For the past two weeks, I've hunted my neighborhood supermarkets
for oyster sauce to complete my steak stir-fry creations.
Frustrated by my inability to locate this evasive condiment
(#firstworldproblems), I turned to the one source where I can get
anything my heart desires --
And courtesy of my Amazon Prime membership, I'll have my Lee Kum
Kee Panda Brand Oyster Sauce (along with my 3M Dual Lock Fasteners)
shipped to me free by Thursday at 8:00 p.m. EDT:
Incidentally, around the time I was placing this order, the good
published a story indicating that Amazon may be planning a big
expansion of its online grocery business.
So let's break it down.
Amazon has plenty of grocery items available for sale on its
website, with the most popular items being K-Cups for Keurig
However, according to the Reuters report, the new initiative will
be centered around AmazonFresh, which delivers fresh food items,
including perishables like vegetables and ice cream, in the
company's hometown of Seattle:
One of Reuters' sources indicates that AmazonFresh will be launched
in 20 other urban areas in 2014, with another saying the company
was targeting as many as 40.
Looked at this way, this seems like a kooky idea. It's one thing to
manage mass quantities of books and digital cameras and any other
untold number of items. But it's another thing entirely to deal
with huge amounts of fresh, perishable food which will vary in
quality and availability according to region.
After all, supermarkets (at least here in New York where many
people don't drive) have delivered food for ages, but in those
cases, people would bring items like milk and ice cream directly
home to avoid spoilage.
Nonetheless, New York's FreshDirect has proven that Internet-driven
sales of fresh groceries (including meat and milk) can work, and if
Amazon's really planning on rolling this out in new areas, it's got
to be doing well in Seattle.
And don't forget about Omaha Steaks, which uses a reusable cooler
and dry ice to ship steaks around the country.
Incidentally, after poking around on the AmazonFresh site, I found
that Amazon has "temperature-controlled tote bags" that will
presumably keep items from getting too hot or too cold:
Now let's talk about the issue of margins.
The grocery business is typically described as low-margin, which is
a major source of concern for Amazon's possible grocery adventure.
First, let's remember that investors don't really seem to care
about Amazon's margins since the long-term bull case is that the
company is taking over the world. (See:
Why Amazon's Low Margins Deserve Praise
Amazon's gross margins have ticked up as of late, but the stock
performed amazingly well from 2009-2012 with no margin improvement:
Now, let's take a look at gross margins across many major food
Amazon's basically smack-dab in the middle here, excluding the
) which makes money on membership fees, and
), which sells expensive stuff to rich people. So it's not like
food is necessarily a big margin drag, especially when having
people use Amazon more and more is a clear strategic benefit that
also damages the competition.
And note, if Amazon really cared about margins rather than revenue
growth, why would it be so big in consumer electronics, which,
), is not a very profitable industry?
You can see here that
), for example, has barely outpaced Amazon in terms of margins,
which is almost certainly the result of sales of high-margin
extended warranties at the former:
Additionally, on the shipping side, Amazon does not appear to be
extending Prime to the AmazonFresh business. To get free shipping
here, customers will have to to spend $100 or more (for doorstep
delivery), or $50 for those who attain "Big Radish" status by
spending $300 or more in the previous month. ("Big Radish" status
is only valid for one month at a time.)
Occasionally, you'll see items on Amazon that most certainly should
not ever be shipped free because of the cost, like this $28.75
25-pound barbell plate:
There is no such nonsense in AmazonFresh.
The idea of Amazon making a big push into groceries, either by
simply pushing its existing capabilities or by expanding
AmazonFresh, isn't as off-kilter as it may seem.
And in fact, as time goes on, Amazon is going to need new product
categories as physical media disappears and traditional consumer
electronics devices are destroyed by convergence. (See:
Xbox One, PlayStation 4 -- and Apple? -- in the
Age of Convergence
.) There's $568 billion in annual spending on groceries -- you
don't think Amazon wants a bigger piece of all that?