Amazon has begun delivering Whole Foods groceries — including meat, produce and alcohol — free and within two hours to Prime subscribers in four U.S. cities, bringing a new level of competition to the already booming food-delivery business.
The grocery-delivery business — though an expensive endeavor for retailers — has become a hotly contested space in recent years, as companies compete to relieve shoppers of one of the few chores many do once a week, if not more: buying food. Walmart, the country’s largest grocer, has aggressively expanded its buy-online-pick-up-in-store option throughout the country and is eyeing same-day deliveries in New York. Others, like Costco and Target, are also rolling out grocery-delivery services in hopes of tapping into a growing pool of convenience-minded shoppers.
“Nearly every chain that plans on being in business in five years is moving to delivery,” said David J. Livingston, a supermarket analyst for DJL Research. “Most people buy the same groceries week after week, so they’re saying, ‘Do I really need to go spend an hour at a Giant or Walmart for this?’”
It might be a pain point, but many companies have struggled to fill the need. Analysts said grocery delivery is a pricey business full of logistical and practical challenges. For one, grocery stores aren’t warehouses, so it often takes reconfiguring to efficiently find and package fresh food for delivery. And then there’s the issue of keeping cold items cold and frozen foods frozen. And Amazon itself has tried and failed to get into the grocery business in the past. Its decade-old Amazon Fresh delivery business has been slow to catch on, leading the company to cancel the service in at least nine states, including Maryland and Virginia, last year.
“If somebody’s ground beef is sitting in the back of a car for two hours, that’s not going to work,” said Lee Peterson, executive vice president of brand, strategy and design for the retail consultancy WD Partners. “There’s a lot of potential here, yes, but there are also big challenges.”
Another challenge for Amazon: It is targeting suburban areas in middle America instead of large coastal cities like Boston and New York, where grocery delivery is already a way of life for millions. If it can persuade shoppers who have cars and easy access to sprawling grocery stores to try delivery, it would tap into a market that companies like Peapod have largely been unable to crack.
“The suburban market has always been a conundrum for grocery-delivery companies,” Peterson said.
Thursday’s announcement comes six months after Amazon paid $13.7 billion to acquire more than 400 Whole Foods stores around the country, and it is the latest example of how the online giant plans to bring together the two companies by offering new incentives for members of its Prime membership program, which costs $99 a year. Amazon is also extending a $5 discount on roses to Prime subscribers, who will be able to buy two dozen for $19.99 through Valentine’s Day. An estimated 90 million Americans are Amazon Prime members.
“The ultimate dagger is Prime Now — if you can deliver groceries free, that’s an entirely new bar for the grocery industry,” Peterson said.
“There’s panic in the C-suite of every grocery chain in the country. How do you compete with a grocery company that doesn’t care about making money?” he said, referring to Amazon’s history of plowing profits back into the business.
He added that Amazon’s foray into grocery delivery is also likely to put particular pressure on third-party services like Instacart, which offers Whole Foods grocery delivery within one hour for $11.99 and within two hours for $9.99.
“While Whole Foods remains a valued partner, they represent a small and declining portion of our revenue as Instacart customers have gained access to more and more of North America’s favorite grocers including Sprouts Farmers Market, Publix [and] Costco,” a spokesman for Instacart said in an email.