Oct 30, 2019

Why Amazon keeps spending big on grocery delivery

Erica Pandey, author of @Work

An Amazon Fresh delivery worker makes a stop. Photo: Smith Collection/Gado/Getty Images

Amazon is losing billions of dollars as it expands free, fast shipping. Still, the company keeps doubling down and debuting two-hour grocery delivery at zero cost to Prime members in new markets.

The big picture: The American food market is worth a whopping $700 billion, but that's not why Amazon is chasing it. Consumers shop for food more frequently than anything else, and Amazon is betting that getting people to visit its site whenever they need groceries will turn them into loyal, lucrative customers.

"The path to the U.S. consumer's bank account is through their stomach," says Charlie O'Shea, a retail analyst at Moody's.

Driving the news: Amazon is slashing its monthly $14.99 fee for two-hour Amazon Fresh grocery delivery in 20 cities.

  • The retail giant already offers this delivery service to Prime members ordering from Whole Foods through Prime Now, but Amazon Fresh offers certain popular brands that Whole Foods doesn't, like Oreos and Cheetos.
  • Amazon's commitment to delivery isn't cheap — it spent $9 billion on shipping in just the third quarter. And with competitors like Walmart and Target focusing on delivery, Amazon has no choice but to keep spending, O'Shea says.

But, but, but: "I see Walmart's advantage in food similarly to the way I see Amazon's online retail advantage," he says. "The lead is too big."

  • The most important variable in food delivery is proximity to shoppers.
  • While Amazon has a number of warehouses for Amazon Fresh and 470 Whole Foods stores to serve as potential distribution centers, Walmart has 4,700 stores. Almost every American lives within 10 miles of a Walmart.

What to watch: Toppling Walmart is nearly impossible, but Amazon is in the best position to do it. It has a ton of cash to invest in the fight — and patient shareholders who are willing to let it spend big and worry about profits later.

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