Amazon Fresh grocery delivery goes in new markets

The AmazonFresh service lets Amazon customers order groceries, including perishable items like dairy, meat and fish, for delivery within 24 hours. It’s only available to customers who buy a $299 Prime Fresh membership, which also includes other perks that come with the company’s regular $99 Amazon Prime program.

Amazon began testing the service in 2007, but has been slow to expand it since then. Today, it is only available in parts of Washington state, California, New Jersey, New York City and Philadelphia.

It has been 18 months since Amazon launched Fresh in a new city, though sources say the company originally planned to launch in the U.K.last year. It’s not clear what has held up that launch, but industry sources speculate that a deal with U.K. grocer Morrisons may have slowed down its plans.

The new launches appear to indicate that Amazon is going all in on the grocery delivery market, which is tiny in the U.S. today — making up less than 5 percent of grocery sales — but has the potential to be a giant market.

Separate from its Fresh service, Amazon also partners with local grocers in some cities to offer a limited catalog of perishable foods and beverages through its two-hour delivery service, Prime Now. Its Prime Pantry service lets Prime customers fill a box for a $5.99 fee with packaged groceries it doesn’t otherwise offer.

Amazon is also gearing up to begin selling its own brands of grocery items, and recent reports suggest the company may open drive-up grocery stores, too.

“They are very, very committed,” said Keith Anderson, a vice president at Profitero, a startup that provides e-commerce analytics to retailers and brands.

The multitude of offerings, however, have confused some in the industry who are waiting for a single unified initiative.

“[W]e’re playing with a lot of different models to see what resonates with consumers and it’ll guide our investment decisions going forward,” Amazon Chief Financial Officer Brian Olsavsky said on Amazon’s most recent earnings call, in response to an analyst’s question.

The pace of the Fresh expansion, which has been slow by Amazon standards, likely has to do with the difficult economics of grocery delivery. Amazon has to open refrigerated warehouses, carry its own stock of perishables and hire delivery people in each new Fresh market — considerable costs that eat up profits. Compare that with a model like Instacart’s, which requires signing up grocers and hiring workers but includes no warehouses and no inventory risks associated with food that goes bad.

“I think the pace of rollout is almost a necessity and is gated by a lot of things, not the least of which is talent,” Anderson said. “In many ways, running a local online grocery market is like a mini business unit. It’s very different than a national model where you have people at headquarters and they can manage everything.”

At the same time, the steep Prime Fresh membership fee continues to puzzle some industry insiders who can’t understand how the service could possibly go mainstream with such a price tag.

“Amazon Fresh is good, but not so compelling to justify a $200 premium over standard Prime membership,” Anderson said in a followup email.

Sources say that Tom Weiland, the longtime Amazon customer service head who was named as head of Fresh two years ago, is no longer running the service. It’s not clear who is in charge now.

Amazon’s grocery efforts pit it against companies like Instacart, Peapod, FreshDirect and even Jet.com in some markets, but all of these businesses are really competing with traditional grocers to change consumer behavior.