Five Reasons Why Prime Now Will Drive Real Profits To Amazon

Prime Now has come to Miami and four other cities in the United States. The company is rolling it out fast (Atlanta just added to Miami, Dallas, New York and Baltimore). I’ve had a chance to use it, and have come to some surprising conclusions.

First some quick background: Prime Now has two levels of offerings, all for existing Amazon Prime members: Free two-hour delivery and $7.99 for one-hour delivery in certain ZIP codes.

(AP Photo/Ted S. Warren)

On the surface, it’s hard to believe that a one- or two-hour personal delivery service would be less expensive than 2-day shipping. In Amazon’s case, however, I think it will be, and will actually be very profitable. This is certainly important for investors, and also sends a real wake-up call to other retailers ranging from warehouse stores to Walmart.

Here are five reasons why.

1)      The Customer Is Footing Part of the Delivery Bill: Amazon expects you to tip the driver. it recommended a $5 tip be included with my orders. I couldn’t go lower, but I could have gone higher if I wanted to. So the onus of delivery costs are not solely sitting with Amazon. UPS drivers are not dependent on tips.

2)      The assortment is much narrower than “regular” Amazon.com AMZN +0.58%. The company touts that “over 25,000 products” are available through Prime Now. That’s a lot less than the almost infinite number of items available via the mother ship.

Right out of the chute, I’m going to say the assortment is a little weird. Every category, excluding Pet Central, leads with the Fitbit Flex. I’m not clear why this is something people need within one hour, but I assume there’s a reason for it. Expect that as the business matures, more items will be added to the assortment and others will be displaced.

3)      The company does not need to package the order in “industrial strength” boxes. Frequent readers will recall that I have asked over and over again how Amazon can possibly ever make a profit while shipping so much air inside so very much corrugated. But the Prime Now order didn’t have that problem. A case of paper towels was properly boxed in its own carton, but everything else I’ve ordered has been placed in a heavy duty brown paper bag — just like you’d get it in a grocery store, stapled closed with a packing list on the outside. I guarantee the cost to deliver that order was less than half a typical Prime order. And the delivery guy got a motivating spiff as well.

4)      Delivery Windows are very predictable. It’s important to note that the two-hour zone isn’t exactly as it sounds…and that’s good for Amazon. If I look at the Prime Now app, it tells me the next two hour window of availability for me. So, for example, I was writing this at 11:32 am Sunday morning, and Prime now was telling me that if I order in the next 13 minutes, I could take delivery between 12 and 2 PM. That also makes it much easier for the distribution center to build a route.

5)      It creates incredible disruption for other retailers. Home delivery in narrower windows is a service that consumers want. In fact, anyone who has ever spent the day waiting for merchandise is desperate for it. Suddenly, Amazon has made it possible, and without a week of planning in advance. The assortment is such that it’s not going to steal the entire market basket from anyone.

But… But thinking about what dollar stores did to Walmart – nipping around the edges of its market basket just enough to keep comparable store sales flat – I could easily see Prime Now doing the same to Pet food chains, grocery stores, and even Costco. I do see this as a disruptor, especially if (when?) they get the assortment right.
These orders will definitely be more profitable than “regular” Prime orders. It’ll show up nicely on Amazon’s P&L. Plus, Amazon has thrown down the gauntlet. Retailers will find themselves racing to keep up. Two-hour delivery. No drones. Free. That’s a story.

Cr  :  Forbes