Why groceries could be Amazon's next big loyalty play
Amazon CEO Jeff Bezos published his annual shareholder letter yesterday. There are many interesting aspects of the letter, which covers everything from severance pay to drones, but perhaps the most important is Bezos' commitment to expanding the Amazon Fresh service.
Amazon Fresh, which allows subscribers to receive same-day delivery of groceries and other goods for $299 per year, was tested in Seattle for five years before it expanded to other cities. (Bezos acknowledges this extended testing in his letter by saying that no one "accuses us of a lack of patience.") Committing to its continued rollout suggests that the service will become more important to Amazon over time -- which isn't surprising, given how the company makes money off users.
Amazon prefers customers who pay a set amount each year and then purchase other goods in addition to those subscription fees over people who buy one item with a large margin. That's why it offers free express shipping to its most loyal customers, why it offers its glorified sales catalogs at cost, and why its digital services are available on all kinds of competitive products.
Groceries are the ultimate recurring revenue scheme. People can grow tired of a movie service or stop buying so many knick-knacks, but they aren't going to stop needing food or other households goods any time soon. Groceries are short-term solutions to long-term problems (you gotta eat), and that means that people will be buying them forever.
Delivering those groceries might not be enough for Amazon to attract the customers it needs to make Amazon Fresh work. But the company is also experimenting with products that make it easier to keep track of your grocery list by scanning goods or speaking their names out loud. Those goods are then added to an online grocery list that Amazon Fresh users can buy with a few clicks and have delivered to their homes either that same day or overnight.
Amazon Fresh is more than just quick delivery -- it's a new shopping experience. It also offers goods from local shops and restaurants, which might help the service appeal to people who like supporting local businesses. It also offers recipes for a variety of dishes, makes it easy to cater a party, and has access to items sold on Amazon itself. Delivery is just one aspect of the service.
Offering more services like Amazon Fresh will prove important to Amazon's future. The company's revenues have started to decline -- which isn't anything new, given the leeway it's enjoyed as it tries to make everyone under the sun its customer -- and its efforts to garner loyalty might be to blame. As Pando contributor Kevin Kelleher outlined in an article about the problem:
So it’s not so much that Amazon’s revenue growth is slowing, it’s why. If it’s something Prime can reverse, Amazon’s future looks bright. If not, it will mean customer loyalty may be too slippery a thing even for Amazon to grasp for long. The quest for the best deal may be more powerful than Amazon realizes. So Amazon spends and spends, but it’s not enough to keep enough shoppers coming back.
Buying a costumer for life, if it can be done at all, is an expensive proposition. Maybe too expensive even for Amazon to afford. The expansion of services like Amazon Fresh will be a direct response to those challenges. The introduction of products like Amazon Dash, the device that makes it easier to manage grocery lists, will also continue Amazon's efforts to become the most convenient storefront around. As Re/code's Jason Del Rey wrote in an article published after Amazon Dash was first announced,
As for the Amazon Dash device, it’s a different approach to the same company goal of giving its shoppers the quickest path to load a bunch of goods into their shopping cart wherever they might be. Is it that hard to look in your cabinet at the brand of pasta you are running low on, and then search for it on Amazon at the laptop on your kitchen table? No, not even close. But, thanks in large part to Amazon, we are living in a time where speed and convenience in shopping often seem to trump all, for better or worse. And Amazon is placing a small bet that using the Dash device will be quicker and more convenient.
If it’s not, we’ve still learned two things about Amazon’s approach. First, if there were any remaining doubts that Amazon is dead serious about expanding its grocery business, they should now be gone. And second, the company is investing time and money into planning for a future where the search bar on Amazon websites and apps becomes the less convenient shopping tool. The mention of Amazon Fresh in yesterday's shareholder letter appears to be the first public mention of the service Bezos has made in some time. Its expansion to Los Angeles after five years in Seattle, and its continued expansion to San Francisco just six months later, suggest that Amazon Fresh is getting closer to a wider release. And the debut of Amazon Dash, the first Amazon product that focuses on physical goods instead of entertainment services, makes it seem like Amazon is devoting more resources to groceries than most people might think.
Marketplaces started as a place where people could buy all the food they need. Then they became sprawling shopping malls where people could purchase all kinds of other goods. Amazon has taken the different approach: after spending a few decades selling knick-knacks and entertainment, it's ready to focus on the essentials.
[Illustration by Hallie Bateman]