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Commentary

Amazon’s Newest Venture Is Likely to Be a Bust

Aug 21, 2017

As Amazon (amzn) grows further into the grocery space, through both AmazonFresh Pickup and the recent acquisition of Whole Foods, it continues to raise the stakes when it comes to super-fast delivery times. It’s latest foray into grocery and delivery, “Instant Pickup,” will allow shoppers to buy certain items online, like snacks and drinks, and pick them up within 2 minutes at nearby lockers. While it’s only launching at five college campuses for now, Instant Pickup puts Amazon in direct competition with convenience stores, drugstores, and on-campus vending machines. But if Instant Pickup’s prices are comparable to Amazon.com or even 7-Eleven, the service may struggle to find traction.

Benefits to Amazon

There are two primary reasons that the Instant Pickup model is worth testing: One is to increase top-line revenue, and the other is to reduce net shipping costs.

Increased share of wallet

Recent data from ComScore.com suggests that less than 20% of household discretionary retail dollars are spent on digital commerce. If Amazon plans to continue to grow, it needs to capture more of that discretionary share-of-wallet.

Historically, consumers have been hesitant to make purchases with their digital devices, and until 2016, most e-commerce transactions occurred via desktop. Last year was a tipping point for mobile, and one could argue that the Gen Z audience has been primed (no pun intended) for Instant Pickup. If any company can crack the code on how to encourage the collegiate consumer to purchase their snacks, toothpaste, and phone chargers via their mobile device, surely it’s Amazon. After all, it was one of the first e-commerce firms to use algorithms to recommend new books to consumers. Amazon has the consumer insight data (click-stream, browsing, and purchase history) to understand the wants and needs of this key demographic. Amazon’s online shopping behavior information, combined with mobile location services/GPS coordinate data creates a fairly complete consumer activity profile. Amazon knows exactly when the consumer is thinking of a product and where they are when they are searching for it on their mobile device.

Reduced shipping costs

It’s no secret that Amazon’s outbound shipping costs are significantly out-pacing its shipping revenue (see Statista graphic), and the company has successfully positioned its Amazon Prime subscription service, with its free and fast shipping, as table-stakes. Recent ComScore data shows that consumers now expect free and overnight shipping from the majority of major online retailers.

The ability to centralize the shipping of specific, high-volume items to a Pickup location would cut down on a portion of Amazon’s shipping expense, but it would take a large shift in consumer behavior before that savings would be obvious to the bottom line based on year-over-year net shipping revenue trends.

Benefits to consumers

The value proposition Instant Pickup offers to the customer may be both convenience and price, but this positioning lacks uniqueness. Perhaps the novelty of having shopping items waiting in a locker will drive some shoppers to take it for a test drive, but are consumers willing to walk even a block or two for a product they could likely purchase in their dorm room vending machines or from the store in the student union? Amazon Prime and Prime Now already promise delivery within days or hours, respectively. Instant Pickup will need to be differentiated to compete in the convenience space.

Trusted brand

Consumers certainly trust the Amazon brand and feel safe shopping on its e-commerce platforms. Because of this, the company is uniquely positioned to win over first-time mobile shoppers.

Price

One way that Amazon could incentivize its consumers to choose Pickup over the nearest drugstore or convenience store is by offering an extremely competitive price. While this strategy may drive traffic, it will most certainly be a loss leader for the company, for any gains the firm may make in shipping will be lost due to the lack of profit on low-margin convenience items.

For example, if Amazon applies a blanket 10% to 25% discount to all Pickup items, is that savings going to be enough to convince a consumer to purchase a bottle of Coca-Cola (ko) from a Pickup site vs. paying a few cents premium and wandering down the hall of a dorm or apartment building?

Rewards

Perhaps a better way to win consumers over to Instant Pickup is to offer some form of rewards program that incentivizes frequent users (a program outside of or in addition to the Amazon Prime Rewards Visa Signature Card). Rewards could be offered in the form of dollars off any Amazon.com purchase, or could take more of a form of a buy-one-get-one offer and only be available through Instant Pickup.

The e-commerce giant may be a bit of a victim of its own success—Prime and Prime Now have a clear unique value proposition that is difficult to beat, even with a two-minute service option. Unless Amazon is able to persuade consumers that they getting a better value or unique service with Instant Pickup, this distribution model won’t give Amazon the growth its looking for.

Heidi Mannetter is an assistant professor of practice in marketing in the College of Business and Public Administration at Drake University.

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