Dive Brief:
- Amazon is testing half-hour or quicker deliveries of groceries and household essentials in parts of Seattle and Philadelphia, the e-commerce giant said Monday.
- The ultra-speedy delivery, dubbed Amazon Now, is about $14 per order, or about $4 for Prime members. Orders under $15 also incur a fee of about $2.
- In order to facilitate this offer, the company said it has placed small fulfillment facilities designed for efficiency “close to where Seattle- and Philadelphia-area customers live and work.”
Dive Insight:
Amazon has closed more stores than it’s opened in recent years. The e-commerce and tech giant shuttered its entire nonfood fleet, about 70 stores, a few years ago, and it has recently pruned its Amazon Fresh operation.
That may not matter much, as its delivery has expanded and gotten faster.
The company is speeding up delivery to 4,000 rural communities and expanding same-day fresh grocery delivery to more U.S. cities. Amazon is on pace to set another record for Prime delivery speed, aided in part by a strategy to arrange inventory placement so that the distances goods travel are shorter and package handling during fulfillment and transportation is reduced.
With about 535 Whole Foods Market stores and 60 Amazon Fresh stores, Amazon has a small fleet compared to rival Walmart, which runs more than 5,000 U.S. locations, or even Target, with nearly 2,000. But its delivery operation is increasingly able to compete with that, according to Bank of America analysts led by Justin Post. The service also vies with the likes of Instacart and DoorDash, the analysts noted.
“While this offering is in early test mode, we think Amazon Now is potentially an important step toward Amazon matching or even surpassing the immediacy benefit of in-store purchasing,” Post said in a Tuesday client note.
This would not surprise Amazon CEO Andy Jassy. During an earnings call with analysts in October, Jassy stipulated that there would come a day — accelerated by AI — when brick-and-mortar sales no longer dominate retail.
The Amazon Now delivery option could also bolster the appeal of Prime and drive advertising revenue on the Amazon site, according to Bank of America.
Growth of revenue from services, including advertising, has been outpacing growth in Amazon’s retail operation in recent years. In Q3, seller services sales grew 12% year over year to $42.5 billion; advertising grew 24% to $17.7 billion; and subscription services grew 11% to $12.6 billion. Meanwhile, online store sales rose 10% to $67.4 billion, while physical store sales rose 7% to $5.6 billion.
At least in the short term, Amazon Now is likely to have low, if not negative, margins, Bank of America said. But given the scale of the pilot, that wouldn’t impact overall profitability or margins; the latter, thanks to inventory placement, robotics and slow headcount growth, will likely expand next year, they said.
