Amazon (NASDAQ:AMZN) may soon do to supermarkets what it has already done to electronics stores.
The company has introduced a new device in select markets that allows customers to shop for groceries without leaving their home in a way that could revolutionize how people buy food and other household staples. The product -- Amazon Dash -- is a small handheld wand (it looks a bit like a remote control) that lets users scan product bar codes or just name an item to have it added to a shopping list. Once a list is built customers simply log in to their Amazon account to schedule delivery.
Dash is being tested by invitation only in the markets where Amazon currently operates its Amazon Fresh grocery delivery service -- Southern California, San Francisco, and Seattle. The company has not announced plans for the Dash service, but Fresh is expected to expand into roughly 20 urban areas, some not in the U.S., Reuters reported.
Grocery shopping is big business
Breaking into the grocery business has been a bit of an unattainable holy grail for web-based companies because the size of the market is enormous and has continued to grow despite Internet competition. Even with Amazon's regular service nipping at the edges of the grocery business, total supermarket sales rose 3.1% in 2013 (compared with 3.8% in 2012), pushing total sales over the $600 billion mark, Progressive Grocer reported.
That's an enticing business for Amazon, but it's also a field littered with failures. In the University of Wisconsin research report Failure to Deliver: Why Did Online Grocery Stores Crumble?, Chad Navis explained that during the tech boom of the late 1990s analysts predicted that online grocery stores would be an $11 billion sector.
Those predictions brought in a lot of venture capital that brought us companies including Webvan (the remnants of which Amazon now owns), HomeGrocer, and others that all failed. Privately held Peapod has managed to buck that trend and some other services including FreshDirect have achieved niche regional success, but none has the money, power, or installed user base to truly shake up the supermarket industry.
Amazon makes things very easy
Amazon has a strong relationship with its customers and it has proven incredibly successful in leveraging that connection. The Kindle Fire tablet was not about selling devices -- in fact the company actually loses money on the hardware -- it's about making it easier for customers to buy within the Amazon ecosystem. If a customer has a Kindle e-reader, a Kindle Fire tablet, or the new Fire TV he or she can buy movies, music, apps, and more without feeling like any money actually changed hands. The transaction proceeds smoothly and the barrier to purchase is incredibly low. Amazon has your credit card already and in most cases buying takes a single click.
The online retailer also has the trust of its customers as Amazon scored an 85 on the 2013 American Customer Satisfaction Index, the top score for all retailers and well above the ACSI average of 77.9
With Dash Amazon can leverage the trust of its customers and the ease of its service to win new business. Why go to a grocery store, pack your own cart, and stand in line to pay when Amazon lets you shop via a magic wand then brings everything to your door?
A blow to shipping companies
Amazon has been building a network of fulfillment centers across the country and it has also been reworking its method of delivering products to shift some of the burden to its own trucks and away from UPS (NYSE:UPS), FedEx (NYSE:FDX), and the U.S. Postal Service.
James Tompkins, who runs Tompkins International, a Raleigh, N.C.-based consultancy, told DCVelocity that Amazon has divided the nation into three segments based on population size: The top 40 markets, which comprise about half of the U.S. population; the next 60 largest population areas that account for about 17%, and the remaining areas, which account for about one-third.
"The top 40 markets will be served by a private fleet being built by Amazon to support an expansion of its online grocery business," according to Tompkins. 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.
The expansion of Amazon Fresh (and likely Dash) will not only allow for the same-day delivery of groceries, it will also give Amazon the infrastructure to deliver the rest of its products to customers. Basically if Amazon is going to pay for local fulfillment centers and its own delivery fleet, it needs to increase demand for those services to spread the cost out across more items and more customers.
Amazon will be a factor in groceries
Amazon has done an excellent job making buying easy for its customers and Dash will make buying from Amazon Fresh a simple alternative to traditional grocery shopping. If the device works -- and Amazon has a strong history of only releasing effective hardware -- it eliminates the awkward web interface the current online grocery shopping now requires.
Amazon Fresh is really just a natural expansion of the company's relationship with its customers -- something the company has done steadily since its launch. What started with books has moved into everything from electronics and clothes to groceries and toiletries. The Amazon customer has no reason to doubt the company's ability to offer a quality grocery service because he or she already buys so many disparate things from the retailer. It's likely that Amazon Fresh would have grabbed a chunk of the supermarket business without Dash but with the device it seems likely to win even more of it and increase regular Amazon sales as well.
Daniel Kline has no position in any stocks mentioned. He is an Amazon Prime member. The Motley Fool recommends Amazon.com, FedEx, and United Parcel Service. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.