Amazon.com unveiled a new version of its successful Prime shipping service on Monday as the world's largest Internet retailer tries to attract more-frequent shoppers with groceries and other everyday household products.
Amazon expanded its AmazonFresh online grocery business into parts of Los Angeles on Monday, after testing the service in its hometown of Seattle for more than five years.
Amazon offered a 90-day free trial of AmazonFresh in Los Angeles to consumers who are already members of Prime, which costs $79 a year for free two-day shipping on millions of products.
After the trial ends, customers will be upgraded to a new "Prime Fresh" membership. This costs $299 a year and includes free same-day or overnight delivery of orders over $35 of groceries and more than 500,000 other everyday household items.
Amazon's original Prime service encouraged members to shop more regularly on Amazon.com because they did not incur shipping charges after paying their flat $79 a year fee.
With its new, more expensive "Prime Fresh" subscription, Amazon is betting that this same consumer psychology will get people shopping for groceries and other everyday items even more frequently.
"It's a whole new level of Prime and potentially a new level of customer loyalty to Amazon," said Anne Zybowski, vice president of retail insights at Kantar Retail.
The new Prime tier is part of a big expansion of the AmazonFresh online grocery business. Later in 2013, Amazon plans to launch in the San Francisco Bay Area and, if that goes well, the company may enter 20 other urban areas in 2014, including some outside the United States.
The plans are a threat to Wal-Mart Stores, the world's largest retailer, as well as big grocery chains such as Kroger , Safeway and Whole Foods Market , according to Zybowski.
Wal-Mart has been testing grocery delivery in some parts of the United States and Safeway already offers such a service, she added.
Adding a new $299 Prime Fresh subscription to its online grocery offering may help fuel Amazon's expansion in this huge part of the retail sector, according to analysts.
Members of Amazon's current $79 Prime service spend more than double the amount of money that non-Prime Amazon customers spend, according to a study conducted earlier in 2013 by Morningstar equity analyst R.J. Hottovy.
"The $299 price point is intriguing and could help to not only drive greater shopping frequency and increase the amount spend on Amazon per member, but also shopping across a wider range of Amazon departments," Hottovy said on Monday.
"More important, it will help to make Amazon the starting point for online purchases - more than it already was - and give consumers even less of a reason to shop anywhere else," the analyst added.
Amazon shares rose 1.4 percent to $280.88 in afternoon trading on Monday.
An Amazon spokeswoman declined to comment on AmazonFresh's expansion plans beyond L.A. The new $299 Prime Fresh membership is not being offered to existing AmazonFresh customers in Seattle, she added.
"We've been testing AmazonFresh in Seattle for several years and are excited to try a new approach in Los Angeles," the spokeswoman said. "We know customers value this service but the economics remain challenging. We will continue experimenting and innovating on behalf of our customers to find a model that works."
The online grocery business has a history of low or non-existent profit margins because fresh products can go out-of-date quickly and delivery to people's homes costs so much.
However, Amazon is selling a lot of other everyday, household items in addition to fresh food, such as baby products, shampoo, tools, sports equipment, juicers, toys, games and electronics.
These other products, which will delivered with the food items the same day or overnight, are typically higher margin. That could help Amazon make money on AmazonFresh, Zybowski said.
AmazonFresh also includes deliveries from local food companies, such as delis, fish markets and butcher shops. Amazon charges a commission on sales of food items from these firms and this revenue stream will likely have significantly higher profit margins, Zybowski noted.
© Thomson Reuters 2013