Amazon (AMZN -3.23%) has been quietly testing a delivery service from third-party grocery stores in the U.K. for the past year. Now, it's ready to take the operation stateside, according to a report from The Information.
Amazon already offers same-day delivery from its Whole Foods stores for Prime members. The new program would expand the service to local retail partners and use Amazon Flex drivers, contracted drivers Amazon already uses for Whole Foods and some Amazon.com deliveries. But the expansion would put it in direct competition with other delivery services like Instacart, Uber Technologies (UBER -1.10%), and Target's (TGT -0.87%) Shipt.
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Amazon is ready to compete
Behind Amazon's retail operations is a complex logistics operation that gets packages from warehouses to people's doors with extreme speed and efficiency. And at their core, services provided by companies like Uber and Instacart are just local logistics networks designed to get something from point A to point B, whether that's groceries or people.
With an established technology stack that can efficiently route drivers and pickers, Amazon is an instant threat to the incumbents. Making efficient use of driver time is key to both customer and driver satisfaction.
What's more, it's building the service on top of a preexisting base of drivers and allowing the drivers to find work delivering both Amazon packages from delivery stations or pick up local store orders at Whole Foods or Amazon's partners.
That's a key advantage of Uber, which operates both a ridesharing and delivery service. The additional opportunities for drivers can give Amazon a larger pool of drivers and a denser network as a result.
Amazon could also undercut pricing of services like Uber or Instacart because it requires a paid membership like Shipt. And while Shipt only provides delivery benefits for Target and a few local orders, Prime offers much more.
With everything already in place, Amazon could scale the business very quickly if it sees enough demand from Prime members. And based on its decision to expand to the U.S. and the rest of Europe next year, demand appears to be there.
One big hurdle
Amazon may have trouble finding retailers willing to partner with it for the delivery service since such a service would require sharing product and pricing information, as well as customer and purchase information. Considering Amazon already operates a nationwide grocery chain and it's planning on building a second one, grocers may be hesitant to provide a competitor with such insight into the business.
Previous attempts by Amazon to partner with competing retailers have had mixed results, and usually, direct competitors eschew Amazon's "generous" offers.
While Amazon operates seven Whole Foods Markets in London, its presence is relatively minimal compared to that in the United States. As such, it may have had more success in the U.K. than it will in the U.S.
What it's worth to investors
Amazon is already a $1.7 trillion company. Adding a local food delivery service business might not move the needle that much in and of itself.
For example, Target bought Shipt for a mere $550 million in 2017. Instacart raised $265 million earlier this year at a valuation of $39 billion. Uber's entire operation has a market cap of just over $70 billion.
A successful expansion of Amazon grocery delivery into the U.S. and Europe may only add $25 billion to $50 billion of value to Amazon. That's not nothing, but it's small potatoes compared to the rest of Amazon.
The real value, however, comes from densifying its delivery network so it can deliver more Amazon packages itself and increase the value of Prime. If it helps Amazon justify another Amazon Prime price increase, it could be worth billions in future revenue before it actually collects anything for the service itself.
