In what one analyst called “the shot heard 'round the warehouse,' ” Amazon announced the rollout of same-day grocery delivery in over 1,000 cities, with plans to more than double that number to 2,300 by the end of the year.
That expansion is made possible through a behind-the-scenes investment Seattle-based Amazon has made in recent months to upgrade its stock of same-day delivery warehouses throughout the nation.
In an example of how it is tapping existing infrastructure to support same-day grocery deliveries to more customers, Amazon obtained a permit last month for a $12 million project to build a refrigerated area at its same-day delivery center under construction in Jacksonville, Florida, according to city records.
"We have retrofitted several same-day sites and plan to retrofit more over time," an Amazon spokesperson told CoStar News. "We also utilize larger fulfillment centers that were designed from the ground up to house perishable groceries."
The recent upgrade of its supply chain infrastructure allows Amazon to grab a larger share of the estimated $1.5 trillion spent annually by shoppers at physical grocery stores and other locations, according to a report by Morgan Stanley analysts.
The initiative builds on online ordering options that Amazon already offers through its Whole Foods Market and Amazon Fresh chains.
“We’re continuously innovating to make grocery shopping simpler, faster and more affordable for our customers,” Doug Herrington, CEO of Worldwide Amazon Stores, said in a statement.
Amazon shipped more than 9 billion orders for same-day or next-day delivery worldwide in 2024 after aggressively expanding its same-day delivery service. The company delivered 30% more same-day or next-day items in the U.S. in the second quarter compared with the same period last year, executives said during a recent earnings call. In June, Amazon announced plans to expand same-day and next-day delivery service to reach 4,000 smaller cities, towns and rural communities by year's end, well beyond the 2,300 cities it plans to offer same-day grocery delivery by the end of the year.
Delivery advantage
Amazon is using its existing fulfillment network, which includes 55 dedicated same-day delivery sites as well as other fulfillment facilities, to facilitate grocery deliveries in more than 140 metropolitan areas across the country, an Amazon spokesperson said.
The company is also adding refrigerated storage space to some of its existing warehouses and facilities under construction to store perishables that are delivered in recyclable insulated bags.
This grocery push ties into Amazon's efforts to position distribution sites within a 20-minute delivery drive of 70% of the nation’s population, according to a report by consulting firm Tomorrow Retail.
The tech giant saw productivity gains across its transportation network in the second quarter, driven in part by better inventory placement. By bringing the right products closer to customers, Amazon can make them less costly and quicker to deliver, which in turn boosts sales, executives said.
The moves helped drive record sales and new memberships at Amazon’s biggest-ever Prime Day promotion in July, Amazon executives said.
The company's retooled logistics network for home delivery gives it a major advantage in perishable grocery delivery, said Neil Saunders, a retail analyst for GlobalData.
"These products are typically low margin, and profit can quickly be eroded by the expense of last-mile logistics," Saunders told CoStar News in an email. "Amazon is essentially piggybacking on a network that already exists and where routes already have density and profitability because of non-food products."
While Amazon will incur some expense in adding cold storage and other alterations for perishables, Saunders said the company "has a much better chance at getting this to work than most traditional grocers or some of the dedicated delivery firms."
'Safety play'
Amazon entered the grocery sector in 2017 with the $13.7 billion acquisition of Whole Foods Market. Starting in 2020, the company opened dozens of Amazon Fresh supermarkets before announcing in early 2023 that it would halt the rollout and shut down some locations.
Amazon started opening airier and brighter versions of the stores last year while continuing to expand the number of its Whole Foods locations.
The latest grocery announcement shows that Amazon is trying to be more efficient with its existing warehouse space while tapping into recession-resilient retail segments such as groceries, said Juan Arias, CoStar’s national director of U.S. industrial analytics.
“I see this as less of an expansion play and more of a safety play by Amazon,” Arias said. “Consumer demand, import activity and third-party logistics leasing trends all indicate that we will continue to see a soft patch in logistics space demand through the first half of next year.”
Cold storage boom
Amazon's entry into perishable groceries gives the company a chance to reposition some surplus warehouse capacity as refrigerated rooms to take advantage of a national shortage of cold-storage space, which is expensive and complicated to develop, said Arias.
“The key indicator here is that they are mainly using existing capacity, and not leasing or building new refrigerated space,” he said.
Food storage is driving demand for refrigerated warehouses, giving the property type some resilience to economic fluctuations. The surge in online grocery sales since the COVID-19 outbreak in 2020 has fueled growth, prompting grocers and restaurants to expand storage capacity for perishables.
Arias noted that logistics facilities with refrigerated storage tend to have a lower vacancy rate, especially in major cities. He said there are only 23 million square feet of vacant cold storage space in the nation, with just 4.2 million square feet under construction, pointing to CoStar research.
The move is an important step forward for Amazon in groceries, an area where the company has struggled in the past, Wedbush Securities analyst Dan Ives said in an investor note.
The recent rollout is "the shot heard 'round the warehouse" as the retail giant signals its intention to compete with Instacart and other delivery companies, as well as retailers with large grocery businesses such as Walmart, Ives wrote.
“Along comes Amazon with an existing nationwide network of fulfillment centers and delivery trucks that seems to have finally figured out how to store and fulfill perishables in a way to support same-day efforts,” according to Ives.