Sounding Board: Feeding the shark

Len LewisAmazon’s foray into fresh groceries poses a potential threat to traditional grocers.

If there is one truism in retail it is that customers always want more. The question is whether they are willing to pay for it.

Despite a glacially slow economic recovery I think they are. Not necessarily for products but the vehicle through which they are sold and delivered. The latest one to  test these waters is Amazon, which, after years of hometown testing, has rolled out its AmazonFresh and Amazon Prime pay-for-play grocery delivery service in Los Angeles.

Right now they are splashing around in the shallows but sharks do not stay in one place for long unless the feeding is good.

In other words, any retailer who summarily dismisses Amazon’s latest play as doomed to failure and incapable of going national is being dangerously narrow-minded, Maybe even flirting with strategic suicide.

Online ordering is still a small piece of the grocery business and it is questionable whether it will ever reach the heights achieved by categories like apparel or toys. But the issue is not whether it will work in grocery but which model will work without breaking the bank.

M-commerce—a quaint if not obsolete term, according to some digerati—has already changed the way people shop and the genie is not going back in the bottle. Its popularity is only going to grow thanks to the group known as Millennials—the 18- to 30-something segment that is quickly becoming the industry’s bread and butter. They are the “digital natives,” the generation that will always be “connected” and will not tolerate any retailer that does not offer some form of digital shopping through any device they choose.

Despite ideal demographics, Amazon is not jumping in with blinders on. Although the company is already eyeing other potential markets, “Fresh” same-day home delivery is only being made to select zip codes in Los Angeles. I would not go out on a limb to predict the success of this venture since I thought Fresh & Easy was a great idea too.

However, it represents the kind of instant gratification that is so appealing to the aforementioned Millennials and the $299 annual fee for same delivery under “Amazon Prime” might appeal to more people then you think. Besides, Amazon is less concerned with profitability then it is with building volume and getting people to buy a Kindle or clothing along with their groceries. This is what gives the company yet another opportunity to dominate multiple categories, according to industry analysts.

There are some specific delivery windows so Amazon is not guaranteeing your delivery will arrive at your doorstep exactly at 3:22 p.m. That would be a foolish play indeed.

On the other hand, what do you do when someone is not home to accept delivery of an order of perishables? Does it go back to the distribution center for next day delivery?

Think about the costs involved with spoilage.

Additionally, think about promising same-day delivery during a time of escalating fuel costs in a city where freeways are glorified parking lots.

Then, we have the potential price tag for setting up an ultra-efficient distribution network to handle it all. I still remember how the late and not-so-lamented Webvan burned through $1 billion in cash back in 2001 building a state-of-the-art distribution system to nowhere. The lesson to be learned boils down to a simple formula—critical mass equals economy of scale. Webvan had neither. If Amazon is going to succeed it will have to find a way to do it within the grocery industry’s wafer-thin margins.

A recent story in Wired magazine made an interesting observation about cost, noting that while the annual $299 fee sounds a bit pricey, it breaks down to about $25 per month or about $6 per week, enough to offset the cost of gas and the time it takes going to the store.

Amazon is also giving people a free 90-day trial. That alone will get people to sign on and a percentage of them will stay.

We all know it is cheaper to hold on to customers then to try and get them back once they have left. What will you do?

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