July 27, 2006, 12:00 AM

Amazon.com not playing with its food

­­­­­­­­­Internet retail kingpin Amazon.com is hungry for new business — and it’s not playing around. Last month the company launched new online stores in the toys and babies categories, hot on the heels of its launch of an online grocery store in June.

Amazon.com’s new toys and babies stores are the company’s quick response to losing its multi-year merchandising and e-commerce agreement with Toys “R” Us Inc. after the New Jersey Superior Court ruled that Toys “R” Us could terminate its contract with Amazon. So Amazon is back in the toy retailing business, but this time with its own inventory and on its own terms. The new toys and babies categories feature tens of thousands of products, including hard-to-find items from specialty retailers, the company says.

Following the loss of the Toys “R” Us arrangement, Amazon needed to take aggressive measures to keep pace in the category, many experts say. In a recent SEC filing, Amazon says the loss of the Toys “R” Us contract could negatively impact its operating profit by as much as $50 million for the year, including $25 million in the second quarter.

As such, it’s groceries the company is in part looking to for a counteractive positive impact. Amazon is making a very calculated move into the online grocery market in a way that could result in a very profitable business over time, some industry observers say.

“They are selling higher margin items in their specialty lines and setting minimal purchasing requirements with lower margin products,” says Jon Hauptman, vice president at food retailing consulting firm Willard Bishop. “It’s obvious they’ve done their homework. In the grocery industry everyone is talking about this.”

The grocery store includes 12 categories of nonperishable goods such as cereal, pasta and canned soup. The new category also includes merchandise from a variety of well-known consumer brand manufacturers.

Where’s the beef?

It isn’t clear if Amazon eventually will sell more perishable items such as meat and produce, but Hauptman believes Amazon will move quickly to add more specialty food items. “This is a bold move on their part,” he contends. “They want to supply specialty items at a good margin and take advantage of their brand and centralized shipping and distribution model.”

However, the move into groceries isn’t drawing expectations, for now, of increased competition from major online grocers such as FreshDirect LLC and Peapod. This is in part because the online grocery business today is regional, can be very dependent on local and regional suppliers for perishable goods, and is difficult for a national player to establish as a profitable business, as the ill-fated Webvan showed a few years ago.

FreshDirect sees its established base in New York City and its network of regional suppliers as a tough business combination for a new competitor to beat. “We don’t anticipate that Amazon.com’s new service will impact our business in any significant way,” says Steve Druckman, chief marketing officer. “We focus on serving our hometown and the surrounding area.”

Peapod, the largest national online grocery retailer with a base in more than 15 regional markets, also doesn’t see Amazon as a major competitor. “While Amazon has some wonderful gourmet products in addition to general dry good grocery items, they are selling mostly bulk products,” a Peapod spokeswoman says. “They do not sell produce or other fresh products. For us it falls into the same category of competition that a Wal-Mart, Sam’s Club or Costco would. We do not expect this business to affect our sales.”

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