Amazon starts free, 2-hour Whole Foods deliveries in fresh test of grocery model

Elizabeth Weise | USA TODAY

Show Caption Hide Caption Amazon Prime members can now get Whole Foods deliveries It's the same free two-hour delivery window.

SAN FRANCISCO – Amazon has introduced free, two-hour delivery from Whole Foods stores to its Prime members in four cities, offering a taste of how the e-commerce giant could upend the traditional grocery business now that it owns a national chain.

Customers of the $99-a-year Amazon Prime delivery service in neighborhoods of Austin, Cincinnati, Dallas and Virginia Beach on Thursday can now order fresh produce, meat, seafood, flowers and other items that their local Whole Foods stores stock, said Stephenie Landry, vice president of Prime Now, Amazon Fresh and Amazon Restaurants.

The service will be available only during the hours the Whole Foods stores are open, generally 8 a.m. to 10 p.m. Prime members in the four cities can go to their accounts on the Amazon website or via its Prime Now app, which features two-hour delivery items, and type in their ZIP code.

The announcement is the latest in Amazon's integration of the Whole Foods Market chain of high-end organic supermarkets, which it agreed to buy in June for $13.7 billion.

The Whole Foods purchase instantly made it the fifth-largest grocery retailer in the country, according to analysts at Cowen. Walmart is No. 1, followed by Kroger, Costco and Albertsons.

The deal sent tremors through the grocery business as analysts predicted Amazon's weight with suppliers could force down already thin grocery margins and accelerate a move to near-instant ordering and delivery.

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Less than a year later, Amazon is just starting to give customers and competitors a taste of what it may do. The opportunity is enormous: to make the same waves it made in books and electronics, it would have to persuade millions of customers to start ordering their groceries online.

While Americans don't necessarily shop at Amazon every week, they buy food every few days. Getting those customers to link Amazon and groceries could further tie it into the nation's shopping habits and give it a bigger chunk of the more than $600 billion U.S. grocery market.

Today, the two biggest choke points for consumers when it comes to buying groceries online are cost and scheduling.

A full 40% say they'd buy more groceries online if they were less expensive and 23% said they'd do it if it were more convenient, according to a Walker Sands survey.

Being able to order groceries and have them delivered within two hours would go a long way toward dealing with the convenience factor.

As for cost, Amazon has already lowered prices on some items at the 457 Whole Foods stores in the United States.

Whole Food's 365 Everyday Value brand items are now the No. 2 best-selling private label brand on Amazon, according to e-commerce analysis firm One Click Retail. It estimates as of January, Amazon had 18% of online grocery sales in the United States.

For Amazon, the four-city tryout is a great way to see how many of its customers will engage with the new service and offer a reality check on how difficult it is to manage, said Sucharita Kodali, a senior retail analyst with Forrester.

The initially-small foray into same-day delivery is just the beginning of what Moody's lead retail analyst Charlie O'Shea calls "unlocking" of the real value of the Whole Foods acquisition.

“We expect the entire Whole Foods network to ramp up for delivery in due course, as well," he said.

One question is whether Prime Now will make available for online purchase and delivery the complete inventory of the local Whole Foods or only a select subset.

“The Whole Foods in-store inventory isn’t currently online, so this would be a meaningful infrastructure enhancement, that likely signals Amazon has bigger plans,” said Jason Goldberg, senior vice president of retail and commerce at digital marketing company SapientRazorfish.

Landry confirmed that for now, "We might not have every last item that could be available in your local store, but we’re going to have the vast majority of them.”

It's unclear whether this will exacerbate the troubles Whole Foods stores have had recently with empty shelves, a problem related to an inventory management system introduced before the Amazon purchase.

This Whole Foods delivery test is not on the scale of typical Amazon deliveries. Regular Amazon orders are filled by Amazon employees at enormous, purpose-built Amazon fulfillment centers. In contrast, Whole Foods orders will be filled by pickers who will actually go down the aisles of nearby Whole Food stores.

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“They will pick the items, put them in appropriate packaging to maintain the chill chain and pack them,” said Landry.

Those pickers will not necessarily be Whole Foods staffers. “We will use a variety of methods,” was all Landry would say.

Picking from the store can be "challenging," and not to Amazon's usual designed-down-to-the-movement standards, "but most grocers are doing that for click and collect anyway, so it’s becoming more industry standard," said Kodali.

Once packed, the orders will then be handed off to Amazon Flex delivery drivers. These are Uber-like contract drivers who sign on for individual Amazon delivery shifts using their own cars but Amazon’s routing app. They deliver items for Amazon, Prime Now, grocery delivery service AmazonFresh, Amazon Restaurants and now Whole Foods.

Amazon plans to offer the service more broadly in the future. “We’re going to have a huge expansion ahead,” said Landry.