Features, Grocery and Food

Amazon’s Role Reversal

We all live in a topsy-turvy world.

There are more than a few reasons that we know this is true, but for the moment let’s focus on this strange fact: Amazon, the quintessential online retailer, has recently dipped its toes into the world of brick-and-mortar retailing.

It started with the opening of Amazon bookstores. Amazon could soon open food stores by 2018. It’s rumored that the first stores will open in Seattle and San Francisco, perhaps with more to follow in New York City, Miami and Las Vegas.

If the first wave of food stores proves to be a success, some observers predict, Amazon could roll out sales centers at the rate of 20 per year for the following decade, or 2,000 such locations. That looks like a dubious assertion to me. More about that later.

Regardless of how the numbers play out, there are reasons that developing a chain of food stores would benefit Amazon. First, let’s look at the offline retail Amazon already has.

Amazon bookstores are open in Seattle, San Diego and Portland, Ore. A fourth store is set to open soon in Dedham, Mass. The stores are small, but stylish, featuring an open design. The selection of titles is limited, curated by analysis of Amazon.com sales, promoting the tactic of stocking the books customers are most likely seeking online. If a customer can’t find the books of choice, or doesn’t want to carry books around, orders can be placed at the store for later delivery. The stores also offer Amazon’s own electronic devices for immediate purchase or to order for later delivery. The range includes Echo, Kindle, Fire tablet and Fire TV. The store serves as a showroom with some instant gratification purchases available. That model would be most likely the one Amazon would follow if its food stores are developed.

Food Store Advantage

There are two reasons Amazon would do well to open food stores.

First, Amazon has entered the food-delivery business in a big way. The retailer is offering grocery delivery under the auspices of Amazon Prime Fresh, which requires an additional fee on top of Amazon Prime. which offers quick delivery of non-food items, plus video streaming.

Subscribers to Amazon Prime Fresh can order groceries plus kitchenware and general merchandise. In some markets, Amazon Prime Fresh subscribers also can order meals from local restaurants. Amazon’s commitment to food is further reflected in its early development of private brands: Happy Belly for nuts and coffee; Mama Bear for baby food, and Wickedly Prime for snacks.

The company’s great advantage over other grocery or restaurant ordering systems is the broad range of products that can be ordered along with groceries. Higher-margin merchandise sales go a long way toward defraying the cost of delivery. As is always the case with delivery, the notorious “last mile” problem surfaces. The most costly part of delivery is the last part of the delivery trip as a driver seeks the right address. There are many opportunities for failure and added costs associated with the last mile. Maybe the customer forgot about the order and isn’t there to receive it. In remote areas, many miles must be traveled for a single delivery. In urban areas there’s the cost of parking tickets and tolls. The company has thought this through and operates its own trucking fleet to help control costs.

The second benefit for Amazon food stores: vulnerable produce and other perishable products. Customers typically prefer to choose their own perishables. That’s the chief reason why pre-packaged produce has never been a big winner in American supermarkets, although it is in other countries. American customers suspect that the purpose of packaging is to conceal damage or spoilage. Many suspect the same of online delivery services.

As one CEO of a food-delivery company told me: If you go to a supermarket and pick out produce that doesn’t look so good when you get it home, you consider that to be your fault since you picked it out. If you order produce from my company that doesn’t look so good when you get it, you blame my company since we picked it out for you. Amazon has one of the highest consumer trust ratings. Unless they make major mistakes, it would seem that customers would trust them to maintain high standards.

The Solution

With physical stores, Amazon could solve both the last mile and perishable-product problems.

The stores could be used as customer pickup points for orders placed online. That model is already being used with increasing success by many supermarket companies. Pickup points eliminate the last mile of delivery, so that problem evaporates for Amazon.

The stores could also stock a selection of produce, dairy, a few staples and kitchenware. Consumers could shop there, or use the stores as they would a convenience store, to augment a pickup order with self-selected produce or other items. They could also use the stores as ordering points for product to be picked up later or for delivery.

Most likely, Amazon will curate the product selection and consider best-selling items, just as it does for its bookstores. With Amazon’s powerful back-office analytics, these stores would be stocked on regional, local and even neighborhood preferences.

Should Amazon pursue such a store model, it would follow the lead of Chronodrive, a French company that operates a couple dozen stores that serve as convenience sites and online pickup points.

Despite the advantages that store-based retailing would bring to Amazon, it’s logical to consider whether many of these convenience/pickup stores can be justified. Chronodrive has kept its store numbers limited after several years of operation.

Predictions of big store numbers are always problematic. I’m reminded of Tesco’s incursion into the U.S. with its Fresh & Easy stores. Tesco, based in the UK, proclaimed that after it unlocked its first stores in southern California that they would roll out thousands of stores from sea to sea.

No such luck. Every one of the stores is closed, an enormous loss for Tesco. Of course, Amazon has a far better feel for American consumers. And the data it has accrued will help the company make smart location and marketing decisions.

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What’s Next?

It seems possible that Amazon’s next foray into the world of stores, beyond food, will focus on apparel. Amazon is now credited with selling about 7 percent of all apparel in the nation, and 19 percent anticipated in the coming years. The company is expected to eclipse Macy’s as the nation’s largest clothing seller.

The move from online to brick and mortar is becoming a pattern. Several other retailers that started online now have physical stores, led by Bonobos, Warby Parker and M. Gemi. Several home goods, furniture and electronics brands have also opened stores for direct-to-consumer sales, bypassing the wholesale business. This trend could become global. Suppose manufacturers in offshore countries that currently supply goods to brand owners develop their own brands for online or store-based sales in the U.S. and other countries? This is emblematic of online retail disruption.

Online retailers have been around long enough to have an established place in the retailing ecosystem. Now they are invading the last secure bastion that legacy retailers had: physical stores. It really is a topsy-turvy world.

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