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 1.47%) 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 +1.49%) 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.
