Amazon’s goal to own the online grocery space through quick deliveries and an easy-to-use mobile application and site could give it a significant leg-up, but the company faces a number of challenges that underscore the difficulties that online companies face in real-world retail.

For the time being, Amazon’s ambitions in the online grocery space with AmazonFresh is limited to three markets – Los Angeles, San Francisco and Seattle. The uptick in these markets has been fairly slow, but given Amazon’s aggressive attempts to own the markets in all of its other initiatives, it is possible that the company may hone in on mobile to help expand its offline grocer business.

“There’s a reason why it’s taken more than five years for AmazonFresh to roll out of the Seattle test market — it’s a complicated business if you’re warehousing fresh and perishable goods,” said Rebecca Roose, senior product marketing manager at MyWebGrocer, Winooski, VT.

“Currently AmazonFresh doesn’t have the nationwide reach for online grocery delivery,” she said. “They’re very aggressive, and retailers understand that their competitor is not the store down the street, it’s Walmart and Amazon who are eating into their share.”

Relying on mobile?
According to a report from IBISWorld at the end of 2013, Amazon’s estimated market share of the online grocery space is less than one percent due to the company’s small footprint in the test markets.

This is significantly smaller than PeaPod or Fresh Direct’s market share. IBISWorld estimates that PeaPod controls 8.7 percent of the market, followed by Fresh Direct with 5.8 percent.

The remaining 85 percent of market share comes from a combination of other retailers in the space, showing how fragmented the online grocery space is. This includes some of the independent online grocer services that brands are testing, including Safeway’s Groceryworks, which controls 3.2 percent of market share.

Walmart is also aiming to make a bigger splash in the online grocery space with a service where consumers can buy snacks, drinks, condiments and other items. Similar to Amazon, Walmart’s market share is also less than one percent, per IBISWorld.

Despite Amazon’s small current impact, IBISWorld’s report outlines a few key factors that will be critical in the success of an online grocer, many of which the ecommerce giant is known for.

One is the ability to quickly adopt technology, which is the foundation of Amazon’s business.

Other factors include a loyal customer base and a user-friendly Web site.

In particular, mobile could substantially help Amazon here. The company’s mobile site and app continually perform well in terms of customer satisfaction (see story).

This is important since the number of online sales for everyday items, such as groceries, made via mobile devices continues to grow.

At the same time, there are several disadvantages that Amazon has, including the ability to control stock on hand.

Expanding into new markets was also an area cited for success by IBISWorld, and Amazon’s sluggish start with online and mobile grocery ordering in the test markets suggests that the company may not have the distribution and operational chops to expand nationally.

All of Amazon’s test markets are in densely-populated and urban areas, and it is still a bit unclear how this type of business model would work in more remote areas of the country.

At the same time though, Amazon also has a sizable group of consumers who already rely and trust the company’s ecommerce services, which could help the program scale.

Additionally, Amazon is honing in on a lucrative high-spend demographic of consumers, according to Lisa Byfield-Green, online and digital specialist at IGD, Watford, Hertfordshire.

To use the online grocery service, consumers must first sign-up for a $299 AmazonFresh Prime subscription.

“This business model indicates that Amazon is targeting affluent customers and their families,” Ms. Byfield-Green said.

“The convenience that Amazon offers customers that sign up for the service is unparalleled, with early morning doorstep and same-day deliveries, third-party and non-food items delivered alongside groceries,” she said.

“This will be attractive to busy customers seeking convenience, however there still remains a bigger opportunity for mainstream retailers, who are primarily targeting the mid-market and price-focused consumer.”

Untapped in-store opportunity?
At the same time that mobile is facilitating some of the growth in the online grocery space, there is still a big, relatively untapped opportunity for grocers to improve the in-store experience.

Some of the marketers pushing the online grocery space could likely learn from how grocers are approaching the in-store experience to improve mobile and Web ordering.

Similar to the online grocery space, there are a plethora of branded and third-party in-store apps, all of which offer consumers something different.

Branded apps can make a strong play with the loyalty programs, but few marketers are truly leveraging these kinds of apps with personalized features, per Karen Tanzini, professor of food and marketing at the Haub School of Business at St. Joseph’s University, Philadelphia.

Some of the Midwest grocers that also have gas stations are a step ahead of the curve with loyalty because an in-app action can directly translate to value.

Third-party mobile apps also have an opportunity to feed in content to a retailer and keep consumers coming back to a mobile app.

“Mobile is actually more helpful in enabling in-store shopping,” Ms. Tanzini said.

“I think what mobile does is actually help make your in-store experience more productive,” she said. “It also brings the capacity for shopping online as well, but I see it that at this stage in the game, it’s more of an enabler for in-store and to make that more efficient.”