Thursday, December 1, 2016

Amazon’s drive-in grocery store marks new offline push

On a grey industrial block in north-west Seattle, the lights are already turned on in a building that has no name. This is set to be Amazon’s new grocery store, one of two that will open soon in its home town, marking the retailer’s first step into physical stores for grocery and convenience items.
It will be anything but your typical convenience store, however. The store functions around a drive-in concept, and features a large tilted awning that gives it the air of a 1950s drive-in diner. Customers who come here will not browse the aisles — they will order their goods online in advance, then stay in their car while their groceries are brought out to them.
Amazon’s move into bricks-and-mortar outlets marks a dramatic departure from its online-only strategy, whose success has made the company one of the most valuable businesses in the world. It also underscores a key new goal, one that has so far proved elusive: mastering the grocery market.
The company has been expanding its grocery delivery programme, Amazon Fresh. It has more than doubled its footprint this year and expanded to 17 markets, including London, yet Amazon controls just 1 per cent of the $800bn US grocery market, according to estimates from Cowen and Company.
“Grocery is the company’s biggest potential for revenue upside,” says John Blackledge, a Cowen analyst. He estimates that Amazon’s food and beverages sales could grow from $9bn this year, to $23bn in five years, making it one of the top 10 grocers in the US.
This could spell tough competition for Amazon competitors such as Walmart, which controls a fifth of the US food and beverage market, as well as smaller players such as Kroger and Albertson’s. Walmart is struggling to find growth in its grocery sales, which fell 2 per cent in October compared with the previous year, according to a consumer survey by Cowen. Amazon’s grocery sales grew 12 per cent in the same period.
Amazon’s experiments with physical stores come at a time when its soaring overall sales give it room to test out new strategies. In the past 12 months, Amazon’s salesrose to $117bn (excluding Amazon Web Services), up 25 per cent from the same period a year earlier — vastly outpacing the growth of the US online retail market.
Despite this, more than 80 per cent of US retail sales remain offline, and those familiar with the company’s thinking say Amazon is looking for new ways to get a piece of such sales.
“You can only grow faster than the market for so long before the law of large numbers catches up with you,” says Scott Jacobson, a former product manager at Amazon, now a managing director at Madrona Venture Group. “You have to go after a few different markets — and this is a different market.”
[Amazon has] built up such a large physical [logistics] infrastructure, it is a question of how do they maximise the use of that infrastructure?
Mark Mahaney, analyst at RBC
Although groceries are a notoriously low-margin business, shoppers tend to purchase items more frequently than any other category. This makes it highly desirable from Amazon’s point of view, as the company works to get users ever more hooked on its Prime membership service, which could in future include groceries, and to cross-sell other items to grocery shoppers.
Mark Mahaney, analyst at RBC, points out that Amazon’s retail margins are already in the low single digits, and thus not dramatically different from typical operating margins in the grocery business.
“They have a core competency in physical logistics and distribution” that can easily be applied to groceries, he points out. “They have built up such a large physical [logistics] infrastructure, it is a question of how do they maximise the use of that infrastructure?”
Amazon has been investing heavily to bring its logistics infrastructure deeper into urban centres and closer to its customers by building a network of smaller warehouses close to city centres. These serve as bases for Amazon’s one-hour and two-hour delivery programme, Prime Now, which has expanded to more than two dozen US cities, as well as London and Paris.
The new drive-in stores could build off those Prime Now warehouses, which already include a limited selection of groceries. Those familiar with the company’s thinking say the pick-up stores could dramatically reduce the delivery costs of a fresh grocery service, which is particularly expensive because of refrigeration needs.
A one-year subscription to Amazon Fresh, the company’s grocery delivery service, currently costs $15 a month. Amazon declined to answer questions about its new stores for this piece.   
Analysts caution that the drive-in grocery stores are still an experiment at this point. “Do I expect them to set up a chain of physical retail stores? Absolutely not,” says Mr Mahaney.
However, the company has recently starting increasing its brick-and-mortar presence in other areas too. Amazon opened its first physical bookstore a year ago, in Seattle. It has since opened two more, in Portland and in San Diego, with a fourth set to open in Chicago next year.
Analysts expect that it is only a matter of time before Amazon starts testing out bricks-and-mortar strategies in other areas, starting with apparel. Amazon has already upended the traditional retail market with the success of its online model, and now it is looking to take the fight closer to its rivals’ home turf.

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