Why Amazon, not Starbucks, could dominate mobile delivery in 2016

By Chantal Tode

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December 4, 2015

Amazon’s restaurant delivery service arrives in Baltimore

Starbucks began testing mobile delivery in Seattle this week, hoping to recreate its mobile payments and ordering successes, but it is likely to be Amazon, which has expanded its restaurant delivery offering to Baltimore, that will dominate mobile delivery news in the future.

Mobile-supported delivery options quickly gained momentum in 2015, with fast food chains, retailers and technology startups all interested in the opportunity to address younger consumers’ desire for instant gratification. However, with the return-on-investment still unclear, it is Amazon’s broader attempt to be a hub for all local deliveries that could win out.

“It is Amazon that is seeking to lead in the local fulfillment business, first by speeding its own delivery times – a process they pioneered and are constantly optimizing – and now by increasingly offering to deliver products same-day or to fulfill a local delivery on behalf of retailer or restaurant,” said Mitch Ratcliffe, senior analyst and digital media strategist at BIA/Kelsey.

“In contrast to Starbucks, which is trying delivery partners, Amazon is seeking to be the hub for all local deliveries of varying urgency,” he said. “They’ll have on-demand drivers, employee delivery people, drones and third-party partners and will seek to continue to optimize entire supply chains to speed delivery and increase customization of customer experience.”

Starbucks’ delivery pilot
Starbucks said this week that it is partnering with the Postmates for a pilot program enabling customers to have the chain’s food or beverages delivered within several areas of Seattle when they use coffee house chain’s iOS app.

Starbucks already sees 5 million transactions per month via its Mobile Order & Pay platform, with delivery seen as a natural extension.

To use the service, customers choose “Delivery” when placing an order on the Starbucks iOS app. The delivery option is built into the Starbucks app, meaning customers can take advantage of the customization options they like and still be able to earn loyalty points and offers through the My Starbucks Rewards program.

Using the Starbucks iOS app, customers can choose “Order” then select “Delivery” and enter a delivery address. Once the order is complete, it is transmitted to Postmates system and a Postmates courier is send to the closest Starbucks location.

Customers can track the progress of the delivery by watching their Postmates courier travel in real-time on a map.

Skipping the line
Postmates couriers will be able to skip the line to pick up delivery orders. Starbucks says most orders will arrive in less than 30 minutes but is giving customers a delivery window of 60 minutes.

Expectations are high for Starbucks’ push into mobile delivery given the success it has had with mobile payments and mobile ordering.

However, as delivery has built-in added costs, it is still not clear how much money there is to be made from the strategy.

“It doesn’t mean anything if none of these efforts are profitable or break even at best,” said Sucharita Mulpuru, vice president and principal analyst at Forrester Research. “These are all experiments around the margin.

“I don’t see how you make delivering a $4 latte profitable unless it’s a very small distance or you charge a $7 delivery fee,” she said. “On demand delivery will be a niche service, but more important for Starbucks is order ahead and texting for when your order is ready.

“Delivery of a low-ticket item is overkill and unnecessary.”

Starbucks is likely to test a number of different partners as it looks to make delivery work so it can meet customers’ demands.

Prime time 
Amazon is quickly scaling up a restaurant delivery service it introduced for Prime customers using the Prime Now app, which already delivers groceries from a number of local retailers in a number of markets.

On the restaurant delivery front, the home delivery service was introduced in Seattle in September, in Portland in October, in Los Angeles in November and now in Baltimore, where 60 restaurants are participating.

Competition in the mobile delivery space is likely to continue to heat up in 2016.

“We expect companies with logistics systems, such as Uber, Amazon, Lyft, Shyp and others to compete to aggregate delivery capacity during 2016,” Mr. Ratcliffe said. “More small companies will emerge with local or specialized focus – and they will likely come from existing delivery and courier businesses that have capacity to sell on marketplaces facilitated by the logistics providers.”

One of the challenges players in this space will face will be giving the courier or delivery service provider enough business. As competition grows, aggregators such as Amazon and others will also need to focus more on keeping these delivery service providers happy lest they face some of the problems that Uber has faced.

“The delivery service provider is a second customer in these transactions, unlike the old dyadic customer relationship the on-demand employee adds a third player to the transaction,” Mr. Ratcliffe said. “We believe that these providers will pick and choose between marketplaces and partners based on several criteria, including how they are treated and compensated, as well as whether the logistics/market aggregator can keep them busy enough to earn a living.”

In such a scenario, Amazon could be a big winner.

“Amazon’s unyielding customer focus has prepared it to engage with local delivery partners with greater care than the first-wave on-demand companies, which treated workers as interchangeable cogs,” Mr. Ratcliffe said. “Amazon is thinking about how to treat everyone who touches its platforms as customers.

“Meanwhile, Uber is only learning to respect its workers after being sued repeatedly,” he said.