(Photo: Reuters/Brian Snyder)
Amazon plans to gain a piece of the market in the grocery business by expanding its online food delivery service to Los Angeles.
The e-commerce retailer has been delivering AmazonFresh to locals in Seattle for the past few years, and began offering food delivery, including dairy, fruits and meats, to the Los Angeles area today. The company plans to expand its grocery services to San Francisco later this year.
Customers receive their orders in insulated containers and deliveries are made during a three-hour window when the items are just dropped off or during a one-hour timeframe when customers accept the groceries in person. The foods' prices are similar to that of the usual grocery store and delivery charges will range from $9.99 for purchases under $50, to $7.99 for orders between $50 and $100, and delivery will be free for orders over $100.
Amazon's entering of the $5 billion grocery market is a bold move since it remains untapped by the majority of virtual retailers. Known mostly for its sales in appliances, electronics and other items, Amazon faces a risk in this new business venture.
"If they make a 1 or 2 percent margin on groceries, but they're able to get a few hundred extra dollars from those same customers buying other products, it's more than covered the cost of that venture," said Scott Tilghman, an analyst who follows Amazon for B.Riley & Co. LLC, a California-based stock brokerage firm. According to Tilghman, that's exactly how Amazon will make their profits, not by just selling groceries.
However, other industry experts find Amazon's new project a set up for failure since fresh produce is vulnerable to damage after sitting in a warehouse or during delivery.
"Will it work? I would bet against it," said Roger Davidson, a former grocery executive at Wal-Mart, and other grocery chains. He predicts Amazon will struggle to make money from AmazonFresh because "the reasons these businesses have failed in the past have not gone away."
This expansion also poses a potential threat to other grocery delivery services. In New York City, FreshDirect delivers food to homes and offices and is currently trying to operate its service in other boroughs. Across 24 U.S. markets, Peapod, owned by the mega food corporation Royal Ahold NV, says they are the largest Internet grocer in the United States, delivering more than 23 million daily orders, according to their website.
A rep for Peapod had no direct comment but noted that its employees are "currently trying to gather our thoughts on the entire Amazon issue."
Despite negative expert analyst opinions about Amazon's business expansion, customers are weighing in as well.
"I would definitely use AmazonFresh," said Magdalena Merino, a college student. "It's convenient and since I have a prime account with Amazon, I would hope to automatically get free shipping!" Merino admits to only buying books and electronic devices through the online retailer but hopes that the expansion can hit the East Coast sooner than later.
At Amazon's annual shareholders meeting last month, Chief Executive Jeff Bezos said AmazonFresh had "made progress on the economics over the past year." Perhaps this new business expansion won't be a bust. It's up to customers like Merino who find the convenience of online shopping preferable to make AmazonFresh's business model continue growing.