Why Amazon Fresh is about more than groceries

According to Reuters, Amazon is planning on rolling out it’s grocery delivery service to several new markets: LA and SF this year and potentially up to 20 additional markets in 2014.

This is an absolutely huge deal and an opportunity that extends way beyond groceries. I’m convinced that this is going to be one of Amazon’s most successful business units and here are 7 reasons why:

1. Amazon has tested this for 5 years

Amazon has been testing Amazon Fresh for the last 5 years in the Seattle area. This has given them ample time to work out potential problems with processes, scaling, and business economics. They are not racing to follow a competitor–they are fully aware of the challenges they’ll face. Given that Internet sales tax laws seem imminent, the timing seems perfect to start expanding (tax nexus no longer matters for them).

2. Amazon owns its own fleet of trucks
Amazon doesn’t appear to be leveraging courier services or hiring drivers to use their own vehicles. This gives them incredible control over their delivery fleet and a flexibility that will be tough for others to match.</p>

3. Amazon controls its own inventory
Amazon is not selling for someone else. Unlike Instacart or Google Shopping Express that piggyback off of existing grocery/retail locations, Amazon has their own warehouses and stock. By disintermediating the grocery store, their margins will always be better than what a 3rd party can offer.

4. Inventory is managed based on the delivery model
Amazon’s former head of global fulfillment technology, Nadia Shouraboura, has argued that anyone not managing inventory based off of a warehousing paradigm, will not succeed:

Logistics experts, including Shouraboura, argue that such a strategy will never work if same-day delivery takes off. Stores are organized according to a different logic than warehouses, they say. If same-day orders start pouring in, stores won’t be able to keep up — and in-store customers could get trampled. http://www.wired.com/business/2013/04/store-of-the-future/all

Again, this hurts anyone who needs to piggyback off of existing stores (i.e. pretty much anyone not at Walmart/Amazon scale).

5. Amazon can delivery non-grocery items
Amazon can easily bundle non-grocery items, with deliveries. Each grocery delivery becomes an opportunity to upsell the customer on goods that a grocery store does not carry. Delivery times can be dramatically reduced for items that would normally be shipped from a distant warehouse.

6. Amazon is solving last-mile delivery
There is no good last-mile delivery option in the US. If Amazon succeeds with Amazon Fresh, they will be building incredibly valuable infrastructure that they can leverage across their other businesses. Imagine a future where the Amazon driver is a more familiar face in your neighborhood than the UPS guy.

7. Amazon can run this at a loss
Like their hardware businesses, Amazon Fresh can be run with very aggressive economics because of the positive impacts it can have on their other businesses. Perhaps only Walmart would be able to compete here.

If I were involved in this space (Google, Walmart, eBay), I would be very nervous. They will need to move incredibly fast to stay relevant.