June 30, 2006, 12:00 AM

The market reacts to Amazon’s move into online groceries

Major web grocers Peapod and FreshDirect don’t see Amazon’s move into the online grocery business as a competitive threat--at least not yet. But food retailing consulting firm Willard Bishop says Amazon’s move is bold and well thought out.


Now that Amazon.com, the world’s largest web retailer, is selling grocery items two of the biggest online grocers are taking the news in stride–at least for now.

Amazon, No. 1 in the Internet Retailer Top 500 Guide to Retail Web Sites, began piloting a grocery section in May and launched the new category in June. The section 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 such as Kraft, Kellogg and Betty Crocker.

Amazon is quietly testing the online grocery market and it isn’t clear if Amazon will eventually sell more perishable items such as meat and produce. For now, the move into a new market also isn’t drawing expectations of increased competition from major online groceries such as FreshDirect LLC, No. 68 in the Internet Retailer Top 500 Guide to Retail Web Sites, and Peapod, No. 45 in the Internet Retailer Top 500 Guide to Retail Web Sites.

The online grocery business is regional, can be very dependent on local and regional suppliers for perishable goods and is hard for a national player to establish as a profitable business-as Webvan showed earlier in this decade.

FreshDirect sees its established base in New York City and its network of regional suppliers as a tough business combination for a new competitor, including Amazon, to beat. “We don`t anticipate that Amazon.com`s new service will impact our business in any significant way,” says Steve Druckman, FreshDirect`s chief marketing officer. "FreshDirect`s offering goes far beyond that of traditional online grocers and we are really known for our delicious fresh food and prepared meals. We focus on serving our hometown of New York and the surrounding areas.”

Peapod, a business unit of RoyalAhold and the largest national online grocery retailer with a base in more than 15 regional markets, also doesn’t see Amazon as a major new competitor. “While Amazon has some wonderful gourmet products in addition to the general dry good grocery items they carry, they are selling mostly bulk products,” says a Peapod spokeswoman. “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.”

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

Hauptman isn’t sure if Amazon will eventually sell more perishable items. But he does think that Amazon will move quickly to add more specialty food items. “This is a bold move on their part,” Hauptman says. ”They want to supply specialty items at a good margin and take advantage of their brand and centralized shipping and distribution model."


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