Working Backwards to Innovate at Amazon

Recently, Lisa Eadicicco wrote an article for Business Insider titled, "This is the test Amazon uses to decide which ideas are worth turning into new products."  She describes the "working backwards" methodology that Amazon routinely uses during its new product development process.  Here's an excerpt: 

And while Amazon's product portfolio may be larger and more diverse than ever, there's a simple process the company uses to figure out which ideas are worthy of becoming real products: writing a press release.  This is what has come to be known as the "working backwards document" within Amazon, a mock press release that describes the product and the problem it's trying to solve.

"Everything starts as a working backwards document," Miriam Daniel, Amazon's vice president of Alexa and Echo devices, recently said to Business Insider following the company's fall product launch event. "The reason we write a press release is, when we read it, we want to be able to say as a consumer, 'Wow, I want that.' We write with that end in mind."

All of the devices Amazon unveiled during its event at the end of September started as a working backwards document, says Daniel. The goal of the working backwards document is to help the product team focus on what the main use case for a particular product would be.

Often, at Amazon, they not only draft the press release as part of this working backwards process.  They also write the frequently asked questions document that will be provided to customers if the product/service is built.   These documents help Amazon's managers envision how customers will react to the new product, and in particular, whether it will fulfill a customer need or alleviate a key pain point for users.   

I wrote about the working backwards approach in my book, Unlocking Creativity.   It's a powerful technique that can help individuals step back and gain some distance from a challenging problem.  They can look at the problem in a new way by jumping forward in time and trying to predict how others will react to our solution at that point in the future.  For more on how and why this type of approach is worthwhile, check out the video below: 

 

Why Has Amazon Struggled to Increase Whole Foods' Revenues?

Source: Wikimedia Commons

According to the most recent Amazon earnings reports, the company's Whole Foods Market subsidiary continues to show sluggish sales performance.   Revenues during the most recdent quarter only grew 1%.   Sales were relatively flat in prior quarters.   Why is Amazon struggling to increase Whole Foods' revenues despite repeated attempts to showcase lower prices on key products?  Why hasn't introducing discounts for Prime members been more successful in driving revenue growth?

Yale School of Management Professor Soheil Ghili recently commented on the company's struggles. He told Yale Insights: 

"There might be some non-price factors, but the main challenge is indeed the prices and the “Whole Paycheck” brand image of Whole Foods. It is true that Amazon Prime membership is commonplace among high-income households that are likely to be—or have the potential to become)—Whole Foods customers. However, data on the incomes of Prime customersand U.S. income distribution suggest that the majority of Prime members have household incomes below $100,000 a year. Converting those Prime members to regular Whole Foods customers would require much sharper price cuts than Whole Foods/Amazon is now offering."

Ghili goes to question who the customers are that Amazon is targeting.   The choice of target customer matters a great deal with regard to the appropriate competitive positioning and marketing strategies for Whole Foods.  He explains, 

"Whether you are competing against Trader Joe’s or against Walmart has significant implications on how you want to respond. If you want to poach TJ customers, lowering prices might help with some. (Certainly not all; I for one, don’t see myself leaving TJ for Whole Foods!) If trying to poach from Walmart, you’d better establish cheaper stores and brand them anything other than “Whole Foods.” This, by the way, is something Amazon is already thinking of doing, in parallel to slashing Whole Foods prices."

I find this discussion quite interesting, because I've always been puzzled about the Whole Foods strategy.  The company achieved remarkable success by positioning itself as a highly differentiated, premium price grocer with an exceptional customer experience.  Yes, it is true that the company's sales growth had stalled prior to the Amazon acquisition, as traditional grocers expanded their organic offerings, often at lower prices.  However, it's not clear that the appropriate response by Whole Foods is to try to walk away from the "Whole Paycheck" image.  I fear that Whole Foods runs the risk of being "stuck in the middle" strategically.  They have alienated some of their core customers by weakening the customer service experience and changing the mix of products in their stores.  They have potentially alienated some of their best employees as well.  Meanwhile, the price cuts do not appear substantial enough to bring in waves of customers who would otherwise shop at lower-priced rivals.  Whole Food has to decide who they really want to be when they grow up.  It doesn't seem that they have made a clear choice at this point.  Do they want to be Apple or Southwest?  Which is it?   My gut says that they have a much better chance of thriving as Apple than trying to transform into Southwest. 

Amazon: No Need to Disclose (yet)

Shira Ovide has a terrific article for Bloomberg BusinessWeek titled, "Amazon Takes Secrecy to a Comic Extreme."   She writes,

Companies, of course, would prefer to reveal as little as possible. And then there's Amazon.com Inc., which takes financial disclosure stinginess to the next level. So far, investors have been fine with it. They see one of the world's most ambitious companies and a stock price that has quadrupled since 2012, and happily toss aside their Amazon spreadsheets filled with question marks. But Amazon's thriftiness with financial disclosure could backfire. Secrecy is acceptable when companies are doing well. It becomes suspicious when things go south.

Ovide writes that Amazon provides quarterly earnings projections that are "comically broad."   Ovide explains that the company "loves to show charts without labels" and provide investors and analysts with "reams of fluff."  Bezos, I believe, would rebut Ovide's observations by explaining that Amazon does not manage for quarterly earnings or to meet short-term investor expectations.  He is managing for the long term, and he's putting the customer first.  That's his story, and he's sticking to it.  In fact, he's stuck to it for 22 years, profits be damned.  

Ovide does make an important point though.   This attitude about disclosure works beautifully until a company stumbles.  If and when that happens to Amazon, the willingness to accept very limited disclosure will change.  In fact, it may change quite suddenly if Amazon falters.   For now, though, Amazon gains a key competitive advantage through its limited disclosure policy.   Competitors don't know the types of details that they would love to have access to as they formulate their strategies.  Once again, Bezos has found a way to gain the upper hand.  Some of his key rivals have to play by a different set of rules.  Not only must they turn a sizable profit to please investors, but they must disclose much more information.  

Scott Galloway's "Amazon Clinic"

For those intrigued by my post yesterday regarding Amazon and possible future acquisition targets, you should take a look at NYU Professor Scott Galloway's talk titled "Amazon Clinic."  He presents some fascinating and startling data on the state of retail in the United States, including the dramatic overbuilding of malls in past decades and the steep decline in foot traffic over the past few years.  

Will Amazon Buy Nordstrom Next?

Back on May 11th, NYU Professor Scott Galloway appeared on Kara Swisher's Recode Decode podcast. During that conversation, he predicted that Amazon would acquire Whole Foods. One month later, Jeff Bezos made his move. Amazon purchased the organic supermarket retailer for $14 billion. Yesterday, Professor Galloway appeared on Swisher's podcast again. This time, he predicted that luxury retailer Nordstrom might be Amazon's next big acquisition target. He explained, "It would be cheap, it’s in Seattle, they’re operationally very sound, it’s a great company and they’re [Amazon is] trying to establish relationships with high-end brands, which they have been unable to do. Nordstrom has those and a lot of credibility, and a lot of wealthy households have a Nordstrom credit card."

Like many brick and mortar retailers, Nordstrom has experienced a sales slowdown as mall traffic has declined. In fact, news reports in June indicated that the Nordstrom family was considering taking the company private. Earlier this week, the company announced that it was opening a test store next month called Nordstrom Local. The Wall Street Journal explained the concept: 

Nordstrom Local, scheduled to open Oct. 3 in West Hollywood, Calif., will span 3,000 square feet, far less than the 140,000 square feet of one of Nordstrom’s standard department stores. It will contain eight dressing rooms, where shoppers can try on clothes and accessories, though the store won’t stock them. Instead, personal stylists will retrieve goods from nine Nordstrom locations in Los Angeles, or through its website. The stylists can also pull together looks for shoppers through a “style board” app.

Is this acquisition a real possibility? I can certainly see Professor Galloway's logic. However, as he notes in the podcast, the company is led by the Nordstrom family. Indeed, the firm's ownership structure could be a formidable obstacle. The Nordstrom family owns roughly 1/3 of the company, and family members continue to lead the retailer. Amazon would find it very difficult to acquire the company without the family's consent. However, Galloway's comments do make you wonder whether other retailers might be acquisition targets. As Amazon contemplates opening a second headquarters with up to potentially 50,000 employees, it's clear that Bezos' ambitions know no limits. Could a luxury apparel retailer be next? Nieman Marcus, anyone? They have been struggling. They announced an exploration of strategic alternatives several months ago. Perhaps they might be a target. They are not as operationally sound as Nordstrom's, and they have considerably more debt, but perhaps it's a more attainable target.

Vertical Integration at Amazon

The Wall Street Journal reports today that Amazon will be moving aggressively to expand its in-house logistics capabilities.  Here is the lead of the article:

Amazon.com Inc. is taking to the air with a fleet of planes, part of a broader effort to reduce its inflated shipping costs. The Seattle retailer plans to shuttle merchandise around the U.S. using as many as 20 Boeing Co. 767 aircraft it will lease from Air Transport Services Group Inc. News of the deal sent the air-cargo transportation company’s shares soaring as much as 24% on Wednesday.

Does this vertical integration strategy make sense?  Let's start with the first sentence of the Wall Street Journal article.  Will the move reduce costs for Amazon?  One would find it hard to believe that Amazon can move goods around the country more efficiently than UPS and FedEx.  Clearly, they cannot match the efficiency of those established players at the moment.  One does not save money simply by doing something in-house.  Some managers think you save because you eliminate the profit margin earned by the supplier (UPS and FedEx in this case).  However, that is not the case because you must invest heavily in new assets in order to conduct this activity within the firm.  Moreover, you may not be as effective at conducting this activity as your supplier.  Thus, it's not clear that profits will automatically improve.

Why then would they pursue vertical integration?  There may be other valid reasons.  First, they may be trying to offset supplier power in this case. In other words, building an in-house capability gives them negotiating leverage with big players such as UPS and FedEx.   Second, UPS and FedEx may be worried about investing in assets specific to Amazon.   Economists call this situation the "holdup" problem that arises when transaction-specific assets are in place.  If UPS and FedEx invest in assets that are unique to Amazon, they may find themselves in a poor negotiating position vis a vis Amazon.  Thus, Amazon may have to invest in these assets because their partners are reluctant to do so.  Finally, Amazon may make their entire supply chain more efficient through closer integration of their ordering, fulfillment, and delivery services.   Conducting delivery in-house may enable that closer integration and perhaps some resulting efficiency.   

In the end, it will be interesting to see how the vertical integration strategy plays out.  Once again, though, Amazon will have more latitude than most publicly traded companies, because investors have proven to be quite patient with them.   Most publicly traded firms would have a hard time justifying this type of vertical integration strategy, which may take some time to pay off.  Amazon will likely have the time to develop this strategy and realize the efficiency gains over time.  

Amazon Hits Back at The New York Times: Why Now?

Yesterday, Amazon's Jay Carney (former White House Press Secretary) published a post on Medium that criticized the New York Times scathing article published two months ago about Amazon's culture and workplace environment.    The newspaper offered a quick rebuttal.   My question: Why now?  Why offer this rebuttal two months after the article ran?  The controversy had died down, after receiving a great deal of attention two months ago.  Why bring the issues back to the forefront now?  It only serves to remind people about the negative statements and observations made about Amazon's organization.  Moreover, as The New York Times stated, the Carney post did not refute the claims made in the article directly, but instead only pointed out that some of the quotes came from highly disgruntled employees (at least one of whom may have been fired for wrongdoing).   In a situation such as this one, offering a clear rebuttal may be good policy, but timing is important.  You have to move quickly.  In many ways, you only rekindle the controversy by responding now.

Amazon Reports Earnings for AWS

Amazon reported quarterly earnings yesterday.  For the first time, the company split out financials for its Amazon Web Services (AWS) business.  That unit provides cloud computing services.   Amazon indicated that AWS generated $1.57 billion in revenue and $265 million in operating income for the quarter.  Overall, Amazon reported revenue of $22.72 billion and a net loss $57 million for the company as a whole.  Amazon continues to argue that they are investing for the future, thereby explaining the continuing escalation of expenses and yet another net loss. 

Clearly, losses in the retail business are more substantial than previously thought.  AWS appears to be profitable, while the company as a whole lost money.  The earnings reports raises a few questions for me, inquiries that I believe many investors and analysts will be putting forth in the coming months.  

• Has Amazon been reluctant to split out financials for AWS because they know that it may cause more questions to be asked about the profitability (or lack thereof) of the core retail business?   
• Are the continuing losses related to investments and expenses that will eventually create a high profit retail business, or are those costs associated with many diverse lines of business that have been launched?  
• Is Amazon spreading itself too thin with so many strategic moves in a wide variety of areas?  
• Perhaps most importantly, what is the strategic logic for keeping AWS and Amazon's retail business together?  Will some investors begin to argue for a breakup at Amazon?

Amazon Opens Brick-and-Mortar Store

The Wall Street Journal reports today that Amazon will open its first brick-and-mortar store in Manhattan.  Here's the description of the first site:

Amazon’s space at 7 West 34th St., across from the Empire State Building in Midtown, would function as a mini warehouse, with limited inventory for same-day delivery within New York, product returns and exchanges, and pickups of online orders. The Manhattan location is meant primarily to be a place for customers to pick up orders they’ve made online, but will also serve as a distribution center for couriers and likely one day will feature Amazon devices like Kindle e-readers, Fire smartphones and Fire TV set-top boxes, according to people familiar with the company’s thinking.

What do we make of this move?  As an experiment, it may serve a very useful purpose.  Innovative companies test ideas and conduct well-designed experiments frequently.  They recognize that such experiments may fail, in the sense that they do not achieve desired business results.  However, they view them as successful if tons of learning emerges from these tests.  Could this site in Manhattan drive a great deal of learning and innovation at Amazon?  Definitely.   However, the logic of a major brick-and-mortar expansion at Amazon escapes me.  Leasing incredibly expensive space in the middle of Manhattan to serve as a place for customers to pick up online orders does not seem to make economic sense.   If the store is meant to be a flagship, focused on providing a fun and engaging retail experience for showcasing the firm's digital products, then one might be able to make a case for it.  Of course, a "flagship" strategy would entail a very limited number of brick-and-mortar locations. Does Amazon need such flagship locations to build the brand and sell more digital devices?  It does not seem so; they already have a strong brand and have achieved great success with the Kindle.   Is the brick-and-mortar location all about same-day delivery?  Well, one could achieve that without leasing high-priced retail space on 34th Street in Manhattan.  It will be interesting to see how this experiment evolves, and to understand precisely what Amazon's aims are with this brick-and-mortar strategy.   

The Everything Store: Interesting Read

Several weeks ago I finished reading Brad Stone's book, The Everything Store: Jeff Bezos and the Age of Amazon.   The book generated some controversy when MacKenzie Bezos (Jeff's wife) posted a scathing review on the Amazon site.  She claims that the book contains a number of factual inaccuracies.  Her real concern, though, is that the book does not always paint a very flattering picture of Jeff Bezos.  Nevertheless, I found the book to be interesting, and I read it with the understanding that it may not be a completely accurate picture (as is true of many of these types of books).  Here's an interview with the author on CBS: 

Stephen Colbert on the Amazon vs. Hachette Battle

The Colbert Report
Get More: Colbert Report Full Episodes,The Colbert Report on Facebook,Video Archive

Price Hike for Amazon Prime

Amazon announced a $20 price increase for its Amazon Prime service.  Does it make sense?  It appears so, based on a quick-and-dirty financial analysis.   First, analysts estimate that 20 million people subscribe to Amazon Prime at the present time.  If they all pay the $20 price increase, that would generate $400 million in increased revenue.  The key question is:  How many people will drop their Amazon Prime membership because of the price increase?  Does the additional revenue from the increase more than offset any lost revenue from cancelled memberships?  

Here's the simple math.  The increase in revenue from the price increase equals $20 * (20 million subscribers - the number of cancelled memberships).  The lost revenue from cancelled subscriptions equals $79 * the number of cancelled memberships.  What's the break-even point here?  If the company has less than 4 million cancelled memberships, then the price increase is a net revenue generator.  Do we think Amazon Prime will lose 20% of its members due to this price increase?  That does not seem likely.   Analysts told the Wall Street Journal that they expect no more than 10% of Prime members to drop their subscriptions.  

One final note - Amazon probably is losing money on some Prime memberships, because those folks take frequent advantage of free delivery.  Those heavy Prime users are not likely to cancel.  They are getting a great deal.   Who is likely to drop their Prime memberships?  That would be the folks who are probably not using the free delivery feature very often.  In other words, the lightest shoppers are the ones who may be most likely to cancel.   That's good news and bad news for Amazon.  It's great to retain the loyal customers who buy tons of stuff from Amazon.   However, those folks also incur a great deal of delivery expenses.   That leads to an intriguing question:  At $99, does Amazon still lose money on a substantial number of Prime memberships due to heavy delivery expenses?  It would be interesting to know!

Netflix Pokes Fun at Amazon

60 Minutes Apparently Airs Infomercials Now

What was that on Sunday night on the CBS 60 Minutes program?  Charlie Rose interviewed Amazon founder Jeff Bezos in a roughly 15 minute segment on the popular news show.  In the now infamous interview, Bezos unveiled his vision for how drones might someday deliver Amazon products to people's homes.  Rose swooned.   But wait... did anyone at 60 Minutes even bother to think about the timing of the interview?  It ran on the DAY BEFORE CYBER MONDAY!  It amounted to a huge 15 minute infomercial for Amazon on the day before the biggest online shopping day of the year.  Where is the journalistic integrity here?  Did anyone at CBS even question the timing?  Of course, Rose didn't ask much about a tiny little word that somehow conveniently never receives much attention when journalists swoon over Bezos (shhh... let's not talk about profit, or the lack thereof).   I don't blame Bezos or Amazon here.  They had an opportunity to participate in a feature on a highly popular news show.  They took advantage of the opportunity for some great public relations.   The fault here lies entirely with Rose and the 60 Minutes producers.  When do the small independent merchants in every small town in America get there 15 minute infomercials on CBS? 

Amazon, TV Pilots, and the Wisdom of Crowds

On Saturday, the Wall Street Journal reported on Amazon's attempt to develop original television programming (similar to Netflix's entry into this market).   Here's an excerpt from the article that describes how Amazon's efforts differ from the way the large television networks launch new shows:

A group of 14 "pilot" episodes had been posted on the company's website a month earlier, where they were viewed by more than one million people. After monitoring viewing patterns and comments on the site, Amazon produced about 20 pages of data detailing, among other things, how much a pilot was viewed, how many users gave it a 5-star rating and how many shared it with friends.Those findings helped the executives pick the first five pilots—winnowed down from an original pool of thousands of show ideas—that would be turned into series. The first will debut this month: "Alpha House," a political comedy about four politicians who live together, written by Doonesbury comic strip creator Garry Trudeau.

Amazon is taking advantage of the wisdom of crowds.   Traditional networks use focus groups to test out ideas for new shows.  Aren't thousands of reviews better than the responses from a small number of people in focus groups?  After all, focus groups can be very problematic, and not simply because of the small sample size.  Well... it depends.  The wisdom of crowds works when the responses from a larger, diverse audience are INDEPENDENT of one another.  In other words, the wisdom of crowds works when each individual response does not influence the response of others.  Does independence hold when it comes to online reviews, or does herd behavior take place?

Tim Harford of the Financial Times asked this question in a recent column.  He cites an interesting study that I blogged about earlier this fall.  According to the Wall Street Journal, researchers Muchnik, Aral, and Taylor found that, "positive online ratings can be strongly influenced by favorable ratings that have come before."  They discovered that initial positive ratings did create herd behavior.  Ratings that followed were more likely to be positive as a result of the influence of the initial evaluations.  According to Harford, "Positive comments tended to attract birds of a feather – a comment sent into the online world with a single positive vote attached was 30 per cent more likely to end up with at least 10 more positive votes than negatives."  Interestingly, initial negative ratings did not lead to similar herd behavior.  People who liked a product often chimed in to "counterbalance" an early, unusually negative review. 

Four Behaviors of Innovative Leaders

Forbes has produced a great interview titled, "The Four Behaviors of Innovative Leaders" to complement its article on the most innovative companies in the world.  Check it out.

Questions about Amazon

Vacation was wonderful, and now it's back to preparations for the new academic year... as well as a return to blogging.  As I'm catching up on various business news, I began thinking a great deal about the future of Amazon.  I have a few questions for readers to ponder:

1.  Will Amazon reach a point of  diseconomies of scale and scope sooner rather than later?   Many firms strive to achieve the benefits of size and scope, hoping it will juice their profit margins and overall return on invested capital.  At some point, though, size and scope become a handicap rather than a strength.   The complexity of managing a large, multi-business enterprise becomes problematic.  As we watch Amazon, as well as its founder Jeff Bezos, moving into more and more lines of business, one has to wonder whether the company will reach that point of diseconomies BEFORE it ever generates strong profit.  For years (17 years, in fact), investors have bet on Amazon, in hopes that its strategy would eventually yield high profits.  They have been very patient, incredibly so in fact.   What if the profits never materialize because Amazon gets too big and complex to manage?  I'm not predicting this fate, but I am wondering about how thin Bezos may become stretched as the company expands, and as he engages in other ventures such as the Washington Post.

2.  What exactly is the Amazon business model, and how new is it?    I read the other day that Amazon Prime accounts for a significant share of the company's rather thin profits.   That reminded of another business model.  Think about Costco.   The successful company makes a big chunk of its money from the membership fee.  Amazon Prime is essentially the membership fee.  In other words, Amazon's business model resembles Costco much more so than a traditional retailer.   Most warehouse clubs operate with very thin margins, and they use the membership fee as their profit engine.  Amazon may be the same, more similar to brick-and-mortar retail than many have imagined.

Decision Narratives at Amazon

In this article by Drew Hansen as well as this one by Adam Lashinsky, we learn about an important facet of the decision-making process employed by Jeff Bezos and his top management team at Amazon.  Here's an excerpt from the latter article:

Meetings of his "S-team" of senior executives begin with participants quietly absorbing the written word. Specifically, before any discussion begins, members of the team -- including Bezos -- consume six-page printed memos in total silence for as long as 30 minutes. (Yes, the e-ink purveyor prefers paper. Ironic, no?) They scribble notes in the margins while the authors of the memos wait for Bezos and his minions to finish reading.

Amazon executives call these documents "narratives," and even Bezos realizes that for the uninitiated -- and fans of the PowerPoint presentation -- the process is a bit odd. "For new employees, it's a strange initial experience," he tells Fortune. "They're just not accustomed to sitting silently in a room and doing study hall with a bunch of executives." Bezos says the act of communal reading guarantees the group's undivided attention. Writing a memo is an even more important skill to master. "Full sentences are harder to write," he says. "They have verbs. The paragraphs have topic sentences. There is no way to write a six-page, narratively structured memo and not have clear thinking."

The use of narratives at Amazon reminds me of this article written many years ago in Harvard Business Review about strategic planning at 3M.   The innovative industrial conglomerate had adopted the use of storytelling during its strategic planning.   In the article, the authors explained that bullet points on Powerpoint slides have several deficiencies.  Bullet point lists often prove rather generic, fail to clarify causal relationships, and leave crucial assumptions unstated.   One manager quoted in the article explains, "If you read just bullet points, you may not get it, but if you read a narrative plan, you will.  If there's a flaw in the logic, it glares right out at you.  With bullets, you don't know if the insights is really there, or if the planner has merely given you a shopping list."  Stories or narratives enable you to think more holistically, and they provide the basis for a more thoughtful dialogue and debate.  Finally, stories prove much more compelling than lists.  If we hope to persuade others that a strategy makes sense, a good story works much more effectively than a set of bullet points. 

Classic Mistake at a Job Interview

The Wall Street Journal recently interviewed Jennifer Boden, a human resources executive at Amazon.  They asked Boden a series of questions regarding Amazon's recruiting efforts.   Boden offered some keen insights.  I found this particular exchange with the interviewer worth stressing here:

WSJ: What tends to trip candidates up in interviews?

Ms. Boden: Most people will trip up when they focus on where they've been, the name, and they don't focus on what they've done. Or if they can't explain to us the process of how they delivered results.

Boden's observation confirms what I have seen many times over the years.  I often tell students to NOT make the interview a recitation of their resume.  The interviewer has read the resume!  He or she knows where you went to school, what your GPA is, where you interned in prior years, and what awards you have won.  What does the interviewer not know from looking at your resume?  That's the key question.  You have to talk about the major project you accomplished at your internship or the consulting report you put together for a client company as part of a business school course.  You should describe the major community service initiative you led at your university or the honors thesis research project that you completed.  An interview should be focused on telling several stories of hard work, organization, leadership, and achievement.  Be prepared to talk about what you did, what you learned, and how you can apply those lessons to this organization.    

Amazon and Online Grocery

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.