Inside Amazon's Big Play for Grocery Business

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For years, Walmart has followed Amazon, putting inventory online and starting its own version of a marketplace where third-party merchants can sell their wares. Now Amazon is returning the favor.

The e-commerce behemoth is building pickup locations for groceries in Seattle that could open by the end of the year, according to someone familiar with the plans, echoing a strategy embraced by its chief brick-and-mortar rival.

Delivering fresh food is complicated and the one thing keeping Amazon and other tech companies from disrupting the grocery business. Most consumers still get their milk, produce and meat from Walmart, Kroger and other traditional grocers. But while e-commerce has yet to take hold in the $800 billion U.S. grocery market, Amazon is betting that could change as millennials accustomed to shopping online enter their prime food-buying years.

"We know their best customers are willing to buy groceries online," says Cowen & Co. analyst John Blackledge. "The onus is on Amazon to deliver because the demand is there."

Amazon began experimenting with the grocery business in 2007 when the company started AmazonFresh in the Seattle area, where the company is based. The service offered doorstep delivery of a limited selection of groceries, saving consumers driving time and the trouble of pushing a shopping cart around a store. The service has slowly expanded to 16 U.S. markets, including Los Angeles, New York and Boston. In June, the company rolled out the service to Prime subscribers in London, the first time it has been offered outside the U.S. Amazon currently offers same-day delivery of more than 130,000 items for 7 pounds ($8.58) per month on top of the cost of Prime.

Recently AmazonFresh hit a milestone when it stopped losing money in Seattle, according to the person. Earlier this month, the company dropped the price from $299 a year to $15 a month in the U.S. -- $180 annually -- which proved immediately popular with shoppers and emboldened Amazon to accelerate its grocery ambitions, the person said.

Delivering groceries to a customer's home is an expensive and tricky proposition because fresh food spoils and can't be left at the door like electronics or clothing. It has taken Peapod, the grocery delivery service owned by Royal Ahold, years to figure out how to deliver meat and produce profitably. Instacart, a San Francisco upstart that has partnered with Whole Foods, employs legions of shoppers who troll the aisles and deliver food to customers' homes. It, too, has struggled to crack the code.

Walmart and Kroger have embraced the so-called click-and-collect model. Shoppers select their food online, and then workers fill the order and have it ready for pickup in the store parking lot. Besides side-stepping potential spoilage, Walmart is hoping that shoppers will buy other things once they've made it as far as the parking lot. The service has only been around for a few years and is still rolling out nationally, so it's too early to judge its popularity among the targeted demo of millennial mothers.

Amazon, of course, doesn't have much of a physical presence in the U.S. beyond a few bookstores. So the company is turning to pickup locations for its groceries. In Seattle, Amazon is building facilities that resemble gas stations, where shoppers could pull in and pick up their groceries.

Seattle Planning Department documents reveal two similar projects in the city featuring car canopies. One of the sites is near a new Amazon Prime Now distribution hub where shoppers pick up packages ordered through the company's one-hour delivery service, according to another person familiar with the matter. Construction crews were busy at both locations earlier this week. The company declined to comment.

Amazon could also team up with local grocers to offer grocery pickup sites allowing it to expand the concept more quickly than it could by building new locations around the country, according to another person briefed on the plans. In the U.K., Amazon has pickup lockers at stores operated by the Morrisons supermarket chain where shoppers can pick up online orders. Under such partnerships, Amazon can also put the grocers' inventory on its site.

Meanwhile, Amazon is testing the appetite for grocery delivery among Prime subscribers who don't pay extra for AmazonFresh. Prime members in Southern California and Indianapolis, for instance, can get fresh food delivered from Bristol Farms and Fresh Thyme Farmers Market, via the Prime Now quick delivery service. Further grocer partnerships lets Amazon feel out new markets while competing with Whole Foods-Instacart. Ultimately, Amazon could integrate the Fresh and Prime Now services into one, one of the people said.

Amazon's push into fresh food is a direct threat to the established players. In the U.K., the company has entered a crowded market where Tesco Plc and web grocer Ocado Group Plc have been engaged in a price war for years. Ocado shares plummeted when Amazon announced its U.K. plans. In the U.S., the main tussle will play out between Amazon and Wal-Mart, which is the nation's largest grocer, generates more than half its sales from selling food and uses cheap food to lure customers to its stores.

Time and again, Amazon has shown itself willing to absorb losses while it builds a commanding market share. In groceries, the company is willing to break even in an effort to persuade shoppers to visit the site more often, one of the people said.

The big question is whether sizable numbers of Americans will be prepared to purchase fresh food online, sight unseen. For many people, there's no substitute for personally assessing the ripeness of an avocado or the thickness of a steak. Wal-Mart and other traditional grocers are spending billions to improve the shopping experience and doubling down on prepared meals and private label products you can't get anywhere else. "There's still going to be a place for stores that have a good selection and provide that experience," says industry consultant Roger Davidson.

Still, many experts said shoppers wouldn't buy furniture or cars online. Turns out they will, and Amazon is betting the same will be true of fresh food.

~~ Bloomberg News