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Back to basics: Amazon opening brick-and-mortar grocery stores

By Jagdeep Worah
13 October 2016

Kishore Biyani of India's Future Group may be right in insisting that the ecommerce boom is overrated and cannot replace physical stores or so one may read in ecommerce titan's move to open grocery-centric brick-and-mortar outlets.

Rumours have been brewing for about a year now that slowly but steadily, Amazon is creating a substantial bricks-and-mortar footprint for its retail empire. In Seattle and Sunnyvale, California, there have been reports that outposts are in the works allowing shoppers to drive up and retrieve grocery orders they place online. On Tuesday, the buzz grew louder when The Wall Street Journal reported many such locations are in the works, and they will not only include curbside pickup, but also walk-in convenience stores where you can purchase perishables.

The reports suggest Amazon wants to be a more serious player in the grocery business, and to achieve that, it believes it can't rely on ecommerce alone. And that potentially sets up a kind of retailing showdown we haven't quite seen before.

For long, we've been watching traditional brick-and-mortar retailers try to notch a win on the digital playing. Now it appears we're poised to watch the online shopping pioneer try to march into an arena where the likes of Walmart and Stop & Shop have distinct advantages.

But Amazon is doing so in a very calculated way, one that avoids fully battling the likes of Walmart and Target head-on in favour of making strategic investments in areas where there are limits to what an online storefront can do.

The WSJ reported that Amazon plans to "build small brick-and-mortar stores that would sell produce, milk, meats and other perishable items," and for which orders can be placed via smartphones and possibly in-store touchscreen displays. Amazon will also reportedly provide drive-through locations "where online grocery orders will be brought to the car," with license-plate reading technology deployed to lower wait times.

The report comes with Amazon in the midst of launching a smattering of physical bookstores in major metro areas. Bookstores have opened in Seattle and San Diego, and ones will soon open in Portland, Oregon and the Boston suburb of Dedham.

It also follows the launch of AmazonFresh, a same-day grocery delivery service now available in seven US cities and London. Amazon recently shook up the service's pricing; instead of charging $299 per year for AmazonFresh and a standard Prime subscription, the company now charges $15 per month (effectively $180 per year) for a standalone AmazonFresh subscription, with a Prime subscription (available for either $10.99 per month or $99 per year) sold separately.

For regular Prime subscribers, Amazon also offers its Prime Pantry service, which delivers up to 45 pounds of groceries and household supplies in a giant box for a $5.99 flat shipping fee. But whereas standard Prime orders are delivered in two days or less, Prime Pantry orders can take longer due to their reliance on ground shipping.

Grocery is something of the final frontier of the online shopping revolution, with just 2 per cent or less of sales happening online. There are a variety of reasons for that, The Washington Post points out: customers have been loath to give up control of selecting their own produce and meat, and retailers have had a hard time figuring out a durable business model, since the grocery world already operates on razor-thin profit margins.

 Also, about 80 per cent of the US population lives within 2.5 miles of a supermarket, according to Jim Hertel, senior vice president at grocery consultancy Willard Bishop. In other words, buying groceries in person simply isn't that inconvenient, especially compared to the other types of purchases that have moved online in greater proportions.

That hasn't stopped Amazon from trying to turn us into online grocery shoppers, the Post says. For several years now, it has been experimenting with an offering called AmazonFresh, in which Prime members can pay a fee to be able to get fresh groceries brought to their doorsteps.

It's not hard to see why Amazon would want to be the retailer you turn to when it's time to restock your refrigerator and pantry. Grocery is a loyalty business, one built on frequent trips from repeat shoppers. This fits in well with what it has been trying to do with its Prime membership for years: get people hooked on a bundle of shopping and services that means they rarely have to leave the Amazon ecosystem.

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