Forbes has an article titled, "Why Amazon is Happy Breaking Even With Online Grocery." Author Tom Ryan argues that the firm doesn't plan to generate profit from the online grocery business, but simply to break even. According to the article, based in party on research by RetailNet, "It’s all about helping Amazon attain the scale to support its ambition to build a national same-day delivery shipping model." I don't quite understand this point about scale economies. Amazon isn't going to be shipping books on the same truck as vegetables. It is not likely to be using the same distribution center. What is the scale advantage for other products from having an online grocery business?
Later on, the article provides a much stronger argument for Amazon's entry into the online grocery business, a market where it has traditionally been very difficult to make money. Quoting an analyst at RetailNet, Ryan writes, "Finally, Amazon views steady grocery delivery as a 'powerful way to drive frequent customer interaction,' and opens up avenues to entice consumers to shop for other products with each order." Now we have the key rationale! Consider why Target has expanded its grocery offerings. It wants to build traffic in its stores. Target knows that the margins are very slim on grocery items. However, when guests come to buy groceries, they also buy apparel, home goods, and the like. The firm can make healthy margins in those areas. Target has learned that offering more grocery items brings people to its stores more often, and that foot traffic yields higher margin sales in other departments. Amazon clearly believes that the same dynamic applies when people shop its website. Engaging people to buy groceries will hopefully yield more sales of books, electronics, and other items that do produce better margins. Moreover, Amazon may be able to use its strong predictive algorithms to help drive those kinds of profitable sales, based on a deep understanding of this online grocery customer.