In 2007 Amazon rolled out a test of its online grocery service, AmazonFresh, in the Seattle area and has since begun to expand to other cities, even going so far as to lay the groundwork for international expansion. The continued growth of Fresh indicates that the company is determined to play in this space, but the cautious approach to pricing and the slow speed of expansion indicate the uncertainty surrounding its strategy in online grocery.
Keeping the program in its trial status in the US allows Amazon to figure out pricing and a long-term strategy. It allows Amazon to maintain a foothold in the online grocery space while it sees if it can learn lessons from other countries. After a German expansion proved to be a non-starter, a rumoured expansion into the UK this year could help Amazon figure out what to do with Fresh. In this three part series, Amazon’s strategy and future prospects will be analysed by country with respect to the current competitive landscape in each country.
From One City to Many
Despite the increased interest amongst retailers and shoppers in online grocery options in the past few years, Amazon has actually been involved in the space since it rolled out the service in its hometown of Seattle in 2007. The company spent six years honing its approach before finally feeling comfortable enough to expand. In 2013 the company introduced the service to Los Angeles and has since expanded to New York, Philadelphia, and San Francisco. The company has not only made an effort to branch out into other cities, but metro and suburban areas as well like those of New Jersey and Northern California.
From One Price to Many?
Amazon’s expansion into different cities may not appear straightforward, but it is their attitude towards pricing that is truly improvisational. The period between 2007-2013 could reasonably be referred to as the test period given the focus on a single town at a reduced price. AmazonFresh was established temporarily as a free trial to all those with the original Prime membership. The free trial included free delivery of fresh food and other groceries to Prime members so long as order minimums were met and made use of same day delivery for orders placed in the morning and next day for those placed later.
After spending 2013 and 2014 introducing Fresh to new regions, Amazon announced its intent to move past the trial pricing in 2015. The plan was to institute a new Prime Fresh Membership which included all the benefits of the original Prime membership, but included grocery delivery for an annual price of US$299. Customers voiced their displeasure at this outsized upfront cost and Amazon has been since backtracked on this plan in a number of markets. In California, where the US$299 membership was instituted from the start instead of the extended free trial, Amazon had to recalibrate and ended up introducing an alternative pricing scheme. It gave regular Prime members access to Prime Fresh deliveries for a flat fee of US$8 for each delivery. Amazon’s willingness to offer more affordable alternatives in California and delay the introduction of the more expensive membership in others shows that Amazon still has not figured out a pricing strategy for the service.
Cost and competition limit Amazon’s ability to set the terms of the market
Some might argue that the rollback on pricing could be a strategy to continue building a customer base. For some of the newly incorporated cities, this is at least partially true. But in Seattle, AmazonFresh has been out for eight years now, more than enough time to build up a base in a town full of Amazon loyalists. Amazon’s hesitance to raise prices there indicates a price sensitivity that is exacerbated by the plethora of competition. Yearly delivery memberships for both Google Express and Instacart start at about US$99, and both offer smaller fees for individual orders alongside grocery delivery companies new (InstaCart) and old (Peapod). Walking or driving to the grocery store is even cheaper.
If it ever wants to become the world’s largest retailer, Amazon is eventually going to have to figure out grocery—grocery retail is the largest channel in the world. However, Amazon faces a great deal of competition in the US, including many players that aim to bring such a large offline market online. Tech start-ups will put pressure on pricing thanks to their desire to gain share. Store-based retailers in the meantime will have a chance to test and eventually roll out click-and-collect options like Walmart and Kroger are doing currently. More established grocery firms like Peapod and Safeway will benefit from the inertia of their current user base. The sheer number of services and prices in the market limit Amazon’s options on pricing if they want Fresh to be competitive. However Amazon is no stranger to leaving profit on the table in the short term, so it will likely maintain its grocery delivery in its current form, testing and tweaking on a market-by-market basis until the company figures out an optimal pricing strategy (or someone else does).