still, despite solid strategy and
capabilities, Walmart’s internal conflicts between its core brick-and-mortar business and its increasingly relevant
online businesses could hold it back.
CPG Implications
There are 3 fundamental grocery fulfillment models – national ship, full-basket delivery, and drive/curbside pickup.
l National ship = ships ambient/shelf-stable product anywhere in the country from a network of fulfillment centers.
Examples include Drugstore.com and Amazon.com
l Full-basket delivery = Ships merchandise including frozen, chilled and ambient products from distribution centers.
Examples include AmazonFresh and Peapod
l Drive/curbside pickup = Offers full-basket categories picked and packed by the retailer but with delivery logistics
handled by the shopper. Examples include Harris Teeter Express Lane and Giant Eagle Curbside Express
Most brands have optimized their ecommerce strategies for national ship, and they now have to develop new
competencies around full-basket delivery. In RNG’s experience working with CPG companies, vendors initially emphasize
Amazon.com given its scale and growth. However, full-basket delivery may ultimately prove to be higher-potential
than national ship for several reasons:
l Unit economics – it’s very difficult to make money shipping low dollar value, low-margin goods in eaches (single
packs designed for retail distribution). Amazon.com’s average order is less than 2 items, so even with bundling many
categories may not realize a profit in a national ship model (Amazon refers to these products as CRAP – can’t realize
a profit).
l Logistics – Full-basket logistics models require less product and packaging customization. Certain products, such as
6-packs of beer, aren’t optimized for national ship but could be delivered using full-basket delivery
l Impulse – Impulse merchandising and approaches to basket-building are much easier in the full-basket model. While
AmazonFresh is still a “spearfishing” model, it provides more opportunity for impulse than does Amazon.com
l Growth trajectory – The growth trajectory of full-basket delivery is non-linear. Traditional ecommerce models tend to
grow item-by-item (ie, “I’m going to start buying shampoo on Amazon), in part because Amazon.com’s mission is to
get the shopper to the item they’re looking for. When customers buy into full-basket delivery, on the other hand, it’s
typical to see them shift 20-40% of their annual grocery dollar out of the store.
Vendors and manufacturers need to develop competencies around winning the digital shelf in online grocery:
l High-quality images, descriptions, ratings & reviews, and other “digital packaging” are key to search ranking &
conversion
l Introducing brands, driving trial, and driving impulse are different & more difficult online
l Despite price transparency, full-basket online grocery shoppers tend to be less price-sensitive – willing to pay for
convenience
l Many opportunities to pay to play online; essential to prioritize marketing & merchandising vehicles based on reach &
effectiveness.
Overall, this is a watershed moment for online grocery in the US as full-basket and drive/curbside pickup expand. Even
though volume will take time to build, this is an important place to play long-term.
For more about Amazon, stay tuned for a webinar on May 1 and the forthcoming release of Amazon in Focus: The
Authoritative Guide to Amazon for Retailers and Suppliers.
Amazon In Focus – May 1 @ 1pm EST
Register
Add to Calendar
Event Number: 299519758
Event Password: Amazon
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4. Telephone #: 1-650-479-3208
Toll-Free #: 1-877-668-4493
Note: A previous version of this article incorrectly reversed the sequence of the Los Angeles and San Francisco
market entries. RNG now believes LA is the first market, to be followed by San Francisco in October. We regret the
error.
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