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Is Amazon Fresh a Boon For Small Businesses?

Startups are loving the exposure that comes with joining the e-commerce giant's grocery-delivery business. But is dealing with technical hassles and giving up a large cut of revenue really worthwhile?
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A bowl of tomato soup garnished with arugula hovers above a piping hot mug of cappuccino. To the right, a banner promotes a section called "Seattle Spotlight," where notable haunts like Pike Place Fish Market and 314 Pie receive top billing. One click on 314 Pie's enticing photo and you’re whisked to a virtual boutique, where the signature pies sell for $8 a pop.

This isn't your mother's grocery store--it's Amazon Fresh.

Four years ago, Amazon made its foray into the online grocery-delivery market with Fresh, which launched near the company's headquarters in Seattle. Five years later, the service expanded to Los Angeles. Then last week, Amazon announced it was expanding Fresh yet again, this time to San Francisco.

While the service is fantastic for busy professionals with money to spare, it’s a harder sell for small businesses torn between winning shelf space in the online supermarket and ceding 30 percent of retail sales to the e-commerce giant.

Mark Klebeck, co-founder at Top Pot Donuts, was thrilled when Amazon tapped him to sell his old-fashioned pastries on Fresh two years ago. Although his products were already on sale in Whole Foods and other stores in Southern California, he tells Inc., he knew there was something to be said for "having our product on people’s doorstep in areas where we don’t have a presence." 

What especially drew him to the partnership was “seeing zip codes on orders that were a little more remote and far from where we operate," he says. "All our numbers are really solid, but in some of the more remote locations, month after month we saw those numbers going up.”

Even with a grocer's support, that kind of exposure is hard to come by. It also underscores Amazon's importance in a growing market. According to the consulting group Brick Meets Click, 39 percent of online grocery shoppers use Amazon Fresh, more than any other service. More than half said they like shopping online because they can find things that aren't available in stores. 

Tech problems

After four months of working with Fresh, Casey Cooper, the co-founder of 314 Pies, isn’t fully convinced the service has been a boon for his West Seattle business. Beyond the 30 percent cut of sales, he’s found Amazon "expects [his] business to operate as they do," and that fixing technical glitches has been easier said than done. As an example, daily sales on Amazon Fresh potentially can outstrip his inventory. One particularly grating snafu occurred when the systems he was using to track inventory failed to sync with Amazon’s software.

"They said, 'We’re having this problem and have to take your site down,'" he recalls. "Then we were instantly offline and had all these orders to go that were just wasted. They’ll make split-second decisions that affect your sales."

Bill Bishop, chief architect at Brick Meets Click says this is the main challenge smaller retailers face. "It does take a discipline and familiarity with their systems," he explains, "and if mistakes are made or there’s a discrepancy, it can be quite an intense effort to correct the error."

Then, of course, there’s the issue of setting prices, adds Tom Furphy, a former Amazon executive who worked on Fresh for four years and now runs Consumer Equity Partners, a venture capital firm in Seattle. If you’re selling a pie for $14.99, you’ve got to build in enough room for Amazon to take its revenue share while keeping customers happy. "As long as you have enough margin room, it can be great,” he says. And if you view the trucks as free distribution, "that cut may not seem so bad." 

Speaking of Amazon’s efficient logistics, Cooper admits the company has been fairly accommodating when it comes to delivering his company's pies, which are best kept refrigerated until they’re served warm. "With Amazon, they’ll say, 'Here’s what we have and we’re fine with sending this kind of truck with ice packs or whatever you need.'"

Like Klebeck, Cooper knows his company’s presence has only increased since working with Amazon and he would have been remiss not to join Fresh. "It’s not like you’re competing for shelf space at a grocer, where some other company has to fold before you can get in," he says. "On Fresh, it takes awhile to get everything set up, but for them there’s no limit to how many stores they can add."

There is a limit, however, to how much a Web-based company can interact with its offline customers. "The upside is that your business is exposed, lots of folks can see it, and hopefully they'll get excited enough to visit you,” says Furphy. "But it keeps you from creating a direct relationship," and leaves you vulnerable if Amazon directs those customers to competing vendors.

Keith Anderson, the vice president of research firm RetailNet Group, says he doesn't see Amazon Fresh having a negative impact on small businesses. "Food is still such a narrow swath of the market and those who buy, buy from a local bricks-and-mortar," he says. Sure, Amazon is bent on building out demand by "piggybacking on local players that people already know and trust," but the retail giant isn’t out to "displace those folks" as it did with many independent bookstores.

Last updated: Dec 17, 2013

JILL KRASNY | Staff Writer

Jill Krasny is a staff writer for Inc. magazine, where she covers the intersection of entertainment and startups. Prior to Inc., she was a writer for MTV and Esquire and an editor at TheStreet. She is a graduate of the University of Southern California with a degree in communication. She lives in New York City.




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