Amazon notably dropped the $14.99 per month membership fee for its AmazonFresh delivery service at the end of last year, and the consumer response has been strong. Delivery orders more than doubled year over year in the fourth quarter, according to CFO Brian Olsavsky.
Amazon's growth comes despite Walmart's aggressive efforts to convince more online shoppers to make Walmart.com their destination for groceries. It now offers curbside pickup at over 3,000 locations and can deliver to customers homes from 1,400.
It introduced Delivery Unlimited last fall, a $98 annual subscription for same-day grocery delivery that will go head-to-head with Amazon Prime.
While Walmart's figured out a formula that works for it -- leveraging its big box stores -- Amazon's still, by Olsavsky's own admission, figuring things out. But its success so far indicates grocery could be a big area of growth for Amazon.
Figuring out what the customer wants
"Right now, we're really just testing and reacting to the customer demand and the customers' preferences," Olsavsky told investors during Amazon's fourth quarter earnings call.
And Amazon might find that certain markets require different approaches. Delivery is more popular in dense urban environments, while curbside pickup is often preferred in suburban sprawl, according to Coresight Research. The good news is that Amazon is well positioned to offer both options in each of those environments.
In dense cities, Amazon can use its AmazonFresh network to facilitate deliveries. In suburban markets, Amazon can reformat existing Whole Foods stores. Moreover, it's testing a new grocery chain in southern California, which it could design with curbside pickup in mind. Meanwhile, Walmart's concentration on suburban markets could prevent it from penetrating more urban markets.
Amazon's also still figuring out how consumers like to order their groceries. Sometimes customers stop in stores, sometimes they use the Prime Now app, and sometimes they use the Amazon website. Again, Amazon has already done the legwork of getting shoppers to link their Prime membership to their in-store purchases at Whole Foods. That can improve its online grocery platform. By comparison, tracking shoppers' in-store purchases is an area where Walmart lags behind the competition.
The importance of grocery for Amazon
Amazon's push into grocery is important for the sustained growth of its retail operations. Prime membership growth in the United States is getting harder to come by, and a majority of members now subscribe month to month instead of paying for a full year in advance. Frequent grocery purchases not only provide a boost to revenue, but more importantly, give Prime members a reason to stay subscribed every month or pay up for the annual membership.
Grocery delivery may also be able to attract more Prime members to the service as consumer adoption increases. Those looking for an inexpensive and convenient way to get their online grocery orders delivered may compare Prime to Walmart's Delivery Unlimited or other competing grocery delivery subscriptions. When you factor in all the other benefits of Prime, including one-day shipping on millions of items on its marketplace, paying a slight premium for Amazon's subscription might make sense for most.
That said, Amazon -- and Prime, in particular -- generally attracts shoppers with higher incomes, compared to Walmart. Amazon needs to work to protect its hold on higher-income shoppers, but it's also working to expand the appeal of its grocery brand to a broader base of consumers. It'll start testing a new grocery chain later this year to do just that.
Consumers have responded well to Amazon's efforts in grocery so far, as evidenced by the growth in delivery orders last quarter. But Amazon likely has a long way to go before a majority of Prime members and prospective members associate the program with online grocery ordering.
Investors shouldn't expect regular updates on the grocery business from Amazon's typically tight-lipped management. And its Prime membership updates are more focused on the program's global expansion than its success eeking out a few million new members in the saturated U.S. market.
But keeping an eye on where Amazon's investing in grocery and how it's affecting both retail and subscription revenue might give investors clues as to how it's progressing.