January 25, 2011, 12:43 PM

Amazon may expand home delivery

The online giant makes a go at bricks-and-mortar retailers.

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Amazon.com Inc. reportedly wants to expand the reach of its free home delivery program, AmazonTote, which is currently available in the Seattle metropolitan area. Experts expect the rollout would be slow, starting in seven markets where the retailer launched its same-day delivery program in October 2009.

AmazonTote, which offers weekly delivery of select Amazon.com groceries and other items, does not require consumers to sign up for subscriptions, order a minimum quantity or pay any fees. Experts say expansion could be risky because consumers aren’t paying extra. That’s not the case for Amazon Prime, which promises free two-day shipping on all orders for $79 a year.

“As a consumer, it’s great,” says Paula Rosenblum, Retail Systems Research LLC managing partner. “But the challenge is home delivery in cities isn’t easy. You never know when you’re going to bump into something weird, like having to wait for a freight elevator, which can slow deliveries down and create customer dissatisfaction that ends up costing you money.”

Amazon, No. 1 in the Internet Retailer Top 500 Guide  will likely own its own trucks, as it does with another grocery delivery pilot called AmazonFresh, says Fiona Dias, executive vice president of strategy and marketing at e-commerce technology provider GSI Commerce Inc. (GSI operates ShopRunner, a free shipping service that competes with Amazon Prime.)  Amazon owning its trucks might mitigate some uncertainty about an outside company providing a high level of service, but maintaining a fleet of trucks can be costly, she says.  

 “Even when you order a pizza, the pizza delivery guy charges you a fee for the delivery,” Dias says. “That’s because gas is not free, trucks are not free and delivery people are not free.”

The only way the math works is if more consumers buy more from Amazon, giving the world’s largest online retailer incremental that can cover the delivery costs, says Dias.  One way Amazon aims to do so is compelling shoppers to consolidate their purchases.

“Right now consumers are having Amazon Prime packages arrive, SuperSaver packages arrive, and, in rare cases, same-day delivery packages arrive,” she says. “That means that Amazon is already showing up at consumers’ doorsteps in a variety of ways.”

If consumers in a given neighborhood know an Amazon truck is going to be deliver in that area each Friday, Dias says, “they’ll realize they can get all their purchases at that time, which may mean that they don’t need Prime. But Amazon can afford to do that because if everyone gets their deliveries on Friday they’re ensuring that they have that density.”

Amazon may also reduce some costs because AmazonTote delivers packages in sealed, reusable tote bags, rather than boxes. For items too large for a tote bag, Amazon will deliver them in their original packaging and cover them in bad weather. With the savings from its minimal packaging, the retailer may be able to afford coolers so consumers can purchase refrigerated items, says Dias.

AmazonTote does have some limitations. For instance, Amazon says millions—but not all—of its items are eligible for the program. And, as the program rolls out in markets outside Seattle, that may shrink. Moreover, items cannot weigh more than 50 pounds, which may limit some consumers’ purchases.

If consumers don’t mind those limitations and Amazon’s experiment proves successful, it could pose a serious challenge to bricks-and-mortar retailers, particularly Amazon competitors like Wal-Mart Stores Inc., says RSR’s Rosenblum.

“The fundamental question that retailers need to think about is how you keep the store relevant in the 21st century.” she says. “If I can just push a button and create a new order, I don’t have to go to the store any more. Retailers want me to drive to a store, and then find a parking spot. Once I’m inside I have to find may own way around a store, figure out which product is better than another and then, often, check myself out. What’s the point?”

While Amazon has largely escaped the requirement to collect sales tax, giving it the upper hand against bricks-and-mortar retailers, it might not be able to do so if the e-retailer expands its presence via a delivery fleet, says Rosenblum. The U.S. Supreme Court ruled in 1992 that online retailers must only collect sales tax in states where they have a physical presence, such as an office or distribution center.

“This might put a dent in their argument that they don’t have a presence in the state,” Rosenblum  says. “But I suppose they’ll look into ways around it.”

AmazonTote is similar to a program Sears Holdings Corp. has offered in the Chicago, Boston, Washington, D.C., and New York City areas since last summer. The Sears program, called MyGofer, provides home delivery of groceries and other Sears and Kmart items, as well as items from select merchants in the retailer’s marketplace. The AmazonTote program does not include marketplace sellers.

Amazon offered no immediate comment.

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