Amazon Fresh and the disruption of the supply chain

This means that Amazon Fresh essentially relies on an old-fashioned business loss leader strategy. Amazon Prime charges a flat, annual fee for unlimited two-day delivery, streaming content and other benefits. Amazon has shown a willingness to lose money on its digital retail business to foster a broad, loyal customer base through Amazon Prime. In the U.S., 60% of Amazon’s customers are Prime members, and a Prime member will spend, on average, almost double that of a non-Prime member per order. Amazon Fresh is likely to be another vehicle to drive this strategy, by offering another enticement to join Prime. Amazon Fresh is well-known, has received outsized media attention in relation to its market share and success, and encourages Amazon Prime membership. As a loss leader, it’s not hard to see Amazon Fresh as a success, even if it is not quite a disruptor.

Amazon Fresh’s success may lie in how its beans are counted. Brick-and-mortar grocery stores are mostly made up of fixed costs. The goal is for the thin gross margin of sales to cover slightly more than the fixed costs (rent, utilities, store employees), for a profit. Comparatively, in online grocery, the costs are mostly variable. The more orders there are, the more a company has to pay for picking, packing, transport and delivery. There are few avenues to profitability.

One route, however, is to fill the truck with more — ideally higher-margin — goods. This is where Amazon Fresh starts to look clever. The company has a supply chain configuration that is different to its competitors. Other players generally send order pickers into stores, who pick directly from store shelves, either in partnership with, or as business units of, grocery chains. Amazon Fresh uses replenishment centers just outside urban centers. This allows Amazon to potentially complement the usual offer catalogue with up to 500,000 non-consumable items for delivery with Amazon Fresh.

With Amazon Fresh’s link to Amazon Prime and the shared variable costs with non-grocery items, Amazon can potentially leverage Amazon Fresh in ways competitors cannot, by helping to absorb the warehousing costs and sending more full trucks on the road. With this model, low-margin Amazon Fresh items are on trucks that are already scheduled to hit the road — and with higher margin goods for Prime members. It seems that store picking is not the only road to profitability. Recently, Both Tesco and another UK grocery chain, Sainsbury’s, have added replenishment centers in the London area to bolster their in-store picking models.