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Grocery Delivery Orders Double as Amazon Sales Soar in Q4

Free delivery for Prime members contributed to the increase
Photograph courtesy of Amazon

Amazon’s move to strike the additional fees associated with grocery delivery for paid Prime members helped to double the number of grocery orders it fulfilled and contributed to overall revenue growth that crushed expectations during its fiscal fourth quarter.

The Seattle-based e-commerce giant said net sales for the period ending Dec. 31 increased 21% to $87.4 billion, beating consensus analyst estimates by $1.3 billion. In North America, sales totaled $53.7 billion, nearly $1 billion more than analysts had expected.

In a conference call reviewing results, Amazon Chief Financial Officer Brian Olsavsky said online sales were sparked by the company’s move last year to introduce one-day delivery for most Prime members. A separate move enacted late last year to eliminate the $14.99 monthly fee on top of its Prime membership for customers to receive grocery delivery sparked the surge in grocery during the quarter. Olsavsky was careful to describe the grocery initiative as a test, even if it was becoming clear already what Prime shoppers made of it.

“We believe customers are starting to notice and take advantage of this,” Olsavsky said. “We wanted to … see where people’s tastes and preferences will take them … whether they go to the store, the Whole Foods Market store, whether they use Prime Now or Amazon delivery for their groceries. Right now, we’re really just testing and reacting to the customer demand and the customer's preferences, and we'll do so for the foreseeable future.

The delivery option appears to be wearing away slightly at Amazon’s sales in physical stores. That division, which consists primarily of Amazon-owned Whole Foods Market stores, saw its sales dip by 1% during the fourth quarter when adjusted for currency. Amazon does not count online orders fulfilled through Whole Foods stores in the physical stores figures. They totaled $4.36 billion in the quarter, vs. $4.4 billion a year ago.

Since last October, Amazon has been rolling out the free delivery option to Prime members in 2,000 U.S. cities. Before then, Amazon tacked on the $14.99 fee for Prime members who, in most cases, are charged $119 annually or $12.99 per month for membership. Deliveries come from local Whole Foods stores or from Amazon Fresh facilities and are available in as little as two hours.

Scott Mushkin, an analyst with R5 Capital, said in a note to clients that Amazon’s surging sales momentum was helping to overcome effects of the high costs associated with its aggressive moves in delivery. “Looking out, we believe Amazon is entering a period of unprecedented profitability, which is leading to significant free cash flow generation,” he said.

And as the company turns more attention to grocery and consumables, “this puts many companies that operate in that industry in peril,” Mushkin said. “We strongly suggest investors avoid the traditional supermarket space.”

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