A hat tip to Karen Caplan, CEO and President of Frieda’s Inc., who sent along a piece from the Hartman Group that made a point about AmazonFresh. Karen wrote:
I think it would be excellent if you did a commentary on your thoughts about the future of AmazonFresh, especially in light of Hartman’s comments comparing it to Tesco launching Fresh & Easy.
We have written a great deal about Fresh & Easy, so we will rise to the bait. The Hartman piece is titled “AmazonFresh…Grocery Domination Ahead?” — it is, as with most of the Hartman research, thought-provoking. The piece questions the future of AmazonFresh, and, more broadly, online grocers:
Whether AmazonFresh can or will succeed remains fodder for media pundits and market analysts to debate. From our perspective, we question whether AmazonFresh isn’t more akin to Tesco’s foray into the American marketplace with its Fresh & Easy Neighborhood Market small-format stores.
That is, while “fresh” is relevant to contemporary consumers, both retailers face significant challenges in convincing consumers that they can deliver on the fresh proposition. In the case of AmazonFresh, consumers simply don’t equate “online” with “fresh.”
The piece is based on new research that Hartman is selling here for $15,000, although the Executive Summary is free. It goes on to point out some other issues with online shopping. First that online shoppers are not a unique breed:
As Brad Kalil, The Hartman Group senior quantitative analyst, project lead and co-author of The Online Grocery Shopper report, points out, “There are a number of myths about online grocery shopping and shoppers that our research shatters. For one, conventional wisdom says that an online grocery shopper will visit the physical grocery store less often. We found the opposite to be true. Online shopping does not significantly cannibalize the number of visits to the physical store
Second, that the frequency of store visits does not seem to drop with online shopping:
Some believe that difficulty in getting to a store is a primary motivation for online grocery shopping. Again, our research debunks this belief. Results in The Online Grocery Shopper find that two-thirds of online grocery shoppers live within walking distance to a grocery store. To further confound traditional food marketers, Online Shoppers visit physical stores more frequently than At-Store Only Shoppers. Online grocery, food, or beverage shopping does not significantly reduce the number of trips to a store, and, for some (1 out of 10), can actually lead to an increase in store visits.
On average, At-Store Only Shoppers shop for groceries 8 times a month with a quarter of them visiting stores multiple times during a week. Online Shoppers, on the other hand, visit stores 14 times a month (4 times a month online and 10 times a month at a store).
Since starting online grocery shopping, half of the Online Shoppers (56%) have not changed the number of physical trips they make to a store, while a third (32%) make fewer trips, and the remainder (13%) make more trips.
The report also highlights the difficulty of fresh:
…not all retailers can deliver on the cues to quality that food shoppers seek today, namely those linking to freshness. Freshness remains a new frontier in emerging food channels, whether digitally-driven or brick and mortar. Whether or not Amazon will continue to experiment with Fresh is open to conjecture — yet, one thing seems sure: Amazon will almost certainly continue to compete in the area of shipping shelf-stable foods and beverages from its main website as it seeks to gain greater share of wallet in pursuit of global retail domination.
What drives businesses to do things is often difficult to determine and often determined by things unrelated to the project at hand. Tesco’s decision to pull out of the US might well be different if things were booming in the UK or if China closed to foreign retailers.
So whether Amazon will persevere with AmazonFresh is an open question. Clearly it has not been the kind of wild money making success that would lead Amazon to prioritize rolling it out nationally. It did, after all, launch in Mercer Island in 2007 — meaning the “experiment” is now going on six years old and has expanded to only a few Seattle area zip codes.
Yet there is a powerful reason for Amazon to persevere, and it goes beyond the obvious opportunity to make money selling food.
Wal-Mart was interested in the food business, especially the fresh food business, not just to make money selling food but because consumers purchased food more frequently than they did general merchandise. By adding a grocery store to its general merchandise store, the calculation was that it could increase the frequency of shopper visits, even if didn’t make much money selling food. The idea was that it would make plenty of money selling general merchandise to consumers whose visit was motivated by an intent to purchase food.
Similarly, Amazon has long since gone beyond books and music and now sells just about everything. If it gets people to order more frequently, it will likely sell not only food but more non-food items. This is exactly what motivated Wal-Mart and now motivates drug stores and others to find ways to sell fresh food.
Amazon, though, has two extra reasons to want to make this work: First, whereas Wal-Mart or Walgreens are the same experience whether they sell fresh food or not, AmazonFresh is a difference in kind, not degree, from buying from Amazon.com. Why? Simple, AmazonFresh offers same-day delivery. Already it pushes customers to buy non-food through AmazonFresh offering high volume shoppers benefits through its Big Radish Program and touting environmental benefits:
Here are some tips and tricks for getting and keeping Big Radish status:
• Make your Amazon.com purchases on AmazonFresh. We offer many popular items at the same Amazon.com prices. We deliver the Amazon.com items without packaging right with your groceries. Next time you need baby supplies, party supplies, books, movies, electronics, or other item, start your search on AmazonFresh.
If Amazon.com were to develop a national AmazonFresh program, it would acquire an ability to deliver anything same-day or next-day; this would make people much more likely to buy other products from Amazon.
In addition, right now Amazon pays a fortune to courier services such as UPS and Fedex. If it rolled out a national AmazonFresh program, Amazon would, basically, become like Fedex or UPS, but better — because it could offer same-day delivery. Not only could Amazon make the profit that UPS and Fedex make on its business, it could become a competitor to these companies offering to distribute products for other companies at a fee.
The basic notion that Hartman pushes — the idea that consumers don’t perceive on-line product as fresh — is not fully established across all categories.
Yes, originally, the thought was that consumers would not feel comfortable purchasing fresh items on the Internet. How would they know, after all, if the quality was good or the melon was ripe?
Subsequent research and the experience of vendors do not seem to indicate that is true, at least when applied to fresh produce. Indeed there are indications the opposite is true — that consumers don’t trust their own ability to identify a ripe melon or a quality avocado and are inclined to allow the experts at their trusted online service to make the decision for them.
Indeed, most online services make substantial efforts to build up consumer credibility. AmazonFresh, for example, ranks each item with its Daily Produce Ranking, which is built around a Five Radish system:
Freshness does, however, depend a great deal on concept and execution, and we would agree with Hartman’s parallel between Fresh & Easy’s failure to deliver fresh and AmazonFresh’s failure when it comes to the deli/prepared food assortment.
AmazonFresh sells a very limited assortment of fresh-cut meats and cheeses and doesn’t have chefs preparing prepared foods. In other words, the product it sells in the deli/prepared foods arena is not equivalent to the fresh foods sold in nicer supermarkets. As such, consumers whose online food delivery experience is confined to AmazonFresh would be correct in not associating online shopping with freshness.
This is, however, a critique of the AmazonFresh effort, not online shopping. Fresh Direct is a much superior offer to that offered by AmazonFresh. It promotes a large line of freshly sliced meats and cheeses and a beautiful assortment of prepared foods. It promotes that it has Michael Stark, who worked at Drew Nierporent’s Tribeca Grill, as its Executive Chef.
In produce, it promotes Tony Como, who worked on Hunts Point, as did his father. It also offers a five-star Daily Produce Rating System.
In fact, Fresh Direct is so far superior to AmazonFresh and is so much larger — not only selling throughout New York but now has rolled out to Philadelphia — that it has attracted worldwide attention. In 2011 Wm. Morrison Supermarkets in the UK announced that it purchased a 10% interest in FreshDirect for £32 million — about $51.7 million US dollars. Buying an opportunity to learn the business from a master.
In fact, if Amazon is serious about developing expertise in fresh foods that it could scale, it should terminate the AmazonFresh experiment and just buy Fresh Direct. If we assume that the $50 million valuation for 10% has doubled, that would place a value on the whole company of a billion dollars. Amazon.com has a market cap of $120 billion plus — so swapping 1% of the company for the opportunity to accelerate its fresh rollout and gain crucial market share in New York and Philadelphia seems to make a lot of sense.
The always prescient Professor Ed McLaughlin at Cornell has a theory that “Anything that can move to the internet, will move to the internet,” and, realistically, many fresh foods can be delivered in better condition — fresher — because they can be properly temperature-controlled, with delivery direct from a depot, than they can be sold after being displayed in a retail store.
It is also clear that internet ordering is increasingly allowing sale of the product in multiple ways with delivery one option but pickup through dedicated drive through facilities another option.
Consumer attitudes toward Internet shopping will depend crucially on the product sold. Fresh & Easy was not perceived as fresh because on many deli items — say sandwiches — it was not as fresh as those stores with in-store sub programs.
Those stores that use a store-pick method for internet sales don’t have the opportunity to enhance freshness, but those services such as AmazonFresh and Fresh Direct that go straight from a depot to the consumer probably can offer a more perfectly temperature-controlled cold chain, and that will eventually show.
Besides, internet shopping offers a unique way for competitors to enter markets that, conventionally, would take generations. Kroger can’t find enough sites without an acquisition to enter the New York Metro area, but Fresh Direct has entered. If it succeeds in Philadelphia, surely Boston or DC are next. How many cities must Fresh Direct triumph in before it becomes obvious that Internet shopping is a game-changer and conventional retailers ignore it at their peril?
One peril for the produce industry that is being exposed by the internet shopping services is that a lot of produce is not ranking very well. The other day, Amazon Fresh ranked zero produce items as worthy of its Five Radish ranking, and only two fruits and nine vegetables as Four Radishes. Lots of name brand produce was scoring two or three stars. That is sad, and the industry should make a determined effort to find out why that is so and to turn it around.
Many thanks to Karen Caplan for suggesting we deal with such an intriguing topic.