Amazon struggles selling groceries online; might open brick-and-mortar stores

"Very wasteful" isn't a phrase usually associated with Amazon.com Inc., which is so cost-conscious it once removed the light bulbs from its cafeteria's vending machines.

But after spending several months analyzing the online retailer's grocery-shipping hubs in 2014, that's exactly how a mechanical engineering student described its approach to selling bananas.

Workers at Amazon Fresh, the company's grocery-delivery business, threw away about a third of the bananas it purchased because the service only sold the fruit in bunches of five, the student concluded. Employees trimmed each bunch down to size and chucked the excess.

The research paper by Vrajesh Modi, who now works for Boston Consulting Group, highlighted other problems: Poorly trained employees often stood around with nothing to do. Moldy strawberries were frequently returned by disappointed customers. Amazon's inspectors believed their corporate bosses didn't care much about the quality of the food.

Such challenges linger for Amazon. Despite several attempts to break into the $800 billion grocery industry and almost a decade in the business, the company has struggled to entice shoppers en masse to buy eggs, steaks and berries online the same way they have flocked to buy books, tablets and toys.

"Online grocery is failing," said Kurt Jetta, chief executive of TABS Analytics, a consumer products research firm. Only 4.5 percent of shoppers made frequent online grocery purchases in 2016, up just slightly from 4.2 percent four years earlier despite big investments from companies such as Amazon, according to the firm's annual surveys.

"There's just not a lot of demand there," he said. "The whole premise is that you're saving people a trip to the store, but people actually like going to the store to buy groceries."

Amazon CEO Jeff Bezos now seems to understand that he can't win the grocery game with websites, warehouses and trucks alone. The world's biggest online retailer sees brick-and-mortar stores playing a key role in a renewed grocery push, documents reviewed by Bloomberg show.

And like it did with Amazon Fresh, the company is launching its newest projects in Seattle, its hometown.

Late last year, Amazon purchased supply-chain software from LLamasoft Inc. — a major departure for a company known for its logistics prowess, and defying an internal mantra of "we don't buy, we build." And it more recently restructured how various grocery teams were managed to narrow their focus and set clear priorities, according to people familiar with the company's business.

These changes come as Amazon breaks from its standard formula of shipping products in boxes out of jam-packed warehouses. Instead, it will invite shoppers inside its own grocery stores to see the tomatoes. Ahead of a national rollout next year, Amazon is testing three brick-and-mortar grocery formats in Seattle — convenience stores called Amazon Go, the drive-in grocery kiosks and a hybrid supermarket that mixes the best of online and in-store shopping. The company may open as many as 2,000 stores, according to internal documents.

The firm has said little about its grocery-store plans, aside from a video about Amazon Go's no-checkout format that has more than 8.7 million views on YouTube. An Amazon spokeswoman declined to comment for this story.

"A bunch of smart people at Amazon have been thinking about re-imagining the next phase of physical retail," said Scott Jacobson, a former Amazon executive who is now a managing director at Madrona Venture Group. "They want more share of the wallet, and habitual, frequent use of Amazon for groceries is the ultimate goal."

For Amazon shoppers interested in buying groceries online, the company's current offerings can be confusing. Amazon Fresh is available in about 20 U.S. cities (though not yet in the Twin Cities) for those paying $14.99 a month. But Amazon Pantry lets shoppers buy crackers, cookies, chips, coffee and other nonperishables for a delivery fee of $5.99 per box. And Amazon's speedy drop-off service, Prime Now, offers items from local grocers in some cities, such as parts of the Twin Cities.

The various initiatives have been a source of increasing internal tension as employees on different projects compete to sell the same things, according to a person familiar with the matter.

One problem saddling Amazon Fresh is the high cost of losses caused by food going bad, an issue it's never faced with books and toys.

The main reason Amazon began delivering groceries through Prime Now was to hand that risk back to the local grocers to lower Amazon's costs.

The company didn't originally anticipate the scope or difficulty of these problems because so few people in its grocery push have experience in the industry.

"Grocery is the most alluring and treacherous category," said Nadia Shouraboura, a former Amazon executive whose company, Hointer, has been working on redefining in-store grocery shopping for the past 18 months.

"It lures inventors and retailers with shopping volume and frequency, and then sinks them with low margin."