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What's to become of Amazon Fresh?

Online giant is pulling its grocery delivery service out of certain U.S.

Amazon is pulling back its plans for grocery delivery in neighborhoods across at least nine states, two months after plunging deeply into the grocery market with its acquisition of Whole Foods Market, Recode has reported.

The Seattle-based e-commerce giant reportedly notified customers in certain areas via email that it would shutter its Amazon Fresh service – which, as a $14.99-per-month Prime add-on, offers same- or next-day delivery on fresh groceries, household goods and more – in their neighborhoods later this month, the news outlet said. Current states known to be included are California, Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New York, Pennsylvania and Virginia.

However, service will continue in certain areas of large cities such as New York, Los Angeles, Chicago, Philadelphia and Boston. Reportedly, changes aren't related to the Whole Foods purchase, an Amazon representative told Recode.

Analysts at New York-based Gordon Haskett Research Advisors, in the company’s Weekend Warrior newsletter, agreed that while the details behind Amazon’s actions are sparse, it isn’t difficult to view this as another confirmation that the economics behind fresh grocery delivery remain challenging, and that the associated issues are tough to overcome without reaching the proper scale.

"Grocery delivery is a tricky business to be in, and grocers of all types are still experimenting with different fees and models to figure out what will stick with their shoppers," added Dan Farmer, VP of retail solutions for Toronto-based e-commerce solutions provider Unata. "In fact, grocery is the only vertical that Amazon has had to buy into an existing brick-and-mortar brand, which is testament to how complicated it can be. There is potential they aren't seeing the customer traction that they had expected" with Amazon Fresh.

Problems from the start

The problems Amazon Fresh is facing aren't new; they've been around since its founding, according to Bill Bishop, chief architect of Brick Meets Click (BMC), a Barrington, Ill.-based retail consultancy. Amazon began with a concept that wouldn’t work, as it had no cost-effective supply chain in place to execute it.

Though an Amazon representative told Recode the Whole Foods deal wasn't related to the pullback, David Bishop, partner with BMC, believes the opposite is true, as the transaction gives Amazon the assets it lacked to properly execute its Amazon Fresh strategy.

Amazon knew that its Amazon Fresh model was an extremely resource-intensive model to scale and hinged on building consumer adoption. However, it learned that selling fresh food isn't the same as selling packaged goods. BMC’s research, according to David Bishop, highlights how a household decides where to spend the bulk of its grocery dollars is quite different from determining where to purchase one or two specific packaged goods.

Read: Amazon is buying Whole Foods in $13.7B deal

Meanwhile, Bill Bishop said the industry shouldn't necessarily expect Amazon to abandon fresh – its purchase of Whole Foods is a huge indicator that it doesn't plan to do so.

“Amazon’s trajectory in fresh will start looking very conventional but evolve, if they’re successful, into something much more transformational; i.e. the basis for an entirely new food distribution system that goes directly to the home,” he said.

Read: Whole Foods deal gives Amazon even more access to consumers

Farmer agreed that Amazon Fresh was just one piece of Amazon's overarching grocery strategy, along with Whole Foods, Amazon Go and Prime Now. And as the company continues to develop its strategy, it's going to iterate based on market performance.

"The end goal is to provide the most convenience and choice at the best possible price," he said. "Amazon Fresh might still be part of that goal, but to what capacity, we'll have to wait and see."

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