Amazon fresh is_coming_here_s_what_you_need_to_know


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Amazon fresh is_coming_here_s_what_you_need_to_know

  1. 1. AmazonFresh is Coming – Here’s What You Need to Knowby Logan Gallogly, Friday, Apr 12, 2013Though nothing has been formally announced, RNG DIGITAL strongly expects that Amazon will expand its AmazonFreshfull-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 AmazonsTrojan horse for same-day delivery in the US.BackgroundAmazonFresh has been operating in Seattle since 2007. The service is currently fairly small - RNG estimates it at $66million in sales in 2012, equivalent to less than 3% of the Seattle grocery market. l The site is located at and is currently open only to Seattle residents l AmazonFreshs 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 and AmazonFresh, the user interface for Fresh looks and feels different, its assortment is distinct from Amazon.coms, and its marketing and merchandising programs are very different as well l Delivery is handled by a fleet of Amazon trucksWhy Invest In Grocery Delivery?For Amazon, full-basket grocery delivery is about much more than competing in a small market with razor-thin margins anda checkered history. In fact, our interviews with AmazonFresh insiders suggest that Amazons internal target for expansionwas breakeven, and that its motivation for investment is more strategic than profit-driven. Grocery delivery is key toAmazon for several reasons: l As a standalone business model, it represents an economically viable alternative to Amazons 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 Its 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 deliveryTo this end, AmazonFresh pushes general merchandise delivery heavily. Customers can order more than 100, SKUs through AmazonFresh for delivery with their grocery orders at no extra charge. That option means thatAmazonFresh customers can place orders as late as 6pm and have their groceries and more delivered to their doorstepsthe next morning. Copyright © 2012 RetailNet Group. All rights reserved. Page: 1 / 4
  2. 2. After proving that the model incubated in Seattle can successfully travel to San Francisco and LA, RNG expects Amazonto expand aggressively. Our analysis suggests that the companys major capital investments in its "Forward Deploy"logistics network over the last 18-24 months already include the space and temperature controls to accommodateAmazonFresh 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 DIGITALs analysis suggests around 20-25 addressable markets. l Still, the service wont 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 developmentAmazonFresh Versus CompetitorsOnline 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 AmazonFreshs 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 Amazons 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 Amazons 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 Copyright © 2012 RetailNet Group. All rights reserved. Page: 2 / 4
  3. 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 ImplicationsThere 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 and 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 ExpressMost brands have optimized their ecommerce strategies for national ship, and they now have to develop newcompetencies around full-basket delivery. In RNG’s experience working with CPG companies, vendors initially given its scale and growth. However, full-basket delivery may ultimately prove to be higher-potentialthan 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).’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 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’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. Eventhough 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: TheAuthoritative Guide to Amazon for Retailers and Suppliers.Amazon In Focus – May 1 @ 1pm EST Register Add to Calendar Event Number: 299519758 Event Password: Amazon Copyright © 2012 RetailNet Group. All rights reserved. Page: 3 / 4
  4. 4. Telephone #: 1-650-479-3208 Toll-Free #: 1-877-668-4493Note: 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 theerror. Copyright © 2012 RetailNet Group. All rights reserved. Page: 4 / 4