Amazon's Plans for Drones, Groceries, and More

In his annual letter to shareholders, Amazon  (NASDAQ: AMZN  ) CEO Jeff Bezos laid out the company's plans, including paying the company's employees if they want to quit, and improved delivery to customers, including an allusion to the company's plans to use unmanned drones.

Bezos' letter comes after a year in which Amazon did over $74 billion in sales, a notable increase from $61 billion the year before and $48 billion in 2011.

Delivery is key
As a pure digital retailer, Amazon's relationship with its customers depends upon its ability to deliver items in a timely fashion. One of the planks in its delivery platform is Amazon Prime where (for $79 in 2013, but $99 now) customers get free two-day delivery on items fulfilled by Amazon. According to Bezos' letter, the number of items in the program has grown from 1 million when the service launched nine years ago to over 20 million currently. 

Amazon is notoriously cagey about how many subscribers Prime has, but he did write that over one million new members joined in the third week of December. He also stated that there are now "tens of millions of Prime members worldwide."

Prime customers are important to Amazon because market research firm Consumer Intelligence Research Partners found in 2013 that they spend more than twice as much — $1,340 per year – than non-Prime members using Amazon, according to the Wall Street Journal.

Prime is not Amazon's only method of offering faster and cheaper delivery for its customers. The company launched one practical delivery plan in 2013 and continued testing another that seems closer to science fiction. On the practical side, the company partnered with the U.S. Postal Service to offer Sunday delivery in select markets. There are also plans to "roll it out to a large portion of the U.S. population throughout 2014." 

Sunday delivery removes one of the advantages that traditional stores have over Amazon, but if the company's fantastical test initiative somehow works then delivery at any time on any day of the week would also be possible. Though Bezos did not use the word drones, he did write that "the Prime Air team is already flight testing our 5th and 6th generation aerial vehicles, and we are in the design phase on generations 7 and 8." 

Drones may not be here, but it seems more and more likely that Amazon will find a way to make them happen.

Amazon plans to take on grocery stores
Amazon is also about to make a huge play to disrupt the grocery market.

Bezos wrote that after five years of trials in Seattle, Amazon has expanded its Amazon Fresh same-day grocery delivery service to Los Angeles and San Francisco. Prime Fresh members pay $299 a year and receive same-day and early-morning delivery not only on fresh grocery items but also on over 500,000 other items ranging from toys to electronics to household goods.

"We're also partnering with favorite local merchants (the Cheese Store of Beverly Hills, Pike Place Fish Market, San Francisco Wine Trading Company, and many more) to provide the same convenient home delivery on a great selection of prepared foods and specialty items," Bezos wrote. "We'll continue our methodical approach – measuring and refining Amazon Fresh – with the goal of bringing this incredible service to more cities over time."

Bezos did not even mention the company's new Dash handheld wand that lets users scan product bar codes or just name an item to have it added to a shopping list. Once that list is built, customers simply log in to their Amazon account to schedule delivery. Dash, which is being tested where Amazon Fresh is offered, may become part of the company's plan for grocery dominance. 

With total supermarket sales rising 3.1% in 2013 (compared with 3.8% in 2012) and pushing total sales over the $600 billion mark, according to Progressive Grocer, groceries could be a huge category for Amazon. More importantly, a grocery business could subsidize Amazon building out its own delivery network that would allow it to cost-effectively ship millions of products on a same-day basis from fulfillment centers around the country. 

In a Fool piece headlined "Can Amazon Dash Make Amazon Fresh a True Grocery Competitor," I quoted James Tompkins (who runs Tompkins International, a Raleigh, N.C.-based consultancy) regarding Amazon's plans to build that network. 

"The top 40 markets will be served by a private fleet being built by Amazon to support an expansion of its online grocery business," Tompkins told DCVelocity. "The next 60 will be served by an array of regional parcel delivery carriers, and the remainder will be served mostly by the U.S. Postal Service."

Amazon wants the right employees
Amazon has been growing, and growth means more employees. Bezos' letter shed some light on how the company treats its workers -- even those on the bottom of the pay scale -- and how it helps people less dedicated to the cause move on. 

Bezos explained that Amazon offers employees a program called "Career Choice" in which the company pre-pays 95% of tuition for employees to take courses for in-demand fields such as airplane mechanic or nursing, regardless of whether the skills are relevant to a career at Amazon. "The goal is to enable choice," Bezos wrote. "We know that for some of our fulfillment center employees, Amazon will be a career. For others, Amazon might be a stepping stone on the way to a job somewhere else – a job that may require new skills." 

The second program is called "Pay to Quit." It was invented, Bezos wrote, "by the clever people at Zappos," and the Amazon fulfillment centers have been using it. "Pay to Quit is pretty simple. Once a year, we offer to pay our associates to quit." The first year the offer is made, it's for $2,000. Then it goes up $1,000 a year until it reaches $5,000. "The headline on the offer is 'Please Don't Take This Offer.' We hope they don't take the offer; we want them to stay."

Bezos explained that the company makes the offer because it wants employees to take the time to think about what they want in the long run.

The idea may seem crazy, but it likely helps Amazon weed out disgruntled workers who could cause problems and lower overall productivity for a fairly low cost.

Amazon knows it needs to evolve
What Bezos' letter shows most clearly is that he knows that his company has to continue to change and evolve in order to maintain its status. Revamping delivery and building out a fleet of vehicles that can service a large portion of the country is a huge undertaking, but it's one that may be crucial to Amazon's long-term success. Drones might seem like a fantasy, but so did video chat, having your record collection fit in your pocket, and so many other things that we take for granted now.

Groceries are a logical extension for Amazon as well. Entering that market not only opens up a new sales category, it opens up new ways to put books, electronics, and other "traditional" Amazon items into people's shopping carts.

Treating employees well at all levels is also a shrewd business move for Amazon. Keeping people happy and with the company lowers employee costs, reduces lost time, and generally improves productivity.

By continuing to focus on perfecting the customer experience, Bezos will keep Amazon on the incredible growth curve that the company has experienced.

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  • Report this Comment On April 14, 2014, at 12:56 PM, DukeMontrose wrote:

    This fool believes both the fundamentals + technicals

    do not support the stock:

    Fundamentals? PER 536 to-day.

    Technicals? Plunged throughbBoth the 100 + 200 day averages at higher volumes.

    Bezos is a genius but fools, please lets not confuse him with the stock price.

    Good investing to all fools.

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