In its second-largest acquisition, Amazon buys the company for $970 million.
Amazon now delivers fresh foods same day to online customers in San Francisco, Los Angeles and Seattle—all untapped by Peapod and FreshDirect. The three will compete directly if AmazonFresh launches out East.
Same-day delivery of online grocery purchases is now available to Amazon.com Inc. Prime customers in San Francisco.
It’s the third city to have access to AmazonFresh, a service the retailer has offered in its hometown of Seattle since 2007 and in Los Angeles since June 2013.
AmazonFresh customers pay a $299 annual fee for free delivery of orders of more than $35. Perishables, beer and alcohol, and dry groceries are included in the program, plus more than 500,000 other items that Amazon is more known for selling—such as books, movies, toys and pet supplies.
Amazon is operating its Fresh program on the West Coast without any direct competition from major online players, as the two largest online grocers, Peapod LLC and FreshDirect, sell exclusively in the Midwest and East Coast.
However, the three merchants will compete head to head if Amazon expands the program to the East Coast. And Tom Forte, a senior analyst at Telsey Advisory Group LP who has been following Amazon for years, expects that could happen as early as mid-2014.
Here’s a breakdown of how the three merchants compare historically in online grocery sales:
Peapod brought in an estimated $525 million in online sales in 2012, according to data available on Top500Guide.com. That would give Peapod a 10.5% market share of the $6 billion U.S. consumers spent on groceries online last year, according to global research firm IbisWorld.
Peapod began selling groceries online in Chicago in 1998, but has since expanded to other Midwestern and Eastern markets including Milwaukee, Indianapolis, New York, Boston, Philadelphia and Washington, D.C. The merchant has grown at an average of 15.9% per year for the last decade.
FreshDirect, which operates in the New York and Philadelphia metropolitan areas, brought in $400 million last year, 6.6% of U.S. online market share, based on the Ibis estimate. The merchant has grown at annual rate 13.8% over the past decade.
Amazon does not publicly disclose sales derived from its AmazonFresh program, but Forte estimates that Amazon generated $60 million in revenue from the Seattle program in 2012, or 1.0% of the online grocery sales in the U.S.
If and when Amazon goes up against the big two online grocers in the New York metropolitan area or other Eastern or Midwestern cities like Philadelphia or Chicago, it might have a leg up, Forte says, even though Peapod and FreshDirect have been building a foothold in the hearts and minds of New Yorkers for the last decade.
“To me the competitive advantage is the brand,” he says. “It’s having customers who are familiar with Amazon, who have been ordering with Amazon for an extended period of time, that can deliver them groceries and other items from Amazon in a timely manner.”
To elaborate on Forte’s point, Jane AmazonFresh Member in San Francisco can now place an order at her desk at 9 a.m. for a Blu-Ray disc player and 39-inch Vizio television. She can have those items delivered free to her doorstep at home by dinner, along with a package of steaks and a replenishment of toilet paper that just ran out in the guest bathroom.
“AmazonFresh is another same-day-shipping-type move by Amazon that’s all about getting people to buy products on Amazon and not somewhere else,” Forte says. “The reason that Amazon is interested in grocery is because the frequency of delivery. Amazon wants to have multiple touch points with the consumer and this is another move in that direction.”