Amazon continues to dominate – from bookshelves to refrigerators
Countless times, online grocery delivery has been attempted with little success. It has taken a behemoth like Amazon to finally get it right.
Amazon – no stranger to most American households – is a clear digital winner in many regards. For this blog post, I’ll specifically focus on their “winning” status with respect to online grocery delivery, an industry that many companies have attempted to dominate with little success. I, myself, have been skeptical of online grocery businesses for years: doubting the quality of produce that I wouldn’t personally select; unwilling to pay additional fees for yet another subscription service; and ultimately afraid of spoilage during transport. Instacart, Walmart, and others have done their best to persuade me of their capabilities in mitigating these concerns, but it wasn’t until Amazon offered free two-hour grocery delivery for all Prime members in late 2019 that I finally decided to take a leap of faith. A true convert, I now conduct all my grocery shopping through Amazon.
Below are the three distinct reasons why I believe Amazon is uniquely “winning” in the online grocery business.
1. Amazon already has established and trustworthy customer relationships
In an age where new D2C retailers emerge daily, many consumers are reaching “subscription fatigue”, unwilling to sign up for yet another membership and entrust yet another online company with their payment information. This is somewhat due to security and identify theft concerns, and somewhat due to pure time constraints and convenience. Where possible, consumers generally prefer to buy through a retailer that already has their payment and shipping information saved, expediting the checkout process. Amazon has penetrated an enormous segment of the American consumer base, and therefore has virtually no barrier in convincing its existing users to trust it with purchasing new product lines. The main barrier Amazon faced for customer acquisition was an additional fee layer for the delivery service, which it ultimately eliminated for all Prime members.
2. Online grocery delivery presents a clear customer-value-proposition for Amazon’s user base
Many of Amazon’s Prime members are millennials and young working professionals who live in urban cities. Urban dwellers increasingly are choosing not to own a car and are relying on public transportation and ride-sharing apps. Carrying heavy bags of groceries across town is clearly a pain point for these non-car-owning individuals, especially if they are working long hours and have little time to fit in a shopping trip. These professionals are also already used to purchasing items online, so little behavior change is required. Additionally, increasing health trends are pressuring Americans to be more mindful of eating fresher foods, meal prepping for the week at home, and reducing reliance on take-out from restaurants. Lastly, Amazon’s tight delivery windows that are scheduled in advance ensure the freshness of produce, addressing concerns related to spoilage. These tight windows also provide customers with assurance that the groceries will arrive at a time that is most convenient for them, minimizing the amount of schedule-shuffling needed to ensure that the customer is home in time for the delivery. This model is vastly different to those of USPS, UPS, and FedEx, who deliver at times most convenient for the carrier, not the customer.
3. Grocery delivery leverages Amazon’s existing strengths
Amazon has developed a colossal distribution network, partnering with existing delivery services as well as building out its own delivery team. No other private business has successfully dominated the “last mile” delivery with the efficiency and scale of Amazon. While perishable goods present a unique challenge with respect to temperature control, Amazon was able to build upon its existing network with marginal investment instead of starting from scratch like its predecessors. Additionally, the data that Amazon has collected on its users has helped it to optimize its inventory and more accurately predict which items will be ordered in what quantity, location, and time. Lastly, Amazon’s acquisition of Whole Foods allows it to provide a wide range of products for its customers. Whole Foods inventory consists of premium and organic grocery items that serve customers with higher willingness to pay and more specialized SKUs. By contrast, Amazon’s Fresh service offers “lower cost” and more traditional grocery items for a more price sensitive customer base. Between Whole Foods and Fresh inventories, nearly every customer segment can find a selection of products that fits their individual needs.
For these reasons and more, I believe that Amazon has achieved what I previously thought was impossible – convincing a skeptic like me to trust a corporate behemoth with my precious weekly grocery selection and delivery. Looking to the future, I am optimistic that Amazon will continue to dominate online grocery delivery, as it will increasingly benefit from economies of scale.
Student comments on Amazon continues to dominate – from bookshelves to refrigerators
I agree that entering into the grocery market was a great move on Amazon’s part! It will be interesting to see if Amazon will expand its footprint beyond urban and suburban areas where Whole Foods are typically located or if it will leave less populated areas to other competitors.
Entering the grocery market was an interesting, and as you pointed out, strategically complementary move to their existing offerings. One aspect that I’d be interested to know more about is how this offering could play out in international markets. Amazon made a bid to buy Deliveroo which operates in 14 or so countries (like France and Australia) but since “food delivery” encompasses both delivery of foods from restaurants (where competition is already high) and grocery stores, would this change Amazon’s “winning” model?
The three reasons presented are compelling for this case – consumers’ trust (based on the overall Amazon brand), target audience (with a good product fit) and existing infrastructure (leveraging last mile delivery). More specifically, I fully agree that the existing relationship Amazon already has with many consumers can give incentives for people to try the solution. Similarly, the superlative efficiency focus of Amazon is what is required to crack online grocery. While all the reasons above position Amazon to be possibly the best player to disrupt this space, it will be interesting to understand if this space will actually be disrupted. In fact, there are still profitability questions that may not be overcome despite the great digital solutions Amazon is leveraging.
Interesting post – thank you!
I actually got my first Amazon grocery delivery last weekend, so a lot of these reasons resonate with me. In particular, the convenience was phenomenal. I was able to select a 2 hour slot for my food and track its progress in the Amazon app. In contrast, when I used services like Hello Fresh, I would be given a 5-6 hour delivery slot.
However, I do want to question one point – do you really think Amazon’s existing data helps to optimize grocery inventory? I’m not convinced that data on my purchasing habits of clothes, gadgets etc. is predictive of my grocery shopping. As a result, I believe Amazon will have a learning curve to learn from the grocery data they are collecting. Perhaps they could use data from Whole Foods stores to help predict inventory? I recall being asked if I had Prime membership last time I was in Whole Foods – so I suspect the Whole Foods acquisition is also paying dividends on the insights they are getting from this data!
Interesting blog! I really liked the connections you have drawn from millennial life that explain why grocery delivery might be the need. But this demand has existed for quite some time and the reason that other players have moved away from it is because the economics of the business have not yet worked for anyone – including Amazon. It has captured a lot of the market in urban areas for sure, but it is at a huge cost. It would be interesting to see what cost optimizations they can make and how much volume they would need to hit to stop relying on Amazon’s other businesses to keep running. Drone-delivery might be an answer!
Amazon is also what convinced me to finally try grocery delivery! As you pointed out, last-mile delivery of grocery does have some unique complexities that are especially high-stakes; if my Amazon package is delivered to OWA instead of SFP 6, it’s annoying but I get over it, whereas if that happens to my Whole Foods order, it’s likely going to be ruined and I’m going to request a refund. At the same time, consumers perceive Amazon as being the experts in last-mile delivery, so they have high expectations. It’s a tough spot for Amazon to be in!
Given the criticality of the last-mile delivery, I find it interesting that Amazon has used independent contractors for so much of their Prime Now grocery deliveries, as they are inherently limited in their ability to train these workers. Competitors (i.e., Instacart) have reclassified delivery drivers as employees which could suggest that there may be good reason for Amazon to also consider a similar reclassification. I’d be curious if you have any thoughts on why Amazon has proceeded the way they have? And why / why not you think it would be a good idea for Amazon to take more control over their last-mile grocery delivery?
Very interesting article! Having used it a few times I do wonder why they have not partnered with more brick and mortar stores to offer a wider portfolio of product offerings. I believe it would be interesting to see a partnership with say Trader Joe’s for example. Regardless of whom they partner with, I would see a huge opportunity to creating partnerships, since it feels that the current strategy of acquisition (eg. Whole Foods) might prove too costly or even unfeasable in the long term, given anti-trust concerns.
Great post! As you point out, Amazon has done a great job at targeting millennial consumers in more affluent urban centers. I think it complements their value proposition very well and allows them to leverage the data they already have in many useful ways.
However, in curious to see how they will scale this. Given how unstable the unit economics in this segment have proven to be, in curious to see how they would do in targeting more price sensitive users, who wouldn’t shop originally from Whole Foods, as well as less urban areas en finally international markets. Even though they are dominating the space at the moment, I would be curious to see if a player starting from any of those segments could disrupt them in urban centers where Amazon is already established as the leader in grocery delivery.
I use the service constantly for the many reasons mentioned in the post. I had an interesting experience that shows Amazon’s trustworthy customer relationship. I couldn’t find my delivered Amazon package anywhere, so asked the refund. The customer service operator apologized for the inconvenience from the beginning of our conversation and not only refunded the purchase amount but also gave me $10 credit for any inconvenience! Before the conversation I was displeased with the experience and almost decided not to use the service again, but after the conversation, I felt my bad experience was fully understood and gave credit to their service, which made me continue using the service.