
The Illusion of a Profitable Amazon Prime Now and Prime Fresh - stratelogical
https://www.stratelogical.com/2018/02/the-illusion-of-a-profitable-amazon-prime-now-prime-fresh/
======
aresant
The author dramatically underestimates the opportunities of scale and future
tech in her model.

Amazon is already:

\- Installing lockers into apartment communities
[https://www.amazon.com/b?ie=UTF8&node=6442600011](https://www.amazon.com/b?ie=UTF8&node=6442600011)
that make deliveries dramatically more efficient.

\- Predictive logistics & ordering patterns are a core Amazon discipline and
they are world class at it.

\- Droning looks like a gimmick today, but why should it be in the future?

Imagine a not-far-out future where: \- Predictive ordering algos keep right
balance of product on hand \- Order comes in, robot loads it from GIANT
physical warehouse that is NOT in a city center \- Order is sorted into a
"locker" or a "single" end point \- Locker end points are put onto a locker-
loading vehicle that runs a daily route that ties into the 2hr timeline. \-
Single points deliveries are brought by automated heavy delivery truck to city
center range from which point they are either droned or courier delivered

\- - -

That future ain't that far off folks.

And in the meantime Amazon, who has their shareholders trained to reinvest
every dollar of profit into their scale, is going to go and corner the multi-
trillion dollar grocery & last mile market.

~~~
macspoofing
>Droning looks like a gimmick today, but why should it be in the future?

It's loud. And dangerous.

~~~
askafriend
I'll be the devil's advocate here: Cars are loud and dangerous - we figured it
out as a society.

~~~
macspoofing
That's a fair point, but have you actually heard a drone? It's __really
__loud. It will be incredibly hard to counteract public pressure.

~~~
askafriend
I actually just bought one last weekend. Haven't flow it yet, so I suppose
I'll find out very soon!

I believe you that they're crazy loud, but I think the technology will improve
and we'll figure out regulation, fly zones, etc.

Of course, this is all predicated on us agreeing as a society that we want
this thing integrated into our communities. This want is unclear and I think
that's the meat of the point you were making which is a fair one.

------
swengw
_If you assume a driver’s wage is at least the Seattle minimum wage of $15 per
hour, add nominal fulfillment and delivery costs of $5 per order (the
contractor’s fuel, car etc.) and nominal sales and marketing and general
administration costs of $5 per order, Amazon needs to fulfill close to eight
minimum order ($35) deliveries per hour to breakeven just on the variable
costs_

 _Across 25 associates, the average number of orders was only 3._

There's a third option for how this service survives: increase adoption so
that:

\- variable SG&A drops from $5 per order

\- stops are closer so delivery costs drop from $5 per order

\- drivers can deliver more orders per hour

~~~
gringoDan
It seems like the person who wrote this analysis assumed unchanging variable
costs, rather than recognizing that they will decrease over time.

1) Where did they get a $5 marginal SG&A number? This seems high to me and no
source is given.

2) There is _no way_ that, at scale, delivery costs are as high as $5/order.

The IRS standard rate for mileage in 2018 is 54.5 cents/mile. (Maybe not the
most accurate metric to use, but a decent rule of thumb.) So this analysis
assumes that, at scale, for the average order a driver travels 9.17 miles.
This routing would be incredibly inefficient - Amazon should "batch"
deliveries so that in a 10-mile "loop" a driver can drop off 3+ orders.

Furthermore, I'm not sure if Amazon drivers are employees or 1099 workers. If
they're independent contractors, the delivery costs are irrelevant to Amazon,
since they're passed through to the drivers.

3) Naturally, drivers utilization rates will increase as demand increases.

------
whoisjuan
He did very little analysis on how the actual Prime subscription price
contributes to the profitability of Prime Now.

You cannot evaluate Prime related services in isolation because the whole
point of Prime is that you get a bundle of services that make your life easier
and allow you to get a bunch of things for a flat subscription rate. Some of
those services could be forever unprofitable, but if you remove them from the
bundle, you could be destroying more value and making the whole program
unprofitable.

The author fails to evaluate at least two key points:

1) Prime is still in its infancy. It's clear that Amazon's goal is to reach a
total share of the market that can only be compared to paying for your phone
bill, except in this case the phone bill is Prime, and Amazon is the only
provider. That changes the whole picture regarding economies of scale and
flywheel effects.

2) The author did his pseudo-experiments (asking Prime Now drivers how many
deliveries they did last hour ) in Seattle (I presume since he mentions he is
a PM at Amazon).

Of course Prime Now it's not going to be profitable in all markets but it's
also not that far from breaking even. The real profitability will come from
highly concentrated markets like NYC and Singapore.

------
jpatokal
I'm rather surprised to see an Amazon PM openly slagging their company's own
product, or at least its profitability. I wouldn't have expected Amazon to
tolerate this sort of thing, and this seems like a career-limiting move pretty
much anywhere.

~~~
gdulli
Given the number of employees and what we know about working at Amazon I'm
sure there's a subset at any given time who are trying to get out and might
fish for a dismissal if it comes with severance. Rather than just quit.

------
rabboRubble
I tell you, this service has been a godsend. Emergency trip to the hospital,
no food at home? Prime Now.

Living alone sick, no food in the home? Prime Now.

Parents feeling poorly and I'm 3 states away? Prime Now.

~~~
daxorid
[edit] Disregard, can't ask an earnest question on HN either.

~~~
CodeCube
Yeah my dude, I'd almost venture to say that _you_ are the outlier here
(echo/bubbles, yay!). For many that I know, food is an on-demand lazy loaded
resource. Sure, sometimes they buy groceries (usually when they run out of
pop-tarts) ... But the odd day when they actually cook dinner, it's a trip to
the store for just those ingredients that are necessary.

Is it horribly wasteful and inefficient? yes. Does that get factored into the
equation? no.

~~~
rndmize
Efficiency aside, that feels like awful planning to me. Growing up in the Bay
Area, the threat of a significant earthquake has been ever-present. My family
always had several dozen bottles of water and a reasonable amount of
canned/jarred/dried food around.

~~~
rabboRubble
Yeah, but do you want that sort of food when you are sick? Plus I don't dig
into my emergency supplies when there are other options available.

~~~
0xfeba
You need to rotate your supplies.

~~~
rabboRubble
I put a note into my calendar with the expiry dates for the rations. I eat the
rations when I have purchased a replacement.

Emergency food is emergency food.

------
pontifk8r
The article estimates certain costs (e.g. $5 paperwork/overhead) without much
factual evidence. Relatively small reductions in those costs could make all
the difference in profit or loss on any particular order.

~~~
otalp
The author is a pm at Amazon

------
nsx147
Amazon Flex will eventually encompass more than just delivering goods.
Delivering people (uber/lyft). Retrieving packages from households and
shipping them, maybe even last mile delivery?

I feel like this article completely misses the point about the Amazon
philosophy. It doesn't matter if Prime Now / Amazon Fresh are profitable. They
aren't supposed to be profitable. They are building out the infrastructure of
Amazon Flex for themselves AT COST and then they will open it up to other
services and uses that will undercut any competitors (rideshare is the first
one that comes to mind)

The focus here should be on Amazon Flex and how/where it is going, because
that service will be the one that turns the actual profit. Just like AWS.

~~~
dnomad
Yes the author is kinda silly. People have been writing these sorts of silly
articles about Amazon for nearly 20 years. Yes, Amazon is wasting investor
capital. No, investors don't care as long as the innovation and growth train
continues.

Still, as an Amazon investor, I do wonder why Amazon has to do everything
themselves. It makes me nervous that they are essentially building or their
own ride sharing network rather than leveraging existing networks.

There's a revolution coming to urban logistics that people like this author
cannot understand. What Uber has demonstrated is that _cities are much more
efficient than anybody previously imagined_. The day is fast approaching when
on demand transport of everything will be cost effective and when that happens
cities will be remade. All that retail space can become storage. Restaurants
lose their tables and become industrial kitchens. Office space becomes highly
fragmented with possibly just core teams of 10-20 people requiring co-
location. Schools fragment; students will go to specialized teachers and
facilities wherever they happen to be rather than betting everything on
monolithic school systems. (Education "regresses" into large scale tutoring.)
Hospitals ironically grow more centralised as technology becomes every more
sophisticated. Tying all of this together will be extremely sophisticated and
dynamic transport networks that can indeed move anything anywhere in the city
in under an hour for very low cost.

This is already happening in China btw. This sort of urban hyper-on-demand
culture has already taken hold. The author will look back on this article on
ten years and regret that they failed to see the revolution.

~~~
shanghaiaway
None of what you listed is happening in China. It also will not be happening
anywhere at any time. Restaurants won't become industrial kitchens because
that is not what restaurants are for.

~~~
rjmunro
Some restaurants are becoming just kitchens:
[https://www.theguardian.com/business/2017/oct/28/deliveroo-d...](https://www.theguardian.com/business/2017/oct/28/deliveroo-
dark-kitchens-pop-up-feeding-the-city-london)

These might take some of the business of physical restaurants - probably not a
large amount, though.

------
mabbo
Someone once joked with me that Amazon Fresh was never intended to be a
profitable business. It existed to scare UPS and FedEx by saying 'hey look, we
can deliver stuff ourselves!'.

I'm not sure how much they were joking.

------
jonknee
If you want a look from the other side of the equation, here's what it's like
to be a contractor delivering for Amazon.

[https://www.geekwire.com/2017/amazon-delivery-driver-like-
wo...](https://www.geekwire.com/2017/amazon-delivery-driver-like-work-tech-
giants-citizen-package-brigade/)

------
Quinner
Am I missing something or does the analysis assume every order is a minimum
order? Personally my orders average around $100.

------
qwerty2020
Have not been to a physical grocery store in over 6 months because of Amazon
Prime Fresh. Would be willing to pay much more than I do now after being
accustomed to saving so much time.

------
dna_polymerase
> It also works like magic for Amazon shareholders, by pulling a Houdini on
> them and making their invested capital disappear.

Nonsense.

------
dahdum
Author is pulling per order estimates out of their hat, and seems to have the
missed the fact that driver tips reduce the wage Amazon pays the driver until
the minimum wage is met.

------
ggg9990
Very poor analysis with both bad assumptions and weak imagination.

------
aj7
You fail to take into account reduced price sensitivity and price
manipulation, for instance Whole Foods prices in my area, Tucson, are 30-50%
higher than Sprout’s or Trader Joe’s, and that nominal sales and marketing and
general administration DOES NOT cost $5 per order, but functions more as a
fixed cost.

------
nickthemagicman
Remember how Wal Mart used to move into small towns with low prices, put the
local shops out of business ,then raise their prices?

Amazon's doing that to the entire world right now.

------
leereeves
Is the Prime Flywheel a term Amazon actually uses?

~~~
kevan
Yep: [https://earlymoves.com/2016/06/01/jeff-bezos-the-flywheel-
me...](https://earlymoves.com/2016/06/01/jeff-bezos-the-flywheel-metaphor-for-
amazon-prime-and-prime-video/)

------
jongotiong
Very good analysis on Amazon

------
jongotiong
Very good analysis of Amazon

------
patrickg_zill
I think that the price to the vendor of FBA was not taken into account.

It does not take much research to figure out what Amazon is charging the
vendors for Prime under FBA. You can look at the rates for Fulfillment by
Amazon online. Remember that Amazon doesn't pay for shipping to their
warehouse.

For instance, an $18,1 kg roll of 3d printer filament shipped via FBA nets
Amazon about $8 by my calculations. Yes it has to be shipped and fulfilled,
which involves taking it off the shelf and adding a shipping label. What are
Amazon's costs for shipping/delivering 1kg small packages? Far less than $8.

