In our Operations Strategy MBA class, Gad and I teach and discuss the operations and economics of Internet grocer pioneer Peapod. Two interesting e-grocer articles appeared this week:
The first, written in Forbes by Tom Ryan, is about AmazonFresh, the grocery overnight delivery service founded by Amazon in 2007, but still only serving the greater Seattle area. Why? In class we show the difficulty of this business and I praise the operational focus of Amazon. If Amazon is using this as a testbed for future expansion, it confirms our findings that this is a slow business where one must build density household by household. It simply takes a long time to arrive at profitable density: even for Amazon, it’s taking more than 6 years.
In his article, Tom proposes a second raison d’etre of AmazonFresh:
AmazonFresh isn’t about “competing with a small market with razor-thin margins and a checkered history.” It’s all about helping Amazon.com attain the scale to support its ambition to build a national same-day delivery shipping model.
In other words, it’s not about making money in groceries but more strategic: groceries would just be akin to providing “base capacity” (stable, predictable, frequent) to Amazon’s aspirations for same-day delivery shipping. This is an interesting conjecture and it has several good reasons behind it, but I am skeptical that moving into same day logistics will be a profitable move for Amazon. (How likely is it that it can do this better than say UPS or FedEx ground? And, how long will it take to build the household customer base to provide this base capacity at every node of the network?)
The second story is related along two dimensions: it is on grocery delivery and is written in Seattle. But that’s where the similarities end. The second story is a study by University of Washington Professor Anne Goodchild and doctoral candidate Erica Wygonik and has a more interesting thesis:
University of Washington engineers have found that using a grocery delivery service can cut carbon dioxide emissions by at least half when compared with individual household trips to the store. Trucks filled to capacity that deliver to customers clustered in neighborhoods produced the most savings in carbon dioxide emissions.
“A lot of times people think they have to inconvenience themselves to be greener, and that actually isn’t the case here,” said Anne Goodchild, UW associate professor of civil and environmental engineering. “From an environmental perspective, grocery delivery services overwhelmingly can provide emissions reductions.”
The article has two very cool graphs (one is below, graph2) but, to me, the interesting fact is:
“We tend to think of grocery delivery services as benefiting urban areas, but they have really significant potential to offset the environmental impacts of personal shopping in rural areas as well,” Wygonik said.
So, it is not just about density, but also about the comparison of the e-grocers “traveling salesman route” compared to the sum of individual customer routes (each almost going back-and-forth along spokes to a grocery store at the hub):
Excellent point for the SOCIAL benefits in fuel, time, and carbon reduction. The challenge, however, is how to align this with the profit concerns of the e-grocer. Aligning social and individual preferences using carbon taxes would ease this challenge. Perhaps some time in the future…