Amazon's Grocery Pickup Locations Make Sense And Give Food Retailers Another Reason To Worry

This column is not about the clandestineness of Amazon or the Project X – it’s about the two reasons I feel Amazon will be successful in grocery.

Originally published on Forbes.com.

Amazon’s secret Project X, along with supporting photos and site blueprints, appears to no longer be a secret. Last week Geekwire reported on the construction in Seattle of what it believes to be a new grocery concept where shoppers can pre-order online, or from a tablet in-store, and pick up their groceries at this brick and mortar store. This follows reports of similar facilities being built in the Bay Area.

Few food retailers admit they are not carefully watching Amazon’s foray into grocery, whose total annual e-commerce sales have reached $99 billion (eMarketer says e-commerce in the U.S. will hit $396.72 billion in 2016, or 8.2% of total retail sales). Published reports indicate that Amazon’s current share of U.S. grocery sales is less than 1%, and while some may doubt the company can break through, a new surveyfrom Cowen reports that the number of people who participated in their survey who shop for groceries and other consumable goods via Amazon increased 18% in the first quarter of the year, compared to the same period in 2015. Can Project X be the added service that becomes Amazon’s tipping point to give it a stronghold in this industry?

It seems that there are three potential sites for Project X, one in Seattle and two in the Bay Area, all three just under 10,000 square foot. The planning documents submitted to Seattle on December 2 list the change of the property site as “use from restaurant to general sales and services (retail sales, multipurpose), construct substantial alterations including new canopies in parking lot and occupy, per plan. You can access all the permits and documentation, the owner on the current assessment roll is listed as Real Property Associates, Inc. a property management firm in the Seattle Area co-owned and managed by Gordon Stephenson, a prominent realtor.

The planning documents from the city of Seattle also include a description of the proposed business. “When placing an online order, customers will schedule a specific 15-minute to two-hour pick up window. Peak time slots will sell out, which will help manage traffic flow within the customer parking adjacent to the building. When picking up purchased items, customers can either drive into a designated parking area with eight parking stalls where the purchased items will be delivered to their cars or they can walk into the retail area to pick up their items. Customers will also be able to walk into the retail room to place orders on a tablet. Walk in customers will have their products delivered to them in the retail room.” Clearly nothing specific is mentioned about selling food, however you have to wonder about converting the former Louie’s Cuisine of China restaurant that is food ready with the above average plumbing and refrigeration needed, versus just remodeling a non-food use building that would obviously be less expensive. The property assessment listed on the Seattle tax rolls was $1,874,000 in 2013 and sold in 2014 for $2,498,000.

But this column is not about the clandestineness of Amazon or the Project X – it’s about the two reasons I feel Amazon will be successful in grocery. 

The first is based on an email from a Forbes reader, Neel Premkumar, that I received just yesterday sharing his path for his all-natural drink mix brand Stur and Amazon’s role in his success. His email to me was intriguing and timely. It began, “I thought you would be interested in my story about the importance of Amazon.com to startup food/beverage brands.” 

His email went on to say:

When I launched our all-natural drink mix brand, Stur in 2012, I sold our products into several hundred natural food stores and distributors on the East Coast. However I lost money on each bottle sold in the early days” [note: his email pointed to the reasons as including retailer/distributor trade marketing spending requirements, off-invoice deductions/chargebacks and typical payments for goods received 45-60 days from invoice]. “I had a constant cash flow problem, and probably would have gone out of business if not for Amazon. I uploaded our products onto the Amazon marketplace without any publicity or marketing, and consumers started purchasing quickly. Amazon paid every 15 days (automatic bank deposit), so we had the cash to be able to buy more inventory. Today we have over 5,000 4.5 star-reviews, and we are the #1 selling drink mix item on Amazon.” 

A major accomplishment for sure, but he also shared that in his first meeting with Kroger three years ago, he leveraged his success on Amazon to gain distribution of 8 flavors of Stur in over 2,000 Kroger stores. It is now sold, according to Premkumar in over 20,000 stores nationwide, and the company is profitable.

This is a story I have heard firsthand many times from both large multi-national and small start up food brands – Amazon is a pleasure to work with, stands by their word and delivers on sales. It’s this kind of relationship that grocery retailers including Publix, Wegmans, Hy-Vee and others enjoy with brands that makes them preferred partners; to other retailers who just beat up on food brands in the ways Premkumar described. 

The second reason is that the order online/pick up at store concept will prevail. More traditional supermarkets are adding this option and report successes; not only measured by shopper reaction and sales – but also profit – that eludes them in the delivery model. There are just too many logistical issues to maneuver, streets to navigate, and in areas that do not have high population densities it is doubtful they can ever achieve the volume needed to make a profit (at least until driverless cars become pervasive). Amazon’s difference is its online store’s unmatched intelligence and ability to offer up “recommended” products while shopping. Nice features when I am shopping for picture hanging supplies; but an unbelievably powerful feature when I am shopping for say, healthy ethnic foods. A feature that few online grocery services, including Instacart’s and others’ “inspired by” algorithms can compete with.

The reason is simple. The average supermarket has over 42,000 products and in the time an average consumer does their shopping, they are lucky if they have seen, or been attracted to a single digit fraction of what’s been placed on the shelf. Amazon has built its business by making it easy for us to shop and buy. Project X, or whatever it will be called, is just one more example of what Amazon is doing and testing to become a preferred grocery store. We buy food in supermarkets more often than we purchase just about anything else – 1.5 times per week according to the Food Marketing Institute. Just imagine what Amazon’s algorithm could do for its non-food sales if they can get us online or on mobile to buy our groceries that often.