"Very wasteful" isn't a phrase usually associated with Amazon.com Inc., which is so cost-conscious it once removed the light bulbs from its cafeteria's vending machines. But after spending several months analyzing the online retailer's grocery-shipping hubs back in 2014, that's exactly how a mechanical engineering student described its approach to selling bananas.
Workers at Amazon Fresh, the company's grocery-delivery business, threw away about a third of the bananas it bought because the service only sold the fruit in bunches of five, the student concluded. Employees trimmed each bunch down to size and chucked the excess.
The research paper by Vrajesh Modi, who now works for Boston Consulting Group, highlighted other problems: Poorly trained employees often stood around with nothing to do. Moldy strawberries were frequently returned by disappointed customers. Amazon's inspectors believed their corporate bosses didn't care much about the quality of the food.
Such challenges linger for Amazon. Despite several attempts to break into the $800 billion grocery industry and almost a decade in the business, the company has struggled to entice shoppers en masse to buy eggs, steaks and berries online the same way they've flocked to buy books, tablets and toys.
"Online grocery is failing," said Kurt Jetta, chief executive officer of Tabs Analytics, a consumer products research firm.
Only 4.5 percent of shoppers made frequent online grocery purchases in 2016, up just slightly from 4.2 percent four years earlier despite big investments from companies such as Amazon, according to the firm's annual surveys. "There's just not a lot of demand there. The whole premise is that you're saving people a trip to the store, but people actually like going to the store to buy groceries."
Amazon CEO Jeff Bezos now seems to understand that he can't win the grocery game with websites, warehouses and trucks alone. The world's biggest online retailer sees stores playing a key role in a renewed grocery push, documents show. And as it did with Amazon Fresh, the company is launching its newest projects in Seattle, its hometown.
Earlier this month, men in cherry pickers worked through driving rain to affix "Amazon Fresh" signs to a drive-in grocery location in Seattle's Ballard neighborhood, where shoppers can stop and have online orders loaded into their cars. Crews were busy on a similar site south of downtown, readying canopies over parking spaces to protect customers from the elements as they pick up their shopping bags. The secretive company has yet to announce the projects, and crews have covered the Amazon signs in black fabric and paper.
Late last year, Amazon bought supply-chain software from LLamasoft Inc. -- a major departure for a company known for its logistics prowess, and defying an internal mantra of "we don't buy, we build." And it more recently restructured how various grocery teams were managed to narrow their focus and set clear priorities, according to people familiar with the company's business.
These changes come as Amazon breaks from its standard formula of shipping products in boxes out of jampacked warehouses. Instead, it will invite shoppers inside its own grocery stores to smell the oranges, see the tomatoes and tap the watermelons.
Ahead of a national rollout next year, Amazon is testing three grocery store formats in Seattle -- convenience stores called Amazon Go, the drive-in grocery kiosks, and a hybrid supermarket that mixes the best of online and in-store shopping. The company could open as many as 2,000 stores, according to internal documents.
Amazon's goal is to become a Top 5 grocery retailer by 2025, according to a person familiar with the matter. That would require more than $30 billion in annual food and beverage sales through its sites, up from $8.7 billion -- including Amazon Fresh and all other food and drink sales -- in 2016, according to Cowen & Co., a financial services firm.
Reaching that milestone would require a new wave of store and warehouse investments around the country, costing billions of dollars. That's an existential change for Amazon, which initially stayed away from perishable goods and has mostly avoided the overhead of physical stores since it started in 1994.
"A bunch of smart people at Amazon have been thinking about re-imagining the next phase of physical retail," said Scott Jacobson, a former Amazon executive who is now a managing director at Madrona Venture Group. "They want more share of the wallet, and habitual, frequent use of Amazon for groceries is the ultimate goal."
One problem saddling Amazon Fresh is the high cost of losses caused by food spoiling, an issue it has never faced with books and toys.
"Grocery is the most alluring and treacherous category," said Nadia Shouraboura, a former Amazon executive whose company, Hointer, has been working on redefining in-store grocery shopping for the past 18 months. "It lures inventors and retailers with shopping volume and frequency, and then sinks them with low margin."
Long term, a stronger grocery business could position Amazon to become a wholesale food-distribution business serving supermarkets, convenience stores, restaurants, hotels, hospitals and schools. But first the company has to find a way to get more people to think of Amazon when stocking their refrigerators and pantries.
A group of Amazon executives met late last year to discuss the disadvantage Amazon faced compared with grocery competitors such as Wal-Mart and Kroger because of its lack of stores and customer apprehension about buying fresh foods online. They decided they needed something more to jump-start Amazon's grocery push beyond plans already underway for the Amazon Go convenience store, modeled for urban areas, and drive-in grocery pick-up stations suited for the suburbs.
They worked out plans for a third approach: grocery stores closer in size to a Trader Joe's than a Wal-Mart to offer easy access to milk, eggs and produce. Other items like paper towels, cereal, canned goods and detergent would be stocked on-site in a warehouse where they could be easily packed and delivered to shoppers at the location, according to documents. It would also serve as a delivery hub for online orders.
Meanwhile, the first wave of its new grocery experiment, Amazon Go, was unveiled in December and for now is open only to employees while the systems are tested. Cameras and sensors monitor shoppers who scan their smartphones upon entering, allowing them to grab items such as sandwiches, yogurt, drinks and snacks and automatically pay for them without a checkout kiosk.
Beyond letting customers skip lines, the technology gives Amazon valuable data, said Guru Hariharan, founder of Boomerang Commerce Inc., which designs software for large retailers. Even if customers don't buy everything they touch, there's value in understanding what shoppers consider but don't ultimately buy, he said. That makes it worthwhile for Amazon to work through the kinks in the technology.
"It takes a lot of time and experimentation to work through unpredictable scenarios like a child picking up an item or a person wearing sunglasses or a face muffler," he said.
SundayMonday Business on 03/26/2017