THINK TankNovember 7, 2019

Is Free Grocery Delivery Sustainable for Amazon?

Samsonsite's Charlie Cole and Best-Selling Author Shep Hyken Weigh in

The Breakdown: Competition over grocery delivery is heating up and Amazon just kicked it up a notch. Last week, Amazon slashed its subscription fee for Amazon Fresh grocery delivery from $15 per month to $0 — a pretty sweet deal for Prime members who can now order free 2 hour grocery delivery. 

 

For the time being there’s a small caveat: if you’re a Prime member, you can only use the service if you’ve previously paid for the Amazon Fresh subscription. 

Amazon’s no-fee service challenges competitor Walmart’s newly rolled out grocery delivery subscription, which costs $98 annually. Kroger also launched a grocery delivery service of its own last year while Target acquired Shipt to offer same-day deliveries  

At this point, it seems like Amazon is more than willing to burn money if it means reducing costs for customers and winning more slices in the market share pie.

 

Q: Considering many factors including Amazon’s lack of infrastructure, is this subscription model sustainable for Amazon? 

 

The Weigh In: Charlie Cole and Shep Hyken 

 

Shep Hyken:  One of the things that Jeff Bezos has done from the very beginning is sacrificed margin in favor of a better experience for the customer. Now I don’t think they’re going to lose money. That reminds me of the old saying, you know, the radio announcer, “We lose money on every sale, but we make up for it and volume.” That’s not going to work. But I do believe sacrificing margin has always been a strategy for Amazon and they’re not sacrificing it bound to zero or to a loss.

 

Shep Hyken:  I think it’s important to recognize what’s happening is we have entered into era of convenience and a big part of convenience is delivering what all of these retailers are figuring out is customers love to have things delivered to them so they don’t have to leave their homes and their offices, whatever. And I also want to point out that you know, while there has been a fee involved in the past, even if it’s reduced down to nothing, don’t think that it’s free shipping or free delivery because it’s not, it’s being paid for somehow some way there might be an extra few cents added to items across the board. I don’t know how they’re going to make up for it, but they will figure out a way to do so.

 

Charlie Cole: I think they’re uniquely positioned to, even if they do lose money. And, and I haven’t done the unit economics analysis or anything like that, I know that also in the news they kind of took a beating on their stock price because they’ve been taking much more cost involved in their operations. But Amazon’s uniquely positioned to absorb this because their fastest growing basis segment is advertising. And so if this leads to an influx of consumers, even if the consumers themselves are unprofitable on a unit economic basis, you’ve got to keep in mind that this has also been part of Amazon strategy, which is basically use retail and grocery, and whatever it may be, as a loss leader. We use it to build your brand so you can sell cloud storage, use it so you can build your brand to sell advertising and ultimately that’s what gotten them in a little bit of hot water.

 

Charlie Cole: I think it’s more like tepid water politically at this point, but I think that – to Shep’s point – even if they break even or close to it, they can absorb a little bit of a loss because it could fuel a much more profitable part of their business.

 

Shep Hyken: Actually I think that they’d love to increase their Prime member base, but I believe the goal being what can we offer Prime members that will make them want to re-up every single year. And that’s the key. They don’t want to lose it.

 

This conversation first appeared on the Nov. 4 episode of the Retail Rundown.