Amazon Reportedly Expanding AmazonFresh Grocery Service to Los Angeles And San Francisco

Amazon (NASDAQ:AMZN) is preparing for a major expansion of its AmazonFresh online grocery, with first deliveries outside its Seattle home turf as early as this week, Reuters reported on Tuesday (June 4).

The first city to be added is Los Angeles, with San Francisco later this year, the news service said, citing two anonymous sources. If the service goes well in those two cities, AmazonFresh could expand to 20 other cities next year, including some outside the U.S.

Amazon declined to comment. So did Kroger (NYSE:KR), Whole Foods (NASDAQ:WFM), Supervalu (NYSE:SVU), Safeway (NYSE:SWY) and Target (NYSE:TGT). Walmart (NYSE:WMY), on the other hand, has been testing grocery delivery in San Francisco and operates a grocery delivery business in the U.K. "We are ready and able to expand grocery delivery in the U.S. as the market demands," said Walmart spokesperson Dan Toporek. Fresh Direct and Peapod also have profitable grocery delivery businesses.

The fact that grocery is a low-margin business probably wouldn't deter Amazon—most of its businesses are low margin. The bigger challenge may be something that has begun to show up in grocery market share statistics: The big-box chains that were supposed to swallow the grocery business are now losing ground. The volume-buying, traffic-generating size advantage of Walmart has turned out to be not quite such a big lever when it comes to a business where there aren't any margins to squeeze. But unlike Walmart's (and Amazon's) typical merchandise, the goods can go bad if they sit on the shelf even a little too long.

That's why there are still bodegas in every city in the U.S. Food is still a people business, and successful grocery chains have thrived by working a delicate balance between people, automation and scale.

Amazon has most of the characteristics it needs to make a run at the grocery business. It's patient. It can live with tiny margins. It has big warehouses and it knows fulfillment and delivery. But Amazon is also really big—and grocery may be the one place where a really-big mindset is a disadvantage.

For more:

- See this Reuters story

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