Amazon Fresh Grocery Stores: Don't discount them as too conventional - here's why

Amazon has worked hard to develop a grocery store that its affluent customers would like to shop. Its new Amazon Fresh store has a value proposition that appeals to today’s shoppers, and it combines the flexibility to meet changing customer needs with lower operating costs. If this works as planned, it’s a store format that other grocers will need to watch. These Amazon Fresh stores should be able to maintain profitability as margins compress and sales volumes fall – which is a key to survival.

At first glance, Amazon Fresh looks a lot like a conventional grocery store: It’s not too small and it’s not too big, it carries all the items found in a full-service grocery store, and its meat, seafood, and deli departments offer fresh prepared items, grab-and-go, as well as pizza.

But a closer look reveals that Amazon Fresh is a digitally integrated grocery store, merchandised for today’s customers, that provides a seamless shopping experience. Its low break-even sales volume means that it can operate profitably in intensely competitive markets.

These store these are not designed to attack the competition; they are built to outlast (aka survive) other grocery retailers. Here are six things we see that set Amazon Fresh stores and strategy apart:

1. Amazon Fresh has a well-defined target customer.

All the Amazon Fresh stores are located in trade areas with above average median income. These more affluent shoppers value time as well as money and spend more per week on groceries than other shopper segments.

• Amazon is already connected with many of these shoppers through Prime, so it can reach them easily with promotions and other targeted communications.
• Fresh store customers also save money with “consistently low prices” and 5% back when paying with the Amazon credit card or shopper card.
• It’s easy to get in and out fast, thanks to the store’s size (30,000-35,000 sq. ft.), plus the navigation tools and Dash Cart.

All these features combine to encourage customers to do more of their grocery shopping within the Amazon ecosystem – an important building block in the company’s “long game” strategy.

2. The product assortment can compete with larger grocery stores.

The key to the Amazon Fresh store’s broader appeal is adding items that surprise and delight customers. These include:

• Local brands  which are one of the merchandising innovations that proved popular in Amazon’s smaller 365 stores, like Rockenwagner Bakery and Groundworks Coffee.
• Regional brands  with strong followings from around the country, like Dukes Mayo from South Carolina and Elleno Yogurt from Seattle.
• Exclusive Amazon brands  like Cursive Wine and Fresh, along with 365 brands.

Amazon Fresh isn’t the first grocer to expand the novelty of their assortment, but they may be the first to put ratings and reviews on shelf labels to more quickly raise awareness of what makes the products different and to tap into experience sharing and the social media community.

3. There's plenty of time-saving digitally enabled customer service.

Among those digital offerings are:

• The ability to download Alexa-created shopping lists into the app -- or to the Dash Cart, which takes the uncertainty out of navigating the store.
• An “Ask Alexa” kiosk that offers customers a familiar “face” to ask about meal prep and anything else that comes to mind.
• The Dash Cart also provides navigation guidance, but even more important, it allows customers to shop, and when they are done shopping, leave the store without having to stop to pay. This, by itself, will encourage customers to visit the Amazon Fresh store to buy products they’d otherwise pick up someplace else.

4. The pricing strategy may drive some micro-merchandising objectives.

Patrick Fisher, a friend of Brick Meets Click, has found evidence at Amazon Fresh that it is subtly using price to influence whether a customer buys certain items in-store or online.

If this proves to be the case, it opens a new frontier for fine-tuning business performance. Patrick has written up what he’s found in this recent blog post .

5. The store deployment improves Amazon’s capability to serve the last mile.

Locating Amazon Fresh stores in the middle of its target market areas gives Amazon hyper-convenient access to its customers. This brings two “last mile” advantages:

• A shorter average distance between the customer’s home and the store, making both pickup and delivery easier.
• A higher density of online orders from the immediate trade area, which can translate into lower delivery costs. The importance of this is shown by their emailing thousands of nearby customers during pre-opening.

Add free same day delivery for Prime members along with a convenient site to pick up and return Amazon.com orders, and it’s also a store that makes things a lot easier for Amazon’s online shoppers.

6. The store’s unit economics allow Amazon to operate profitably even in extremely competitive environments.

The low capital investment that comes with redeveloping existing stores creates a low cost of occupancy – and combined with the relatively small size of the stores, this translates into a low break-even sales volume.

As competition increases (as it inevitably will) and margins are pushed down, many competitive stores will no longer be economically viable and eventually need to close. This is where the low break-even of Amazon Fresh will make a big difference.

Building a grocery store for the future (& survival)

So, while some may see the Amazon Fresh store format as too “conventional,”  when you put it into a larger strategic framework you can see that it has the potential to drive the company’s grocery sales with affluent shoppers for years to come.

Plus, there will be no shortage of available “second use” sites that fit their target demographics, and other retailers – like Kohls department stores – are interested in freeing up space in their existing stores to make room for these traffic-generating outlets.

Bottom line, what will be decisive is whether Amazon can run these stores to appeal to their target customers and operate them at such low a cost that it makes it difficult for other retailers to survive when competition intensifies. Their recent hires from Lidl suggest that they are tapping the expertise of those who know how to do this.  If this turns out to be the case, this will be a winning strategy.

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