Amazon Courts Food Shoppers

Right before the cooking-heavy months of November and December, Amazon rolled out a monthly payment option for its grocery delivery service, AmazonFresh. On Monday it expanded to several new cities including Chicago and Dallas.

Amazon — which has been working on expanding grocery delivery since 2007 — is taking aim at the $650 billion grocery industry. It's a highly competitive arena filled with rivals like Walmart and Instacart trying to lure customers away from traditional grocery stores. Some reports suggest that Amazon plans to open grocery stores of its own, but the company has declined to comment.

"Grocery is a massive market opportunity for them," said R.W. Baird analyst Colin Sebastian. It's a notoriously tough business with low margins, since it's expensive to store and transport produce. But Amazon has spent years ironing out the kinks with its delivery service, he said.

Amazon near-decade of experimentation "gives them the scale and expertise that comes with time, allowing them not only to fine tune the service, but also perhaps accelerate the rollout into other areas," Sebastian said.

HUMBLE BEGINNINGS

Amazon started its grocery delivery business around its home town of Seattle, and has since expanded to about 18 cities and regions, including London and New York. It has changed its pricing structure, too, having started with an annual $299 fee that included Prime membership. Its monthly pricing program — $15 a month for members of its $99-a-year Prime loyalty program — started earlier this month.

Amazon doesn't disclose whether or not grocery delivery is profitable, but analysts say it's probably not. Rather, it's a way to drive revenue growth and hook users into the idea that they can buy every product from Amazon.

"They have a user base with Prime that is inclined to use Amazon, and they're clearly leveraging that loyal membership base," Sebastian said. Amazon's monthly pricing model could indicate the business has become less of a money loser.

"I think they've gotten to the point they can be more flexible," Sebastian said. "It's an expensive business to run and that flexibility in pricing shows they've gained some efficiencies."

EVER-EXPANDING PRIME

Amazon has been continuously adding services to its Prime loyalty program, which offers free two-day shipping on many items and boasts an estimated 65 million members (Amazon does not disclose the figure). It also includes streaming music and video, photo storage and other perks. Adding services like grocery delivery and original video programming costs money, but Amazon founder and CEO Jeff Bezos says it's worth it because Prime members spend more at Amazon.

"If you become a Prime member you buy more from us," he said at a luncheon in New York on Thursday. And people that watch Prime Instant Video, for example, are more likely to convert from free trials to paid Prime membership, and are more likely to renew their Prime membership in subsequent years, he said.

"That's what closes the loop from the business angle," he said.

After posting little-to-no profit for years each quarter as it invested in its business, Amazon has begun to balance spending with revenue more prudently and has reported a profit in each of the past five quarters. On Thursday, Amazon said net income tripled to $252 million, or 52 cents per share, from $79 million, or 17 cents per share, in the prior-year quarter. That missed analyst expectations of 85 cents per share, according to Zacks Investment Research.

Revenue jumped 29 percent to $32.71 billion in the period, which topped Street forecasts. Twelve analysts surveyed by Zacks expected $32.57 billion.

For the current quarter ending in December, Amazon said it expects revenue in the range of $42 billion to $45.5 billion. Analysts surveyed by Zacks had expected revenue of $44.7 billion.

The third quarter is a seasonally light one compared to the bustling holiday quarter coming up.