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When you think about it, grocery – where Amazon is set to expand in the U.S. – is the perfect test for Amazon. The business embodies two of the internet juggernaut's most famous attributes: supply chain genius and limited concern for profitability.
It is hard to make money as a supermarket. A good operating margin is 5 per cent and with Wal-Mart (now with $150-billion U.S. in grocery sales), drug stores and dollar stores now in consumables it is more competitive than ever. What has saved a traditional store such as Kroger and allowed Whole Foods to soar is that consumers care about quality, too, particularly in perishables such as fruit and meat (Wal-Mart now offers guarantees on produce freshness).
Consumers also like the experience of poking at fruit or selecting which specific package of meat to take home. Webvan, the original online supermarket that was meant to do to groceries what Amazon did to books, failed because the massive investment in supply chain for perishable products failed to entice enough shoppers to want to buy apples via a computer.
Still, consumer attitudes towards online shopping have advanced, and so have business models. Several online supermarkets exist in the U.S. but are limited to specific, dense markets (Fresh Direct in New York) or are part of existing chains (Peapod is owned by Ahold). Some chains offer online ordering and store pick-up. A national AmazonFresh would appear to be the most ambitious online grocer since Webvan. And if anyone can meet the logistical challenges of perishable delivery it is Amazon. Its operating margin is just under 5 per cent so any dilution to profitability is manageable. With online accounting for $10-billion of a $600-billion U.S. grocery market, according to IBISWorld, Amazon must at least try.
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