Business Update with Mark Lacter

Amazon offering delivery service in Los Angeles

If you lived in LA County in the 1960s, you might remember the Helms bakery trucks that would bring food up and down residential streets.  Donuts and bread, mostly, but it was very convenient.  KPCC's business analyst Mark Lacter says that's changing.

Steve Julian: Mark, now Amazon's getting into the picture, about a decade after online grocery services popped up...

Mark Lacter: Steve, that was during the first dot-com boom in the '90s - except that the concept never quite caught on.  So now, Amazon believes it can deliver produce, dairy, meat and other items you might find at a supermarket, and do it within just a few hours.  And, along with groceries, they'll deliver many other products you can find on Amazon (books, DVDs, whatever).  There's a 90-day trial, and after that membership for the service costs $299 a year - it will be part of the Amazon Prime feature.  That covers delivery fees, so long as your orders are over $35. So clearly, this isn't for everyone.

Julian: They can make money doing this?

Lacter: Good question.  Some would argue that Amazon is less interested in food - which ordinarily generates very small profit margins - than it is on electronics and other high-margin items that would be included in many of these orders.  The grocery service - which is called AmazonFresh - has been operating in Seattle for several years, so presumably the company has learned from any mistakes it's made over that time.  The most obvious challenge is quality control - it's one thing to order a printer, which is always made the same way.  But, peaches comes in all shapes, sizes, and levels of ripeness, and someone will have to determine which is which.  And what if produce goes bad, or gets damaged?

Julian: There's also competition -

Lacter: - oh yes, Southern California is one of the most competitive markets for grocery shopping in the world.  It includes the major supermarket chains - of course - plus the membership stores, plus the big-box stores like Target, plus the smaller niche stores like Trader Joe's, plus the chains that cater to ethnic shoppers.  Now, I would wager that the area where traditional retailers could be most vulnerable are bulk items like soft drinks, household products, canned goods - everyday items that are a hassle to shop for because you have to first drive to the store, and then deal with crowds in the store.  If Amazon does manage to get past all the logistical and quality control challenges, it could represent a huge boost to online shopping.  By the way, Walmart is testing an online grocery service, as well.
 
Julian: I hate to mention something as mundane as getting through traffic, but how will they deal with that?

Lacter: Actually, they're already doing it.  A number of services are providing next-day or even same-day delivery.  And Amazon has a huge distribution facility in San Bernardino, so it's becoming a lot easier to complete an order without having to rely on some warehouse two-thousand miles away.  This is really the next step not just for Amazon, but for any business that feels the pressure to deliver as quickly as possible.

Julian: Drugstore items are a good example…

Lacter: That's right - if you're about to run out of aspirin, you want to get a new bottle as quickly as possible.  Remember when you would place an order from a mail-order catalog, and they would say: allow four to six weeks for delivery?  Well, now anything that takes longer than a week seems like a lot.  And, even though next-day delivery becomes a huge logistical challenge, much of the work can be done in the early morning hours when traffic is light (actually, that's when a lot of food deliveries are made).  Here's the thing, Steve: retailers are trying to somehow balance the convenience of online shopping with the immediacy of receiving an item at a traditional store - and you're seeing it at all levels.

Julian: This may be the first time in my life I can use a grammar school comparison, but digital is to newspapers as online delivery is to brick and mortar?

Lacter: As all these innovations play out, we'll be getting a better idea of just how vulnerable the traditional brick and mortar stores will be.  So far, they seem to be holding their own, but some of these services seem pretty attractive.

Mark Lacter is a contributing writer for Los Angeles Magazine and writes the business blog at LA Observed.com.


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