Amazon Fresh has been slow to roll-out beyond the Seattle market, where it launched in 2007. The usual Amazon MO of undercutting prices (up until this year, largely through tax-free purchases for consumers), to gain market share is not as easy in a business like grocery with thin margins and high delivery costs associated with daily delivery service.
As Amazon looks to offer same-day delivery in all product categories, and begins to build a fulfillment network to facilitate this service, Amazon Fresh is set for it's rollout. And it's not because Amazon necessarily wants to become your full-service grocer, but because of how often people buy food.
SAME DAY DELIVERY LOGISTICS
Same day delivery is considered to be the next level of service expected by consumers - soon to be a standard option without the high delivery costs it is associated with today. However for an e-retailer, creating a same-day service poses significant logistical and economic hurdles. McCorvey writes, "It's the so-called last-mile problem--you can ship trucks' worth of packages from a warehouse easily enough, but getting an individual package to wind its way through a single neighbourhood and arrive at a single consumer's door isn't easy" .
How frequently trucks need to leave the distribution centres, sometimes with minimal volume (trucks that are half-full) poses and economic efficiency problem. If a truck is travelling across town and is only making a few stops along the way, the cost associated with delivery (fuel and time) may be very expensive.
The business key is to balance the immediacy with which the customer wants their goods delivered (the frequency of deliveries) with a volume of merchandise worth delivering.
INCRESED PURCHASE FREQUENCY - & basket
Same day delivery service is something that is expected from Amazon's general merchandise business - and this is where Amazon Fresh comes in. Grocery customers shop at least weekly, and of course, expect same-day delivery. By turning monthly Amazon customers into weekly Amazon and Amazon Fresh customers, the company is generating order volume that makes same day delivery economically viable.
Fresh PRIME LOYALTY
And the final piece of the puzzle - how do you ensure customers are consistently purchasing their weekly groceries from you? Through a membership program which will drive customers to it. We did a quick review of the company's Prime program which is built upon free or discounted delivery. Fresh prime offers $299 membership, which means about 30 orders with free delivery are needed to reap the benefit. With 10 million users of Prime, Amazon has already proven that their membership program works.
The end result of all the above combined? Leading the industry through customer satisfaction with cheap (or free) same-day delivery, increasing customer purchase frequency, added categories and spend with each order (basket), and a potentially significant new membership program with Prime Fresh. "Think of the synergy between Prime, same-day delivery, and Fresh," says Tom Furphy, former Amazon Fresh executive. "When all of those things start working in concert, it can be a very beautiful thing."
ADDITIONAL NETWORK BENEFIT FOR AMAZON
There is an additional business advantage to building a powerful network of transportation and fulfillment centres, and its build upon Amazon's exiting Third Party Fulfillment by Amazon (FBA) business. Amazon provides the framework for third party sellers - currently 40% of Amazon's product sales - and when they use FBA, Amazon handles (and takes money from) the picking, packing and shipping. Increasing their transportation and distribution facilities to accommodate Amazon Fresh and same-day delivery will also have the added benefit of increasing FBA business as well. Not bad for Bezos.