Amazon.com’s purchase of upscale grocer Whole Foods Market Inc. could be the first step toward making fresh food and grocery delivery affordable.
Whether or not the online marketplace is successful depends on its ability to leverage inbound produce logistics, one of the hardest codes to crack in the shipping industry.
“Food delivery by nature is an extremely low-margin, logistically complex business, especially given the perishable nature of the items,” said Natan Reddy, an analyst at CB Insights. “It might take a company like Amazon with extremely vast resources and economies of scale to be able to solve this puzzle.”
While Amazon has yet to conquer the grocery sector, its ability to disrupt is well established. The company built the pillars of e-commerce, rapid delivery and free shipping, and in the process altered consumer shopping patterns.
“Look at the network of distribution centers and fulfillment centers they have created in relatively short order to gain perspective on what this great, transformative company can accomplish,” said John Larkin, a logistics analyst at Stifel Financial Corp.
But that’s been with packaged goods such as books, apparel and home goods. Fresh produce logistics has largely defied the e-commerce revolution. Most prior attempts at food delivery have failed.
HomeGrocer.com – an upstart from Bellevue, Wash. – was one of the first on the online supermarket scene. It launched in 1997, offering consumers selection and prices comparable to traditional grocers. The company invested heavily in its website, top-quality product, distribution centers and delivery fleets. The dot-com crash in 2000 prevented the company from raising enough capital and it eventually went under because it could not maintain its overhead.
HomeGrocer was eventually swallowed by Amazon, which was unable to make a go of the business. It now stands as a reminder for Amazon of the challenge of fresh food delivery.
Grocery delivery startups must set high prices to cover the expense of the delivery business, Reddy said. This makes it difficult to expand the customer-base beyond wealthier consumers or those in certain circumstances who might be willing to pay more for the convenience of grocery delivery, he said.
“It hasn’t quite reached the point where people are willing to pay that higher premium on a mass scale,” Reddy said. “The business model needs a fundamental shift to truly compete with in-store grocery prices.”
Tackling the perishable supply chain is key to solving that equation.
“This is a $40 billion market but it’s very sophisticated and complicated with respect to transportation,” said Tom Finkbiner, co-founder of refrigerated intermodal carrier, Tiger Cool Express.
It’s tricky to manage the storage and home delivery of various types of fresh foods, all with different shelf lives, he said. Leaf vegetables or berries must move through the industry’s supply chain to the destination within 15 days. Longer shelf life items, such as tree fruits and grapes, will last 15 to 30 days. Some foods are easier to handle. Potatoes, onions and carrots can be held in dry storage and are not as time sensitive.
This is complicated by the distance fresh food travels before it can be even staged for delivery, Finkbiner said.
Consumers, for example, expect to buy tomatoes 365 days of the year. Grocers in Chicago, Boston and New York source their tomatoes from Florida, Mexico and California, which have different peak produce seasons.
Florida services these regions during the first few months of the year and then the volume shifts to Mexico. In the early to late summer, California provides tomatoes and then the business goes back to Florida in the early winter.
The remainder of the year, the fruit travels from even further distances.
Keeping up with the nonstop pace is expensive.
Shorter-shelf life items like berries and leafy greens can cost retailers up to $1,000 a day in spoilage, Finkbiner said.
The trucking industry will soon face another wrinkle that could throw all retailers of fresh food for a loop.
Federal regulations that dictate the use of electronic logging devices, or ELDs, which track the time truckers spend on the road to ensure they don’t surpass legal limits, go into effect in December. The mandate could complicate how time-sensitive loads of perishable goods will be shipped long distances.
There will only be “so many options” for carriers to consider, Larkin said.
Team expedited shipping, which is one truckload with two drivers capable of running 22 hours per day, is one solution, but driver teams are difficult to “find, train, create and retain,” he said.
Other options include “using the nation's high service intermodal network originally designed for UPS, and domestic airfreight,” Larkin said. “Airfreight is very expensive. That leaves expedited, premium intermodal service as a likely bigger piece of the puzzle.”
Amazon may be less affected by such headwinds, however.
“With access to low cost capital and a long leash provided by the investment community, those who downplay Amazon and all its creative options may find themselves on the outside looking in,” Larkin said.
The deal also gives Amazon more room to play in the grocery segment.
“There's a lot that Amazon can do with the Whole Foods acquisition,” said Cathy Roberson, head analyst for consulting firm Logistics Trends and Insights.
Whole Foods could become a good outlet to introduce Amazon's private label brands – maybe replacing the 365 label – and this could compete against German discount grocers Aldi and Lidl that primarily sell their own brands and are entering the U.S. market, Roberson said.
“Private labels also are a big thing,” she said.
Whole Foods – whose customers tend to be Amazon customers – also will provide the online retail giant a built-in network with additional distribution space, which will bolster its fledgling Amazon Fresh grocery delivery subscription service, Roberson said.
Amazon Fresh is a grocery solution for members of Amazon Prime, who pay $10.99 per month – or $99 per year – for free two-day delivery of everything marked under the Prime category. Amazon has toyed with pricing for Amazon Fresh, but last year it settled on $14.99 per month with a $9 delivery fee that users can sidestep with a minimum purchase of $40.
It’s not a silver bullet. Amazon Fresh also is limited to specific metropolitan markets such as Los Angeles, San Francisco, San Diego, New York City, Philadelphia, Boston, Chicago and Dallas.
Additionally, not all varieties of fresh produce – particularly in the organic category – are available for delivery during the same window as other goods. That's because shipping organic products is a harder process to sort out for growers, carriers and retailers.
Since most organic produce and ethnic produce are grown on farms too small to generate a truckload of freight, multi-stop truckloads are needed, which require more time. And greater expertise in handling the load causes additional delays, Finkbiner said.
The Amazon and Whole Foods deal could potentially accelerate the already growing demand for ethnic and organic produce, Larkin said.
Annual sales of organic products in the U.S. grew 13.1 percent between July 2015 and 2016, according to Neilsen, a consumer trend research firm.
Yet for sales of both conventional and organic foods, Amazon is heading into a thicket of competitors. Wal-Mart Stores, Inc. has invested significantly in a proprietary sourcing and logistics model for fresh produce, he said.
The company’s 100-door fresh produce consolidation center in Colton, Calif., receives inbound produce from the fields of the California Central Valley, and from there, truckloads of fruits and vegetables are assembled and moved daily to its 41 refrigerated, regional distribution centers.
“But this network only functions well due to Walmart's leading overall volume position in the grocery and fresh produce markets,” Larkin said.
Walmart was the number one retailer in 2017, a spot the company has held for “decades,” according to the National Retail Federation.
“However, if any competitor tries to replicate or surpass the Walmart network, it could be the combination of Amazon and Whole Foods,” Larkin said.
No matter how fast, or how successfully Amazon moves into home delivery of fresh food, its acquisition of Whole Foods will shake up the grocery business.
“All of this activity is great for us the consumer,” Roberson said. “Competition will drive down costs and force stores like Kroger and Publix to step up their efforts even more.”