Amazon.com is making its Los Angeles customers a value proposition
unlike any other they've ever seen from the e-commerce giant.
As of Monday, AmazonPrime customers in several L.A. ZIP codes can receive a free, 90-day trial of same-day and early-morning delivery on 500,000 items, including fresh foods, toys and electronics.
After 90 days, customers will be encouraged to upgrade from a regular $79-a-year Prime membership to a new tier called Prime Fresh.
The price to belong: a whopping $299 a year.
Industry analysts say they're unaware of another subscription-based shopping service with such a steep annual fee, leading some to believe Amazon is limiting membership on purpose to work through the logistical challenges of delivering groceries in L.A.'s infamous traffic gridlock.
"Amazon just wants to make sure everything goes smoothly before opening it up to the public," said Nikoleta Panteva, senior retail analyst at IBISWorld. "Within the next two or three years, we may see a reduction in that fee, and maybe within five years they'll eliminate the fee altogether."
Amazon is expanding its Fresh grocery delivery service beyond Seattle after nearly six years of local testing. To pave the way, it opened a distribution center in San Bernardino, east of Los Angeles, last October.
L.A. 's Fresh differs from the Seattle version in several key ways. Customers who pay the $299 annual fee receive free same-day or early-morning delivery on their grocery purchases above $35. Orders placed before 10 a.m. arrive by dinner, and orders placed before 10 p.m. arrive by breakfast, according to Amazon. (Orders under $35 carry a $7.99 delivery charge.)
L.A. Fresh customers also receive other Prime benefits, including free video streaming, e-books on loan and two-day delivery on regular Amazon orders. By contrast, Seattle Fresh customers pay no membership fee and get free, overnight delivery on grocery orders above $100. Those who do most of their grocery shopping through Fresh can earn "Big Radish" status, entitling them to free, overnight delivery on orders of at least $50.
An Amazon spokeswoman suggested Monday that Fresh remains very much in test mode and would not say which L.A. neighborhoods are part of the trial.
"We know customers value this service, but the economics remain challenging," she said in a statement. "We will continue experimenting and innovating on behalf of our customers to find a model that works."
Analysts believe Seattle-based Amazon will expand Fresh later this year to San Francisco, where it has a new warehouse nearby, followed by a dozen or so additional U.S. markets in 2014.
The grocery industry's razor-thin profit margins and fierce competition long have made the added expense of home delivery a tough business proposition. Wal-Mart said last week it has no immediate plans to expand online grocery delivery beyond a test in California because it's not convinced there's sufficient demand, Reuters reported.
IBISWorld estimates the Internet accounts for only 1.3 percent of U.S. grocery sales.
"Fundamentally, the challenges of grocery delivery still are out there, and I don't think there's anything Amazon has done to resolve it," said Sucharita Mulpuru, an e-commerce analyst at Forrester Research.
Analysts say Fresh likely will appeal to busy, affluent professionals and families with young children -- people willing and able to pay a premium for the convenience of grocery delivery.
But Fiona Dias, chief strategy officer at members-only shopping service ShopRunner, said Fresh is "asking a lot" with its $299 annual fee. She said Fresh's offering, at 500,000 items, is small by Amazon standards.
"It seems like the value proposition is a bit off," she said, noting that a recent analyst estimate put Amazon's full offering in the tens of millions. "I wouldn't be surprised if they find another way to price this."
Others suggest customers who pay the $299 fee will up their spending on Amazon to recoup that cost.
"That's basically like saying, 'I'm in, and I'm going to buy my groceries with you all year long to monetize it,'" said Ben Burke, director of the retail and consumer products practice at PointB, a Seattle-based consulting firm. "Maybe it creates a commitment Amazon wasn't seeing in Seattle."
Amy Martinez: 206-464-2923 or firstname.lastname@example.org. On Twitter: @amyemartinez
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