Please ensure Javascript is enabled for purposes of website accessibility

Did Amazon.com Just Kill Grocery Delivery?

By Rich Duprey - Oct 22, 2015 at 11:48AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The e-commerce king may have found an industry that doesn't fit its business model.

Amazon.com may have unwittingly upended the online grocery business, though whether that's good or bad remains to be seen. Image source: Jason Walsh.

Amazon.com (AMZN 3.15%) just announced it will finally start charging $299 a year for grocery delivery. Because its competitors add only a nominal fee for the service, this begs the question: Has the e-commerce giant just priced itself out of the market, or has it done the industry a favor by acknowledging the costs associated with bringing groceries to your front door?

All-you-can-eat buffet
Selling food is an innately low-margin business, and adding delivery piles on additional costs. It's not like UPS dropping off a package at your doorstep; the groceries not only need to be stored in special boxes, but they also require refrigerated trucks to deliver them. This suggest rivals like Instacart, whose fees start out at $3.99 and max out at under $10, may have difficulty preserving those rates, although for some of the retailers Instacart shops, it hits consumers with a markup on the prices they could get on an item if they shopped the stores themselves. It also offers a $99 "Express" membership, which operates like Amazon Prime and foregoes the per-delivery fee.

Wal-Mart (WMT 0.86%) seemingly recognizes these difficulties. While it also charges relatively low delivery fees (but doesn't mark up items or offer a subscription option), it actually promotes grocery pickup at its stores over delivery.

Walmart believes its broad physical footprint gives it a competitive advantage, as some 70% of the country's population lives within five minutes of a Wal-Mart store. It also offers the pickup service for free.

While Amazon has been building out its network of distribution centers, it's still nearly not as extensive as Wal-Mart's. And as famous as the e-commerce leader is for choosing volume over profits, preferring to gain critical mass before worrying about earning a return on its investment, Amazon's fees may be a recognition that not all services work well with its business model.

It's clear Amazon had concerns about how well charging hundreds of dollars for grocery delivery would be received since it continuously delayed implementing the fee. But now that it's done so, it may simply provide cover for others to follow suit, even if its competitors don't raise prices as dramatically.

Delivery costs money, and although Amazon.com hesitated in finally imposing fees that support the business, the fact that they're here suggests it's not one it could subsidize for very long. Image source: Amish Patel.

Clean up in aisle 7
Grocery delivery is a notoriously difficult business. Webvan was a poster child of the dot-com boom that quickly flamed out, as was HomeGrocer.com, its larger rival that eventually bought it out and ended in bankruptcy.

Peapod by Ahold (NASDAQOTH: AHONY) is the granddaddy of web-based grocery stores by sales, beating most players to market by at least two decades and surviving the dot-com bust. According to Reuters, Peapod had an industry-leading 11.4% share of the U.S. market last year, ahead of AmazonFresh's 2.7% share. But both Amazon and Wal-Mart are growing faster.

Without the critical mass that Amazon pursues, grocery delivery is an expensive proposition, which is why Instacart, for example, continuously lines up new retailers to partner with. Just last month, it added Target and H-E-B to its roster of supermarkets that customers can choose from.

Catch more flies with honey
Amazon doesn't make too many mistakes, and like Thomas Edison's efforts leading up to the invention of the light bulb, it doesn't look at those that fall by the wayside as failures, but rather "10,000 ways that didn't work." Still, the e-commerce giant could have marketed the price change in a shrewder manner.

Instead of hitting customers over the head with a 2-by-4 (even though it's been saying the fees were coming for forever), it could have highlighted that for regular grocery customers, the $300 annual fee is comparable to what they would pay elsewhere.

Weekly shoppers at AmazonFresh, or rather Prime Fresh, as it's now called, will find the cost breaks down to less than $6 per delivery, which in many cases is cheaper than the competition. Shopping every other week puts it at about $12, a still competitive price. It's only infrequent users that will find the new subscription fee harsh, and Amazon may be trying to weed them out anyway. Like Amazon's Prime membership program, which offers free delivery on tens of thousands of products, the grocery delivery service benefits the heaviest users most.

Additionally, Amazon could have better highlighted that the new fee actually includes Prime, so you're getting both programs in one. 

Pay me now, or pay me later
It remains to be seen if customers will balk at paying money up front to have groceries (and other items) delivered versus paying a little each time they order. A monthly fee might have softened the blow. But in the grocery wars, it may be Wal-Mart's pickup service that ends up being the preferred model to follow, with Amazon.com's new subscription fee only serving to shine a light on just how expensive the cost of "free" really is.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$109.56 (3.15%) $3.35
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$122.63 (0.86%) $1.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.