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First Borders, then Best Buy. Now Amazon's gunning for Safeway

After five years of tinkering with a grocery delivery service in Seattle, Amazon is reportedly set to roll it out in California and elsewhere. Here's why the business, with its razor-thin margins, appeals to the company.

Amazon chief executive Jeff Bezos. at the media event last September in Santa Monica, Calif.
Joe Klamar/AFP/GettyImages

SEATTLE -- For the last five years, Amazon has been working to figure out an online business that has claimed its share of carnage -- grocery delivery.

Here in the company's backyard, it's deployed a fleet of green, refrigerated trucks to bring produce, meats, boxes of cereal, and more to customers' front doors 24 hours a day, whenever they choose. And the company has tinkered with pricing formulas, as well as the kind of goods it offers, trying to come up with the right mix that engenders loyalty and still earns a profit.

Asked, after so many years of experimentation, if the company planned to move AmazonFresh beyond Seattle at the company's annual shareholder meeting last month, Chief Executive Jeff Bezos sounded optimistic about the possibility, if decidedly noncommittal. He said that the AmazonFresh team has "made progress on the economics over the last year," adding that the company has "been doing a lot of experiments" to figure out how to please customers and make money.

Amazon has apparently hit on that formula. Last week, the Wall Street Journal reported that it quietly rolled out AmazonFresh to a second market: Los Angeles. And Reuters reported that Amazon will bring the service to the San Francisco Bay Area later this year, and could launch it in as many 20 other cities in the United States and abroad, depending on how well AmazonFresh fares in the two California markets. Amazon declined to comment for this article.

Why does Amazon want to deliver groceries -- a business where so many before it, notably Webvan and HomeGrocer, have failed? It's all about getting more retail dollars from consumers. Amazon's ambitions are as vast as its product selection; it wants to be a digital shopping mall where consumers turn for their every need, be it books, movies, clothes, electronics, or even groceries.

"Like everything, (AmazonFresh) is a wallet share play -- Amazon's attempt to capture more of the consumer's dollar," said Forrester analyst Sucharita Mulpuru-Kodali.

AmazonFresh has the potential, perhaps more than any other Amazon business, to habituate customers into buying from the company regularly. Unlike buying books, movies, and so much else that Amazon offers, shopping for groceries is a weekly, or even daily, activity. If Amazon can persuade consumers to buy their milk, bread, shampoo and laundry detergent from AmazonFresh, it may well move itself one step closer to convincing them to purchase other items from the company as well.

The grocery delivery service isn't just about capturing more retail dollars, though. Amazon will be able to capture more data about customers as well. Just as it uses its insights about the books that customers have purchased in order to recommend similar titles, it can learn more about consumers based on groceries they buy. Those details can be plugged into algorithms that can predict what might be of interest, then target products and ads to those shoppers.

Moreover, AmazonFresh moves Amazon even closer to its customers, who often rely on the United Parcel Service or the U.S. Postal Service to deliver its goods. With AmazonFresh, customers get goods directly from Amazon.

And in the long-running Seattle trial, they can order more than just cheese and crackers. Along with groceries, shoppers can pick up Walter Isaacson's best-selling book "Steve Jobs" for $17.74, a set of $299 Bose QuietComfort 15 noise-canceling headphones, and the B.O.B. Revolution SE baby stroller for $335.56. And they can get it all within hours of placing their order. AmazonFresh could help Amazon figure out delivering online purchases at a speed most of its retail rivals can't touch.

For all the promise, there are plenty of pitfalls for Amazon. Despite the bloodshed in the online grocery business during the boom, there's still plenty of competition. Two companies, FreshDirect and Peapod, continue to develop their own online grocery delivery services, focusing primarily on the east coast. Walmart is testing its Walmart To Go service in a handful of U.S. cities. And a handful of supermarket chains, such as Safeway, offer home delivery in certain markets.

In addition to the competition, Amazon will have to accept the slim margins of the grocery business. That's rarely been an issue for Amazon, which has throughout its existence, squeezed rivals from markets by selling goods for the narrowest of profits.

In the grocery business, though, margins are already tiny. Amazon will be hard-pressed to compete on price. Indeed, surveys by The Seattle Times and Seattle-based Geekwire show that prices at AmazonFresh are often higher than at local markets. What's more, Amazon charges $10 to deliver most orders under $100.

Amazon has tinkered with its formula in Seattle to find success. Here, AmazonFresh has rolled out "Seattle Spotlight," a section of the site that offers foods from some of the city's best known spots, such as Top Pot Doughnuts, the Pike Place Fish Market, and Caffe Vita. It even offers dinner fare such as lasagna and panna cotta La Spiga, a top Italian restaurant, and comfort food, such as meatloaf and chipotle mac n' cheese from Skillet, another popular dining spot.

"This is going to be very, very expensive for them," Forrester's Mulpuru-Kodali said. "It's going to be hard to make a profit in this space and even Amazon doesn't have infinite resources to lose money forever."

But for Amazon, the gambit isn't about making money from online grocery delivery. It's about getting people in the habit of buying everything they could possibly need from Amazon. If the company can pull that off, it knows the profits will eventually come.