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Updated Monday, January 28, 2013 at 03:18 PM

AmazonFresh set to expand?

By Amy Martinez
Seattle Times business reporter

When it comes to groceries, Ann Lancaster would just as soon order online than browse a local supermarket.

Once a week, the West Seattle resident visits the AmazonFresh website to restock her pantry, buying everything from organic celery and chicken strips to paper towels and Keebler crackers. Pickup is as easy as stepping onto her front porch, where groceries arrive overnight in plastic bins.

“I’m not a fan of driving places. And I don’t like spending the time to shop,” she said. “So this is perfect.”

The feeling most likely is mutual. Lancaster, 31, a graphic designer who uses the Internet for everything possible, values convenience over price, making her the perfect online grocery shopper — if not something of an anomaly.

Internet giant Amazon.com launched the grocery-delivery service in 2007, deploying a fleet of trucks from a refrigerated warehouse in Bellevue to doorsteps on Mercer Island. Today, AmazonFresh extends to about 80 ZIP codes, from Everett and Redmond to Des Moines and Kent, but it remains a local experiment.

A broader rollout of Fresh once seemed unlikely as Amazon’s reluctance to charge customers sales taxes prevented it from putting down roots in most parts of the U.S.

That changed in 2011, when Seattle-based Amazon began cutting deals with states to collect sales taxes, paving the way for new distribution centers near major urban hubs, including New York and San Francisco.

While an expanded distribution network could lay the groundwork for Fresh to go national in 2013, it remains to be seen whether its lime-green trucks head elsewhere anytime soon.

Analysts say Amazon has yet to crack the code on how to deliver mass-market groceries at prices that enable it to both compete for customers and turn a profit. What’s more, they say, Amazon must convince customers to put aside their misgivings about buying perishable food sight unseen.

“If you order a loaf of French bread online, you don’t get to give it that little squeeze before throwing it into your shopping cart,” said Melissa Abbott, senior director of culinary insights at the market-research firm Hartman Group in Bellevue.

“Expensive service”

Amazon, which declined to make its executives available for an interview, has said little publicly about Fresh. The company’s CEO, Jeff Bezos, told shareholders in 2011 that Amazon still was “tinkering” with the business model to make it work.

“It’s an expensive service to provide,” Bezos said. “We like the idea of it, but we have a high bar on what we expect in terms of the business economics.”

For years, Amazon shipped books and other products nationwide from a distribution network concentrated in a small number of states. That enabled Amazon to offer tax-free sales to a majority of its U.S. customers and hook them on its website. (Under a 1992 U.S. Supreme Court decision, Internet retailers cannot be forced to collect a state’s sales tax unless they have a local physical presence.)

In contrast, Amazon’s grocery-delivery service offers no such tax advantage over local supermarkets. The perishable nature of its core-product offering requires it to have a distribution center and specialized trucks in every market — a tough proposition given the grocery industry’s razor-thin profit margins and fierce competition.

“It’s not like they’re pricing things to win market share, which usually is Amazon’s M.O.,” said Sucharita Mulpuru, an e-commerce analyst at Forrester Research. “The fact that they’ve been so slow to push it out of Seattle is a testament to how challenging the business model is.”

Indeed, Safeway sells groceries online but does not consider it a significant part of its business. Albertsons gave home delivery a go for a decade before pulling the plug in 2009.

Issaquah-based Costco Wholesale, which has a fast-growing e-commerce business, ruled out home delivery of fresh foods as too expensive.

“We’ve looked at home delivery, and we don’t think it works. Not with the slim margins we have,” said Costco Senior Vice President Joel Benoliel.

Of AmazonFresh, he added, “It’s always been a head-scratcher for me as to how they’re going to make money in that business.”

Profit a challenge

Web grocers long have struggled to build a profitable business model. Dot-com pioneer HomeGrocer of Kirkland grew to 2,400 employees at 10 U.S. warehouses before it was sold to Webvan for $1.2 billion in 2000.

Webvan later went bankrupt, and Amazon took over the domain name to sell nonperishable food items. Doug Herrington, who worked at Webvan from 1998 to 2001, now is Amazon’s vice president of consumables.

Former HomeGrocer CEO Terry Drayton said Amazon approached him in 2006 to lead Fresh, but he turned down the job after a lengthy negotiation.

“I saw them heading into a Webvan-type offering and knew that was a recipe for failure,” he said. “Webvan and Fresh viewed themselves as delivery services that happened to sell groceries, not as grocers that happened to be online, like HomeGrocer. Customers are smart and can tell the difference, which is why Fresh hasn’t been successful.”

Drayton noted that New York service FreshDirect, which specializes in organic produce and prepared foods, is a rare success story largely because it caters to busy, affluent families with high-quality fruits and vegetables.

Seattle Spotlight

AmazonFresh last year introduced a new feature called Seattle Spotlight, offering ready-to-cook meals and specialty food items from local businesses, including Pike Place Fish Market, Top Pot Doughnuts and Tiny’s Organic.

Analysts say Seattle Spotlight reflects Amazon’s broad-based use of third-party sellers to expand its product selection and could be copied elsewhere.

Herrington, in an email to The Times, would not discuss what lies ahead for Fresh, saying only, “We’re thrilled with what we’ve accomplished so far and have learned a lot about what works.” He described Fresh as a hassle-free source of more than 18,000 grocery items, including local ingredients from “beloved” Seattle merchants, as well as 99,000 products from Amazon.com.

Drayton speculated that Fresh really is a way for Amazon to work toward same-day delivery — something it already offers on a limited basis in select cities.

“Their biggest impediment to total retail domination is losing out on the immediate same-day sale that only bricks and mortar can do — unless they can do same-day,” Drayton said.

A recent job posting on Amazon provides a glimpse at where the world’s largest Internet retailer may be headed.

“You say you want half a dozen bananas, a case of Mountain Dew, and an Xbox 360 delivered to your doorstep between 8AM and 9AM? You say it’s 2AM right now? We say no problem,” read the ad for a Fresh software developer in Seattle.

Doorstep fee

Amazon charges a doorstep-delivery fee of $8 to $10, but customers who do most of their grocery shopping through Fresh can earn “Big Radish” status, entitling them to free shipping on orders of at least $50. Otherwise, the minimum purchase requirement is $100.

During one week in mid-December, Ann Lancaster, a so-called Big Radish, used Fresh to buy $77.84 in groceries, plus two Ramen kits from Samurai Noodle for $14.30.

The same groceries at a nearby QFC would have cost her $71.54, or $6.30 less. Had she bought the store’s private-label brands, her bill would have been even lower.

But Lancaster said she makes up the difference with fewer impulse purchases online.

“I don’t end up buying things I didn’t plan, so it’s pretty much a wash,” she said.

By far, the grocery market represents one of the biggest opportunities in online retail. Research firm IBISWorld estimates that the Internet accounts for only about 2 percent of packaged food sales to U.S. consumers each year.

The firm predicts that over the next five years, online grocery sales will grow at an annual rate of 9.5 percent to $9 billion as more Americans return to work and use mobile Internet connections to shop while on the go. That compares with an anemic growth rate of 1.2 percent during the economic downturn of the past five years.

Works for some

But it’s not for everyone. Seattle mom Laura Burke, once a fan of HomeGrocer, turned to Fresh in 2008 to avoid schlepping to the supermarket with her infant son and young daughter.

She found Fresh to be an easy way to replenish diapers and jars of baby food. And because Fresh also sells general merchandise, she used it to buy last-minute gifts for children’s birthday parties.

Even so, she quit Fresh after adding more produce to her shopping lists two years later.

“I’m an avid buyer of strawberries, and I never liked their strawberries. I’d only buy bagged lettuce and maybe a cucumber — things that wouldn’t go bad right away,” Burke, 37, said.

“Convenience was a major focus of my life when my kids were babies, and once they became more self-reliant,” she said, “quality came way back into the picture.”

Tamara Barnett, director of strategic insights at the Hartman Group, thinks the crossover from offline to online grocery shopping is a long process — though not mutually exclusive. She mentioned a recent conversation with one local mom who uses Fresh to buy basic grocery items, giving her more time to browse stores for special cheeses and other treats.

“The way we buy and eat food is very cultural and habitual,” Barnett said. “It’s going to take a little while to break those habits and get people thinking about buying groceries online.”

Sticking with it

Whether Fresh ever goes national may depend on how patient Amazon is willing to be. Herrington said Amazon receives many requests for Fresh to expand — “some from people remarkably far away.”

“At the moment,” he added, “we are focused on delivering the best service we can here in Seattle.”

Experts say Bezos, a big believer in long-term thinking, will keep pushing forward on Fresh for as long as it shows some promise.

“It is a very convenient service, but picking, packing and delivering grocery orders is expensive,” said former technology Vice President Nadia Shouraboura, who left Amazon last year to create Hointer, a robot-operated clothing store in Seattle’s University District.

“Just like apparel, the grocery business is both large and ripe for innovation, so I wouldn’t be surprised to see Amazon be very persistent and patient,” she said. “Jeff always thinks long-term.”

Amy Martinez: 206-464-2923 or amartinez@seattletimes.com

Price comparison

AmazonFresh vs. West Seattle QFC (mid-December)

One red bell pepper

AmazonFresh: $1.99

QFC: $1 on sale ($1.89 regular)

Two 25-ounce bags of frozen Tyson crispy chicken strips

AmazonFresh: $20.98

QFC: $19.98

Six Schwartz Brothers Bakery butter croissants

AmazonFresh: $6.48

QFC: $5.99

Four 19-ounce cans of Progresso chicken & wild rice soup

AmazonFresh: $11.56

QFC: $5.00 with loyalty card (or $10.36 without card)

Two 3.15-pound bags of Purina Cat Chow cat food

AmazonFresh: $12.58

QFC: $14.38

Source: Seattle Times research

U.S. online grocery market

2012, at a glance

$6 billion

Total sales

1.2%

Annual growth rate, 2007-12

9.5%

Projected annual growth rate, 2012-17

$496.2 million

Total profits

$522.2 million

Total wages

1,620

Number of businesses

Source: IBISWorld

U.S. online grocery market

2012, at a glance

$6 billion: total sales

1.2%: annual growth rate, 2007-12

9.5%: projected annual growth rate, 2012-17

$496.2 million: total profits

$522.2 million: total wages

1,620: number of businesses

Source: IBISWorld


DEAN RUTZ / The Seattle Times
Ann Lancaster is a regular customer of AmazonFresh, having groceries delivered to her home every week or so.








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