Amazon (AMZN, Financial) has always reinvented itself – from an online bookstore to full-fledged e-commerce to cloud computing to original content streaming to delivery with Prime. These moves are significant boosts to Amazon’s business and revenue. They have largely paid off and sent competitors scurrying trying to play catch-up.
The fact that Amazon is a bold and successful innovator is without doubt. Therefore, investors should examine its recent two moves to redefine last-mile delivery and the groceries business beyond its surface. The latter refers to Amazon’s entry into the groceries business by purchasing Whole Foods, but beyond the headlines lies deeper insight on how Amazon is transforming the industry. These trends are often underappreciated and knowing them will give you an edge.
Focus on last-mile delivery with decentralized warehouses
The former is less well known, and we will dig into it today. Bloomberg reported last week that Amazon is testing out a new format of decentralized delivery system where it would collect goods from the warehouses of third-party merchants. This would allow Amazon to give free two-hour delivery to consumers under the confidential project called Seller Flex.
Since it appeared on Bloomberg, this is no longer confidential and represents a reversal from its earlier stance of building warehouses across the U.S. Instead of partnering with FedEx (FDX, Financial) and UPS (UPS, Financial), Amazon will handle these deliveries itself on the West Coast.
Source: Steemit
This will allow Amazon to solidify its position with Amazon Prime customers with reliable last-mile fulfillment which is the final frontier for e-commerce delivery. This would allow it to deploy trucks optimized by algorithms and drones over difficult terrains such as lakes. It is notable that Amazon successfully tested its first drone delivery last year and is pending regulatory approval for widespread adoption.
The benefits are apparent. Amazon will get to have more data on consumer behavior which is now UPS or FedEx’s property, and it can cut costs further while reducing costly capital expenditure. The idea of decentralized warehouse isn’t revolutionary, but Amazon’s management was convinced after its successful rollout in India for two years.
Perception of being cheap but not actually the cheapest
A common narrative would be that Whole Foods is a lot cheaper now that Amazon has taken over after its $13.7 billion takeover. If you take a closer look at Amazon’s pricing strategy with the precision of a pricing strategist, you will realize that perception can be deceiving.
In a Harvard Business Report by pricing analysts from Simon-Kucher & Partners, they did an in-depth analysis of Whole Foods' price reductions after Amazon took over for one month. They concluded that Amazon cut the prices drastically for high velocity produce and featured them prominently on stores’ posters.
Source: Mashable
This gave consumers the perception that Whole Foods’ prices are cheap. In fact, other slower-selling products are priced the same as or even more than competitors. Such perceptions are vital in the groceries business where volumes are huge and margins are thin. If Amazon can lure consumers that are staying in between Kroger (KR, Financial), Costco (COST, Financial) or Walmart (WMT, Financial) to their stores, then it can increase its revenue and stay profitable in the long run. Consumers have the habit of comparing goods, different consumer credit and even the refinancing of existing credit on which they can get their hands.
Cover a new target segment
Looking at both home delivery and the Whole Foods acquisition, there is also one underserved consumer area that Amazon is targeting. While consumers are happy to let someone else pick their toiletries and other groceries, a Morning Consult poll notes that Americans are unwilling to let someone else pick up their fresh produce as they prefer to pick it up themselves.
Source: Fortune
Americans’ fascination with the meat production process is also why organic food is appealing to the educated generation. Consumer organizations such as Organic Consumer Association care enough to sue when Sanderson Farms falsely claims that it is "100% natural." The meat production industry in America use over 450 chemicals to promote the growth of animals and U.S. chicken is banned in Europe due to their handling process.
Synergies
Before Amazon bought Whole Foods over, Whole Foods was the victim of its own success when competitors started to offer cheaper organic foods. Their same-store sales growth weakened in 2015, but the Amazon acquisition is expected to reverse that. Whole Foods allows Amazon to capture a new and growing source of income that its Prime delivery business lacks.
Amazon’s new experiment with decentralized delivery will also allow it to reach a wider segment first in America. When the American experiment is successful, experience shows that it will push it out globally. It is possible that we are looking at another source of significant revenue growth for Amazon.
Disclosure: No shares in Amazon.
