Amazon

BRIEF

Can Amazon earn grocery dominance with more automation?

Dive Brief:

  • A report from Barclays notes that warehouse and delivery automation, including the use of “robot vans” in urban markets, could be critical to helping AmazonFresh reach break-even status, according to CNBC.
  • By leveraging efficiencies and converting a significant number of its currently 45 million Prime members to its service, AmazonFresh could generate $40 billion in total sales volume within the next 10 to 15 years, Barclays estimates.
  • However, to get to that point, AmazonFresh will have to significantly grow its share among high-income consumers and in the top American grocery markets. The service is currently used by less than 2% of this “core customer base.”

Dive Insight:

It’s not clear if Amazon has made any strides towards developing the futuristic “robot vans” mentioned in the CNBC story. But considering this is the company that recently made its first delivery by drone, the prospect doesn’t really seem that farfetched.

The big upside for automated delivery is the savings that come from operating with no labor costs and maximum efficiency. As the Barclays report notes, 80% of grocery delivery costs are attributed to labor expenses and wages. The upfront investment needed to install this technology is significant, but this is where Amazon has a significant advantage. The e-commerce giant has capital to burn. Low-margin traditional retailers, by contrast, just don’t have as much money to invest in this kind of advanced technology.

Combined with Amazon’s data-mining capabilities, growing infrastructure and flat-out ambition to become a dominant player in grocery, automation offers another way for the online retailer to quickly scale up. Granted, that may not seem like much of a threat given the company’s current operations. So far, AmazonFresh has grown very slowly, expanding to just over a dozen markets in the span of 10 years. Amazon Prime Now, meanwhile, offers grocery delivery in many U.S. metropolitan markets, while other innovations like Prime Pantry, dash buttons and the snacks-and-savories service Wickedly Prime have made modest gains. Overall, just 10% of users turn to Amazon for their grocery shopping, according to an analysis by Frank N. Magid Associates.

But underestimating the company would be a major mistake, many sources agree. Its online offerings combined with recent openings of Amazon Go and Amazon Fresh Pickup locations indicate a company that’s carefully probing the market. Scaling up quickly in a crowded, low-margin industry like grocery is difficult, but by offering free delivery on fresh products thanks to automated warehouse and delivery capabilities — a possibility noted in the Barclays report — Amazon could make significant inroads. Even if it converts a small fraction of the 80 million Prime members it currently has, the company would go from modest grocery offerings to a major player in the industry.

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