Amazon.com, Inc. (AMZN) likes diversification. The first major online bookseller, Amazon has slowly moved into the general merchandising sector, expanding its holdings to include video production, printing, groceries and hardware development. Amazon’s venture into the restaurant delivery sector – already rife with competition – has left many wondering just how they can make money with a concept that charges nothing for members of their Prime membership service.
Amazon Makes Money From Their Delivery Service Indirectly
With no markup at all, it comes as no surprise that Amazon is making almost nothing on their restaurant delivery service. Amazon does not add a surcharge on "within-an-hour" restaurant deliveries ordered by customers who have signed up for Amazon’s Prime membership service – customers that are probably already costing the company money with free two-hour and overnight delivery windows.
There are two reasons why Amazon is using such an aggressive pricing strategy. First, there’s the Walmart Effect, where a big business enters the market and ends up causing the closure of its smaller competitors. As the field of restaurant delivery grew, Amazon did a test run in Seattle, perfecting its delivery service. Once its delivery infrastructure and ability to do one-hour deliveries matured, Amazon launched the restaurant delivery service in over 20 cities in the U.S. for free, knowing that it would not lose too much money and that its much lower price would be such a competitive advantage for Amazon that smaller rivals would be driven out of business. (For related reading, see: Is Amazon Too Diversified?)
Amazon will do as it did with its fledgling Amazon Fresh service—it will institute a delivery fee. Again, since Amazon already has its infrastructure in place, the delivery fee would be a high margin piece of revenue. (For more, see: Is Amazon Fresh a New Threat to Walmart?)
Prime Numbers Rule the Balance Sheet
Amazon’s restaurant delivery service is only available to shoppers who are members of Amazon Prime. Amazon is obsessed with its Prime number and is working feverishly to increase it year over year by increasing the value of the services the subscription provides. As of October 2018, the cost of a Prime membership was $119 per year, billed monthly. There is a $59 per year option available to students as well.
Amazon Prime members spend more than twice as much each year than non-Prime members according to Consumer Intelligence Research Partners. Amazon Prime members have their preferences stored, their credit card information on file, access to quick delivery, and access to an online library and video collection. Amazon provides many benefits to Prime members, enticing new people to join, and existing members to renew. As of fall 2018, there are over 100 million Prime members in the U.S. alone. The revenue provided from membership fees is in the hundreds of millions, so the cost of providing free delivery service now to corner the market in the future has little negative long-term effect on the company’s balance sheet.
The Bottom Line
Amazon is taking over the restaurant delivery industry the same way it took over the book-selling industry. By partnering with restaurants to ensure quality food delivery and by providing the service for free, Amazon will drive its competitors out of business. With existing infrastructure making the delivery service only marginally more expensive for Amazon, the eventual delivery fee that Amazon will institute will be a high-margin addition to its bottom line. Today, Amazon’s restaurant delivery is in more than 20 U.S. cities but, as with everything that Amazon does, it is expected to expand rapidly.