Problem statement - Evaluate and let the VP of Ecommerce know if Amazon should get into food delivery.

Let’s structure this article as an interview simulation. To scope out the problem, I’d like to ask a couple of clarifying questions:

Me: First, Are we talking about just food delivery from restaurants or do we also want to include instant grocery delivery as Instacart?

Interviewer: Let’s focus on food delivery for now. Anyways we do sell groceries on our platform. We can decide later if the delivery times need to be shortened for them.

Me: Do we want to explore this globally or in the US?

Interviewer: Let’s focus on the US for now.

Me: Sure. Yeah, so Amazon did launch food delivery as a pilot in Bangalore and recently shut it down. In India, labor is cheap therefore Amazon’s last mile advantage may not have panned fully. Also looking at the macro-economics, Amazon does want to focus on cutting losses.

So, first I want to understand how Food delivery fits into the Amazon flywheel and what our goal is with the initiative. Then I’d like to do a SWOT analysis, understand the competitive and customer landscape and then eventually come up with possible recommendations. After this we can evaluate the best path forward based on the pros and cons of each of the recommendations. Sounds good?

Interviewer: Ya

The food delivery market in the US is about 200B USD and is growing year on year as consumers value more and more convenience. Though this may not be lucrative for Amazon as a business, it is substantial. As we have seen, Amazon provides a lot of ancillary products to convert and retain more users to become and stay Prime members. Providing more perks such as free food delivery in addition to the current benefits may be enticing for users to purchase Prime membership. Food delivery also happens at a much higher frequency than purchases which may be a good strategy to stay top of mind for Amazon. For the reasons above, Amazon may be pondering on the idea above.

Now that we have the “why” answered, let’s understand Amazon's strengths and weaknesses as a company in the context of food delivery as a business.

Amazon has established a robust delivery network both long haul and last mile. It has a massive fulfillment network and it also partners with several delivery providers. Amazon is also known to perform well in low margin businesses probably because of frugality as one of its leadership principles. It has also  emerged as an advertising giant in the last couple of years.

Amazon had to shut down its business in India and this setback goes as a bullet point under the weakness section. Amazon has to deeply understand why food delivery didn’t work in India and why this won’t be the same story elsewhere given they choose to try.

One probable reason is the cheap labor available in developing countries which nullifies one the biggest strengths Amazon has. Amazon also doesn’t have the connections built with the restaurants and it will have to bring the most popular restaurants on the platform for this service to succeed.

Because of the antitrust laws, most M&As are under regulatory scrutiny. The market is also flooded with several competitors and each restaurant needs to manage 3-4 order management systems. Adding one more would definitely surface a lot of resistance from these restaurants.

The opportunity lies in converting non-prime members to prime members and as we all know prime members spend 2x times more than non-prime users. Therefore this could be a foot in the door for users to eventually get a prime membership.

There is quite a bit of synergy between customers who shop on Amazon and the ones who order food online. Both of them are tech savvy and value convenience. There is no dearth of competitors in the market, Doordash (more urban), Uber (more suburban) being the largest.

Me: This is how Amazon as a business is positioned. Is there something else to consider before I dive into the possible paths?

Interviewer: No, let's discuss the next steps.

Following the red ocean strategy, if Amazon has to get into the food delivery business it has to lower delivery prices and go solo or create alliances which in this case is acquiring a competitor or not do this as the ROI may not be good enough. These are the three possible paths.

Let’s discuss the pros and cons of each:

Carefully understanding the pros and cons, I am leaning on with the first option.

• - Food delivery is still a growing market and the competitors are split between urban and suburban areas. Amazon has a huge opportunity especially because it has figured out or is in process of figuring out the last mile aspect of delivery, which it anyways needs for its Prime network
• - Getting discounts or free deliveries on food makes Prime membership to be a deal users can’t refuse
• - As to combat the risks/cons of this approach, restaurants can be offered ingredients at substantial discounts as Amazon already has access to many wholesalers. On top of that Amazon may also be able to provide higher commissions to restaurants as it leverages its own delivery network. If optimized well, it can also improve the efficiency i.e. amount spent for delivering items worth x dollars, of the current network
• - Delivery platforms make money through the following: charging restaurants a commission, customer delivery fees, service fees on the order, in-app advertising, subscriptions if any.  Amazon can also entice restaurants through its sophisticated ad model built over the years
• - Amazon AWS has many machine learning models built in and it can use them to help restaurants build custom menus for each consumer and accurate recommendations translate into opportunistic sales and higher AOV
• - The United States has an advantage especially in smaller cities where there is a common shopping area with multiple restaurants. Stacking could be a great way to optimize efficiency where users can place orders from multiple nearby restaurants e.g. a family that can’t decide on one restaurant. This optimization has to be done keeping in mind the speed of delivery which is the biggest variable in customer satisfaction.

Amazon is the best equipped with respect to data, delivery networks to optimize for all the above and therefore it is worth another shot.