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  1. Home
  2. / Investing
  3. / Technology

Amazon Has Some Long-Term Cost Advantages in the Online Grocery Wars

Whereas rivals are typically fulfilling orders from bricks-and-mortar stores, and using consumer vehicles to deliver them, Amazon is relying heavily on its warehouses and delivery vans.
By ERIC JHONSA
Jul 16, 2020 | 06:30 AM EDT
Stocks quotes in this article: AMZN, WMT, TGT, KR, COST

In the short-term at least, Amazon.com's (AMZN) local grocery delivery business doesn't look as well-positioned as those of rivals Walmart (WMT) , Target (TGT)  and Instacart in some key ways.

But at a time when there are still major questions about how profitable major grocery delivery operations are, it's worth not losing sight of how Amazon's infrastructure could provide it with long-term cost advantages as its delivery operations scale.

For the time being, the fact that Walmart, Target and (via its many retail partners) Instacart have giant retail store infrastructures that they can leverage to fulfill grocery delivery orders makes it much easier for them to rapidly scale their operations than the Amazon Fresh delivery service, which Amazon made free to Prime members (before counting a driver tip) for $35-plus orders last fall.

Walmart has 5,000-plus U.S. stores that it could potentially use to support grocery deliveries, and has already done so at more than 1,600 of them. Target has 1,800-plus U.S. stores, and Instacart claims to support deliveries from more than 25,000 stores owned by partners such as Kroger (KR) , Costco (COST) , Safeway, Aldi and (though it also has its own delivery service unit, known as Shipt) Target.

Whole Foods, by comparison, only has about 500 U.S. stores. And while prices for many Whole Foods items have dropped since Amazon bought the company in 2017, it's still very much an upscale grocery store chain.

Amazon Fresh, meanwhile, has launched in less than 20 U.S. metro areas so far (admittedly, they include some big ones, such as NYC, L.A., Chicago and Phoenix). And with Amazon also still in the process of building up its supply chain for Fresh, the service has struggled in recent months to cope with a COVID-19-driven surge in demand. Amazon began waitlisting new Amazon Fresh and Whole Foods delivery customers in April, and anecdotally, a lot of popular Amazon Fresh items are still frequently out of stock.

But all the same, it's hard to ignore the fact that whereas Walmart, Target and Instacart all charge delivery fees -- either via per-order fees or subscription services that cost a little under $100 per year -- Amazon Fresh doesn't. And the reasons for this appear to go beyond Amazon's age-old willingness to absorb short-term losses on new ventures.

Selling groceries is by and large a low-margin, highly-competitive business even when customers are responsible for driving to and from a grocery store, picking the items they want to buy off of shelves, waiting in a checkout line to pay for them and loading and unloading them from a car. Relieve a customer of having to do all this work, and now it really becomes hard to turn a profit...particularly if your infrastructure was built on the assumption that the customer would be handling all this work.

Walmart and Target's stores, and the stores of Instacart's retail partners, were built with this assumption in mind. Amazon Fresh, on the other hand, is being built from the ground up to handle online orders.

Whereas grocery delivery orders fielded by Walmart, Target/Shipt and Instacart are generally fulfilled by individual shoppers navigating bricks-and-mortar stores -- in Instacart's case, the shoppers also have to check out of a store the old-fashioned way -- Amazon Fresh orders are generally fulfilled via Amazon warehouses. And Amazon continues investing heavily in making its warehouses as efficient as possible, in part by deploying hundreds of thousands of robots.

In addition, whereas Walmart, Target/Shipt and Instacart deliveries are generally performed by gig workers using their own cars (Walmart, for its part, relies heavily on DoorDash drivers), Amazon Fresh orders are usually delivered using Amazon's large and growing fleet of delivery vans (used by both Amazon employees and third-party contractors) featuring plenty of shelf space. Aside from being able to deliver a lot more groceries per trip, the fact that this delivery fleet can be simultaneously used to handle both Amazon's grocery orders and its considerable non-grocery orders can also help give Amazon a lower per-order delivery cost.

Walmart, it's worth noting, has been experimenting with creating miniature, robot-packed, fulfillment centers at retail stores to help service online grocery orders. And in time, it's conceivable that Walmart will try to lower its per-order delivery costs by building its own fleet of delivery vans.

Nonetheless, at this moment, the fact that Amazon can leverage a giant fulfillment and logistics infrastructure built from the ground up to support e-commerce looks like a pretty valuable long-term advantage when it comes to profitably supporting grocery deliveries at scale -- even if the infrastructures built by rivals to support bricks-and-mortar retail are a major short-term advantage when it comes to quickly scaling their online grocery operations during a time of high demand.

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TAGS: Investing | Technology

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