So far this month, grocery delivery service AmazonFresh made two big moves: expanding services to the Dallas area and the subscription price dropped from $299/year to $14.99/month (~$180/year). This is AmazonFresh’s third expansion this year and the price decrease serves to draw in many more customers. This should terrify food distributors and wholesalers.
AmazonFresh kicked off in 2007, operating exclusively in Seattle. After six years of testing in their backyard, the service expanded to a couple cities each year since 2013, presently covering 17 markets in the US and London. The Dallas expansion brings that figure up to 19 markets with some amount of coverage. Since its inception, AmazonFresh has practiced slow, steady growth, likely due to the challenges inherent to delivering groceries: short shelf lives, temperature requirements, and food’s naturally low margins.
What makes this expansion so noteworthy is the pace it sets. AmazonFresh first put wheels on the pavement and groceries on the porch in Boston and London already this year and Dallas represents a spike in momentum. With its careful approach, the folks at Amazon have surely learned some lessons and may be ready to expand AmazonFresh by leaps and bounds in the near future. This business unit’s progress follows the Amazon model of domination, using careful, measured growth that quickly transforms into industry-wide domination.
Amazon has barely turned over any profits in two decades of operation, but investors don’t seem to care and sometimes those losses are ultimately profitable. The company has been focused almost entirely on growth instead of shelling out dividends to shareholders, such that it could be incredibly profitable at the moment of its choosing. Given the near slavish dedication to growth, expanding to offer its products and services wholesale seems increasingly likely.
In grocery delivery, AmazonFresh doesn’t face much competition. Instacart, which dispatches professional shoppers to grocery stories with a click, has been facing some difficulties with wages as it moves to scale upward, among many other signs of trouble. Some smaller services, like Peapod, toil on in limited regional markets or for a mere subset of grocery stores. AmazonFresh appears to have a bright and clear horizon for expanding wherever it wants, especially since it has its own climate-controlled warehouses in its target markets and has more stringent delivery time rules than does Instacart. It’s even rumored that curbside pickup via physical stores could be in the works.
Currently, AmazonFresh is consumer-facing and only operating in some of the country’s largest metropolitan areas. Why does that matter to wholesalers and distributors like General Mills’s foodservice unit?
The answer is simple: logistics.
Amazon has spent its entire lifetime working to master logistics and has taken huge steps in that direction recently, leasing its own jets and trucks and becoming an oceanic freight forwarder. As Amazon integrates its own delivery supply chain from end to end and stops relying on middle players like UPS and DHL to fulfill its objectives, providing cut-rate deals on a B2B basis would be as simple as flipping a switch for Amazon. By tightening its grip on the process, the e-commerce colossus can cut costs and pass the savings to consumers. A move like this isn’t about profits; it’s about capturing market share. No one likes paying much for food, so barring any issues questions of quality, Amazon’s lower prices would easily give them a foothold in the market to wedge out current players.
Running the grocery service already requires Amazon to buy food in bulk. Selling wholesale would actually be more profitable since the inventory would need less breakdown and transportation to reach their intended endpoint. Once Amazon makes the B2B pivot, they can offer better purchasing prices with their suppliers and draw away their competitors’ partners looking for more profit, all in the name of grabbing more market share up and down the vertical.
Amazon is already selling some products to businesses. This unit, Amazon Business (formerly AmazonSupply) is doing over a billion in sales after barely a year of operation and the stewardship of Prentis Wilson. Handing the reins of wholesale to Amazon Business would likely turn over a heap of sales opportunities from customers looking for savings, especially with schools and hospitals, who can be very reliable sources of demand.
Setting aside the Fire smartphone’s failure, Amazon’s moves tend to pan out: Amazon Business, AWS, Kindle, Dash, Alexa, even CEO Jeff Bezos’s other ventures with Blue Origin and the Washington Post. There shouldn’t be any doubt that Amazon could succeed in wholesale.
It’s not a doom and gloom – yet. AmazonFresh doesn’t function on a nationwide scale and only serves subscribing customers, not businesses. A company like General Mills or Kellogg, a company with substantial B2B contracts and relationships, can survive and even beat Amazon before the race begins. That is, if they build a platform business model.
A foodservice company can leverage its existing relationships with producers and establish serious transparency on pricing and supplies for their existing customers with a digital marketplace, much like Amazon offers to its customers. This kind of framework, a product marketplace, would be extremely attractive to customers looking to maximize savings and lure them away from their current foodservice providers, which in turn attracts the food producers.
Any and all B2B suppliers should be worried about Amazon muscling into their markets. The expansion of Amazon Fresh is a sign that food distribution is likely on their radar in Seattle and could be a totally different landscape in three years. The best defense is a good offense and the best offense is rolling out a working platform now.
Originally appeared on Inc.
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