September, 2014

Fruits of Thought

Supermarkets Beware: AmazonFresh Attempts National Distribution Platform

The United States Postal Service has announced massive cuts in rates for priority mail – provided the mailer sends over 50,000 packages a year utilizing the service. In some cases, rates will fall by 50 percent. This is the latest move in an aggressive effort to capitalize on the explosive growth in e-commerce. With the growth of e-mail, texting, electronic billing and payments, virtually every category of mail is down and falling, save the shipping of physical goods in small packages, which is booming due to the growing propensity of consumers to buy items on line.

The Postal Service also has its eyes on what role it can play in grocery delivery. Of course, many food items are shipped via Amazon and similar services, which use the Postal Service as well as UPS, FedEx and other carriers to deliver everything from specialty hot sauce to rolls of paper towels. Now, however, the Post Office is doing a two-month trial in San Francisco in which it is delivering for AmazonFresh. AmazonFresh is supplying perishables in insulated totes, and the Postal Service delivers between 3 a.m. and 7 a.m. when its trucks generally sit unused.

This program builds on a pre-existing program in which the Postal Service provides Sunday delivery for Amazon in a couple dozen US cities and a broader program in which Amazon drops off product at local post offices that then deliver the expensive “last mile” on its behalf.

Whether any of this will work is unknown. UPS and FedEx are up in arms, claiming that the Postal Service is not transparent in its cost calculations and may be using its monopoly on first class mail to subsidize these services. The idea of using idle Postal Service assets more fully is a good one but it depends, crucially, on getting the cooperation of the Postal Service’s unions. Operating from 3 to 7 a.m. is half of an eight-hour shift – will the union allow so many part-timers? One reason the Postal Service has had trouble competing with the likes of non-union FedEx is that FedEx runs a lot of swing shifts, with drop-offs in the morning, large breaks in the day and pickups in the late afternoon and early evening. Postal service union contracts place severe limits on this type of staffing schedule.

Scheduling things around idle equipment seems a bit problematic as well. Delivering from 3 to 7 a.m. might work in very safe neighborhoods, but it might lead to theft in others, and some gated communities don’t allow commercial deliveries during off-hours.

Then there is a food quality and a food safety concern: Hours in unrefrigerated trucks; more hours sitting out in the sun. An insulated tote is not the same as refrigeration. Still, it would be prudent to expect that the obstacles will be overcome and Internet ordering of perishables will become mainstream. In the early days of home delivery, there was some thought that consumers, wanting to personally check the ripeness and quality, would not want to buy produce on the Internet. Vendors such as FreshDirect, however, have done an excellent job of being very honest with quality descriptions and so have built consumer confidence. Besides, consumers really have little confidence in their own abilities to select a ripe melon or sweet pineapple, so if a service has “experts” doing that job for them, many consumers are willing to let them.

There have been studies showing that a propensity to shop online doesn’t reduce shopping in the store. This may give false solace to retailers, though, as many who shop online may be looking for specialty product not available in their locale or buying gifts that are easy to ship directly when buying online. Wal-Mart is investing heavily in e-commerce and this division might well succeed, but it still leaves the question of what to do with all its stores.

Retail is a high fixed cost business, and it won’t take much loss of market share for the brick-and-mortar operations to be in distress. A 10 percent loss of volume would throw the vast majority of supermarket operations into the red. And it can happen in a blink of the eye. As anyone who has witnessed the demise of bookstores and record shops can attest, markets can move online with dramatic speed.

So what is a retailer to do? Well, of course, every retailer needs an online strategy, and the expertise in Fresh is not easy to duplicate. However, many obstacles to Internet sales are being overcome. In New York City, some new condos have “FreshDirect” rooms with frozen, refrigerated and ambient storage cabinets; supermarket drive-thru pickups seem to be proliferating, and the post office experiments are efforts at finding cheaper delivery options. Unfortunately, retailers will likely not have the same luxury of time they had to deal with Wal-Mart’s sweep across the country. AmazonFresh is looking at the post office because it wants to scale rapidly. If it can find a pre-existing distribution solution, it will be national in a New York minute.

For now, retailers would be wise to think fewer stores and smaller stores, for the future is going to be very different than the past. Oddly, the future may arrive on the lorries of the United States Postal Service, whose first Postmaster General, way back in 1775, was Benjamin Franklin.