Amazon's best grocery expansion move: Buy FreshDirect

Much of the coverage about AmazonFresh revolves around disruption. Expansion, however, isn't easy. An acquisition of FreshDirect would give Amazon a beachhead and supply chain on the East Coast.

Amazon is reportedly going to ramp its grocery business and expand into San Francisco and Los Angeles. If Amazon wants the other side of the U.S. it should acquire FreshDirect, which has about a decade of experience, distribution, a supply network, information systems and expansion plans of its own.

Reuters reports that AmazonFresh is about to come out from its Seattle-based test market. Amazon has been testing online grocery delivery for about five years.

The rollout plan makes sense and much of the coverage about AmazonFresh revolves around disruption. Expansion, however, isn't easy. You need distribution, which Amazon has, logistics to keep food cold, tight delivery windows that the vendor needs to control, and relationships with local providers and even local farmers if you want to play the better margin organic game.



A good expansion case study would be FreshDirect, a company well known in New York and now expanding in the Philadelphia area. In New York, the FreshDirect trucks are everywhere. Expansion can be tricky because you can't enter a market and screw up. Meanwhile, food is very local. There's a hurdle rate — largely because many people like the experience of food shopping (see Whole Foods) — and you have to prove that quality will be up to snuff along with the convenience. Another hurdle is that food shopping just isn't hated as much as toy shopping. In addition, the competition in groceries is fierce with Wal-Mart using food as a way to upsell.



Given that backdrop, an acquisition of FreshDirect would give Amazon another coast to experiment with. The acquisition would be akin to Amazon's purchase of Zappos. Amazon would get distribution, brainpower and leave the brand largely alone.

Like Zappos, FreshDirect has built up its own systems and Amazon could bring scale and efficiencies. Also worth noting: FreshDirect is looking to hire an executive to improve monitoring systems and replace content management software. Amazon could help that transition dramatically. Back in 2004, I did a case study on FreshDirect, its SAP systems and how it rose up from the ashes of Webvan.

A combined Amazon and FreshDirect could cut out a lot of middlemen in the food business.