SEATTLE - The move by Amazon.com here into a broader assortment of bulk dry groceries is more likely to affect warehouse clubs and other sellers of bulk food than supermarkets - unless the eventual goal is to move into perishables, industry observers told SN last week.
"If Amazon's aim is to be the Wal-Mart of electronic commerce, then food will certainly be a key element in boosting its image as a one-stop-shopping location that offers more than books," Art Turock, a Seattle-based consultant, told SN. "And if it gets nonperishables right, then the next step could be [a move to] perishables, which would certainly be of more interest to supermarkets."
Amazon.com hinted it might someday add perishables to its offerings, noting on its website, in an advisory to consumers, "Because we only carry products when we can offer great prices and free shipping, we don't carry everything (yet)! For example, we don't currently offer perishable items such as milk, fresh meat or peaches because we can't ship these for free. But we work on improving our selection every day, so check back often to see what we've added."
With Amazon limiting its grocery offering to shelf-stable items, it could draw warehouse club customers looking for a way to avoid long lines, Turock pointed out - "especially Costco members who are less interested in the treasure-hunt aspects of shopping than in simply saving time," he noted.
Tim Ghriskey, chief investment officer for Solaris Asset Management, a New York-based investment management firm, also said he believes Amazon poses a bigger threat to warehouse clubs than supermarkets. He said he sees groceries as more of a loss leader for the online retailer.
"The food offering is intended to gain more eyeballs and clicks," he explained. "While Amazon would love to make money off groceries, it's more likely hoping that food will attract more people to click on its website because it can make money selling advertising based on the number of clicks or get those people to buy other, higher-margin products."
The heavy offering of organic foods should help margins, he added. "Amazon has been testing this concept for a while with gourmet foods and health and personal care items, so obviously they know what they're getting into. But I believe it's likely to generate more clicks, while the odds are against it being profitable in the long term."
Amazon.com began offering approximately 10,000 nonperishables grocery items on its website in mid-May, followed by a major launch earlier this month. The assortment includes a mix that's about evenly divided between conventional and organic selections in such categories as beverages, canned and packaged goods, pastas, breakfast foods, snacks, cookies and candy, baking suppliers, household products and pet supplies.
The selection includes mainline offerings from General Mills, Kraft, Kellogg's, Lipton, Betty Crocker and Jell-O, as well as natural and organic selections from Melissa's, Celestial Seasonings and other suppliers, along with private-label offerings from Wild Oats Markets.
According to the company's website, prices are competitive, with Amazon "working with our manufacturers on ways to keep per-unit costs low" - the reason for the bulk packaging, it explained.
Amazon.com also offers regional favorites, such as Andy Capp hot fries, or hard-to-find specialties like Zico pure coconut water, as a standard part of its mix, the website says, plus an extensive selection of natural and organic products.
Amazon spokeswoman Tracy Ogden said the company intends to expand the selection, although she didn't indicate if that would encompass perishables.
Of the Top 10 best sellers last week, eight were diapers from Pampers; one was diapers from Huggies; and one was a box of pregnancy test kits from Clearblue. Among organic groceries, four of the Top 10 items were snack items from Dr. Kracker; three were syrups from Coombs; two were breakfast cereals from Golden Temple Sweet Home Farms; and one was espresso chocolate chunk cookies from Pamela's Products.
Orders over $25 are being shipped free of charge.
Ogden declined to pinpoint the company's expectations for grocery sales nor to disclose details about the company's supply agreements. However, in contrast with past practice, when Amazon offered products from third-party suppliers, she said all grocery merchandise offered on its website will be owned by Amazon and shipped directly from its fulfillment centers.
Turock said he is confident Amazon can ship nonperishable groceries as well as it ships books and other merchandise. "While this will test its capabilities for information technology, marketing, and delivery and logistics, it is just an extension of something it already does extremely well," he said.
Andrew Wolf, an equity analyst with BB&T Capital Markets, Richmond, Va., said he believes Amazon's expansion into groceries has the potential to be profitable. "Consumers looking for premium products like meat and wine are already used to buying groceries online, and they are willing to pay the costs to get what they want," he pointed out. "So if someone orders $100 worth of groceries and Amazon can make $25 or $30 on an order, that's a pretty good margin, so this could be a profitable endeavor. And the larger the order size, the better the profit model."
However, Ghriskey said he questions the profit potential of the venture. "While a grocery offering is probably a good business move, it's unlikely to impress Wall Street," he said. "The market wants greater confidence that this will result in future earnings growth, but the jury is still out on that because it's hard to believe Amazon will dominate this area of the Web."
Jim Hertel, senior vice president at consulting firm Willard Bishop, Barrington, Ill., also said he believes Amazon's goal is to achieve more rings than profitability, pointing out its biggest hurdle may involve "solving all the complexities of the 'last mile' - the challenge of getting products from the fulfillment centers to consumers' homes.
"That challenge is related to the question of what does it cost to ship product through a distribution network vs. the value of the food shipped? With books, a customer may place a $40 order, which fits in a neat little shipping package. But when he buys $40 worth of groceries, it may come in a container that's significantly larger, so shipping costs may go up while margins go down.
"But Amazon may have reasoned that offering something like food, which people buy six times a month, compared with books, which they might buy every six to eight weeks, could promote a lot of re-visits, which might enable it to drive rings for sales in other product categories.
"The reason Wal-Mart, Home Depot and dollar stores got into the food business was to increase traffic for the rest of the store and drive rings, and that might be the parallel situation here."
