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Amazon Is Out to Conquer the Brick-and-Mortar Grocery Business

Now Amazon.com, Inc. wants to be your neighborhood grocer. How's that likely to turn out?

Having found a small patch of retail turf that it doesn't dominate, e-commerce giant Amazon reportedly is getting ready to enter the world of brick-and-mortar grocery stores.

Amazon already offers a wide selection of food, beverages and other grocery items online. It created the Amazon Fresh service expressly to eliminate the need for shoppers to travel to a physical store. But that apparently wasn't enough for the relentlessly innovating Jeff Bezos, with his vast network of merchandisers and fulfillment centers. He had to go head-to-head with traditional grocers.

Reports say Amazon wants to open 2,000 Amazon Fresh grocery stores over the next 10 years. What form those stores will take, in terms of selection and focus, isn't clear. They might mirror the model of the traditional convenience store. They might serve as "click-and-collect" locations for items ordered online. Or they might do both.

Can Amazon prevail in this highly specialized, painfully low-margin sector? The company isn’t entirely without experience in operating brick-and-mortar stores. It operates bookstores in Seattle, San Diego and Portland, Ore., with another branch soon to open in Dedham, Mass. A New York location is also said to be in the offing.

But groceries are another animal entirely. With its easy access to products and one-click online purchasing capability, Amazon has already cut into traditional grocery sales. (Even as big-box retailers such as Wal-Mart Stores Inc. and Target Corp. have crushed many grocery-only chains.) Now it’s proposing to play in a business that’s characterized by high product perishability and razor-thin profit margins.

Amazon might be thinking about the stumbles of early internet grocers such as Peapod and Webvan, the latter of which went out of business 15 years ago. Industry experts attributed their difficulties in part to the desire of grocery shoppers to touch, feel and smell the product before buying it. The new Amazon stores are an acknowledgement of that fact. (Unless they operate under the assumption that consumers will still purchase the items on line.)

“It’s a continuation of the realities around food-based commerce,” says Nick Manzo, global omnichannel lead with 1WorldSync, provider of a cloud-based product-information network. Today’s grocery consumer, he says, is well informed about issues such as food allergies and general health and wellness. Seeing the actual product before purchase goes a long way toward allaying concerns about freshness or contamination.

Manzo believes Amazon can bring to the store-based grocery business its deep expertise in supply chain and order fulfillment. The company already excels in the creation of “a conducive experience around the trust of product online,” he says. “They’ll end up merging the best of the e-commerce space and the brick-and-mortar organization.”

Amazon could find it less easy to manage one of the fastest-growing segments of the grocery business: the selling of prepared foods such as rotisserie chicken, premade sandwiches and fresh salads. Time-pressed consumers are increasingly turning to these premium options as an alternative to cooking meals at home. But product of that sort must be of the highest possible quality and freshness, and the balancing act between supply and demand can be notoriously difficult to pull off.

Yet another challenge for Amazon will be managing the physical replenishment of product to the stores. Will it rely on large delivery trucks? Its own Amazon Fresh-branded vans? FedEx, UPS, the U.S. Postal Service, or some other independent local delivery entity? The logistics of supplying the retail locations remain unclear.

So do the locations of the stores, although it seems logical that Amazon would choose urban locations within high-density areas. It’s hard to see how the model could work in more sparsely populated areas, involving long drives for the shopper.

Mobile technology will likely play a big role in the new stores’ operation. Just about every shopper using Amazon will carry an app on his or her phone, making possible the remote selection and purchase of goods. (Again, assuming that consumers will buy into such a model.) Internet technology will also be central to Amazon’s ability to track and trace product being shipped to the stores, so that consumers won’t encounter stockouts on the items that they expect to find at arrival.

Manzo envisions consumers using mobile apps to comparison-shop and fill their needs for durable and fresh goods from multiple retailers, both online and brick-and-mortar. Amazon, obviously, will be vying for the lion’s share of all those items, but when it comes to offering them in physical stores, it will still be up against traditional retail giants such as Walmart, Target and Costco. They’ve encountered big hurdles in competing with Amazon on its e-commerce turf. What happens when the situation is reversed?

Finally, can Amazon translate its vast warehouse-management expertise into the world of grocery fulfillment, with all of its unique challenges? Manzo speculates that the company could seek to partner with a traditional grocery distributor for that purpose. Such an entity could provide the necessary background in food safety and handling, including for refrigerated and frozen items.

It all comes down to whether Amazon can make the numbers work. In opening up a series of physical stores, the company is taking on substantial new assets and overhead, in order to play in a business where a few pennies often make the difference between profit and loss. Then it has to win the loyalty of the fickle grocery consumer, not just the internet-savvy shopper.

Can it succeed? Ask the U.K.-based grocery giant Tesco, which crashed and burned with its chain of Fresh & Easy neighborhood markets in the western U.S. between 2007 and 2013. Tesco reportedly lost nearly $2.5bn on that venture. Amazon's Bezos has shown a willingness to lose huge amounts of money in the past, but whether he can sustain a bold initiative on unfamiliar ground is another matter entirely.

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