Amazon Series Post-Intro: Setting the Stage
Amazon Grocery: 20 Years in the Making
It’s important to understand that Amazon has spent 20 years watching and learning a number of grocery companies and delivery solutions. The day of the announcement of the Whole Foods acquisition, Ben Gilbert and David Rosenthal released Episode 39 of their podcast, Acquired, detailing the history of how Amazon got to that point and lay some foundational speculation for Amazon’s Grocery development in the coming years.
Webvan transforms Amazon’s Grocery Future
Wait, what did you just write? Starting off by outlining the first really important Grocery Delivery company in the US, Webvan, helps contextualize the path that Amazon seems to be following since the original air of the podcast. Webvan, founded in 1996 by Louis Border, raised more than $800 million including a $375 million IPO in 1999 that raised their market cap to more than $5 billion. Yes, his name should look familiar because he also founded Border’s in 1971 - I know, “eery doomsday music” plays in the background. One year later, they proceeded to scoop up the other pure-play online grocery delivery player, HomeGrocer.com for $1.2 billion in stock and The Webvan CEO, George Shaheen told Supermarket News in July of 2000 that “…the companies combined for 264,000 active customers and 6,200 orders a day with average order size of $98.” Of note, one of HomeGrocer.com’s largest stakeholders was Amazon, who invested $42.5 million for a 35 percent stake.
Obviously it wasn’t that dramatic, but Michael Scott’s crowd presence is something we can all admire…
Even though the acquisition, was highly regarded by a number of Wall Street Analysts, the execution was less than perfect and about a year later Webvan filed for Chapter 11 Bankruptcy laying off more than 2,000 employees. One of those employees, Mick Mountz, was the Director of Business Processes in Logistics for Webvan and after the company folded he went on to start Kiva Systems in 2002. Kiva Systems created warehouse robots that help augment and optimize human capital within warehouses. Prior to Kiva, warehouse employees would have to find products on the shelves and bring them to packing stations. Kiva’s robots allowed those same workers to stay stationary at the packing stations and have the Kiva’s robots find and bring the products to them driving a significant cost reduction in the supply chain. Amazon purchased Kiva Systems a decade later for $775 million, renamed it Amazon Robotics, and has since been one of the defining pillars of Amazon’s logistics prowess to the supply chain community. In a truly remarkable display of foreshadowing, Amazon also bought Webvan’s domain, and at one point in time, webvan.com visitors were directed to a site that in “…the top right-hand corner, (it) says Webvan is “part of the amazon.com family” and consumers can use their existing Amazon accounts to buy.” Now the website leads to a much less exciting landing page:
We can only cross our fingers that Amazon will one day redirect webvan.com to the new AmazonFresh landing pages…
In addition to these acquisitions, quite a few Webvan employees have gone on to work on a number of Amazon’s ventures including AmazonFresh. In June of 2013 Reuters’ Allistair Barr writes:
“Former Amazon and Webvan officials say Amazon drew three big lessons from the Webvan debacle: expand slowly, limit delivery to areas with a high concentration of potential customers, and focus relentlessly on warehouse efficiency.”
These three lessons can definitely be observed when describing Amazon’s recent Fresh Stores introduction. One of the most notable employees to join Amazon was Doug Herrington who served as the VP of Marketing at Webvan and is now part of the ‘S-Team’ at Amazon (Jeff Bezos’ Inner Circle) as the SVP of North American Consumer Business.
Instacart’s Joins the (Third) Party (Grocery Delivery)
The second really important development leading up to Amazon Fresh’s Store opening is the rise of Third Party Grocery Delivery Services. Instacart was founded in 2012 by Aproova Mehta, a former Amazon Fulfillment Optimization Engineer. Instacart has gone on to be one of the leading grocery delivery companies and has been incredibly important for a number of households in the US to get their groceries during the COVID period up to this point and will no doubt play an important role in the near term. However in 2017, Aproova had an Amazon sized problem as Jeff Bezos brought Whole Foods in house. Instacart had signed a 5 year exclusive deal with Whole Foods that started in 2014, had received a secondary investment from Whole Foods in 2016, and then Amazon announces in December of 2018 that in early 2019 Instacart would no longer be delivering groceries from Whole Foods. A year before the acquisition was announced, Whole Foods accounted for the largest grocer share of Instacart transactions, 41.9%. As you can see in the table below, 1010 Data shows that the Instacart was able to expand their network of retailers to help offset Whole Foods completely leaving their service.
According to hosts of Acquired podcast, Instacart’s CEO had crafted the argument that even though Amazon would be one of their main competitors, Instacart’s positioning as a Third Party Delivery Service allowed them to provide a life jacket to other grocers or retailers that needed to dive into the Amazon infested waters of online delivery. Because Amazon can only offer what they carry as a retailer or what Whole Foods had to offer, Instacart would be able to provide a better customer experience and ultimately a larger assortment. The hosts then reveal the prescient counter-argument:
Ben: Let me give you a playbook. Amazon, they sell books on the internet and they’re the retailer of these books and you buy from them.
David: And they would never turn themselves into a marketplace, would they? I mean, they’re a retailer.
Ben: Right. Gosh. How could you ever imagine third party grocery store sellers coming on to Amazon’s distribution and customer platform.
David: I could never imagine that.
Sarcasm aside - Ben and David do have a point. The first glaring anomaly with Aproova’s statement is that something anyone who has used Instacart can tell you. When you navigate to the site, after you type in your zip code the next selection before the you reach items is a list of retailers. This is in direct contrast with his marketplace vs. retailer assortment opportunity. Instacart’s argument that they can provide a greater selection is severely limited by the customer’s decision to choose a retailer. In addition to this even the operational execution that would be required for Instacart to aggregate orders across multiple retailers and still be able to provide a cost/time efficient model with 2-hour delivery has yet to be proven. At the time, one the arguments against Amazon becoming successful was that their platform did not account for the customer’s need for convenience (read: 2 Hour Delivery) and instead encouraged customers to create cadences with subscription based discounts. Until they rolled out Amazon Fresh their ability to do on-demand delivery was non-existent giving Instacart a clear advantage. Amazon has since solved this, as well as the “assumed” assortment advantage that Instacart pointed out with Fulfillment by Amazon (FBA). FBA allows multiple retailers or brands to come within the same Amazon package, giving them the ability to service a seemingly unlimited assortment on their marketplace.
These two historical events, clearly illustrate that Amazon has been doing grocery due-diligence for more than 20 years, and eliminates the idea that “they are new to grocery”. The real question is not if they will become a significant grocery player, but how.
