Washington based comapny AmazonFresh may soon be expanding.

Will Amazon expand its grocery-delivery business?

The Seattle Times - When it comes to groceries, Ann Lancaster would just as soon order online than browse a local supermarket.

Once a week, the West Seattle, Wash., resident visits the AmazonFresh website to restock her pantry, buying everything from organic celery and chicken strips to paper towels and Keebler crackers. Pickup is as easy as stepping onto her front porch, where groceries arrive overnight in plastic bins.

"I'm not a fan of driving places. And I don't like spending the time to shop," she said. "So this is perfect."

The feeling most likely is mutual. Lancaster, 31, a graphic designer who uses the Internet for everything possible, values convenience over price, making her the perfect online grocery shopper -- if not something of an anomaly.

Internet giant Amazon.com launched the grocery-delivery service in 2007, deploying a fleet of trucks from a refrigerated warehouse in Bellevue, Wash., to doorsteps on nearby Mercer Island. Today, AmazonFresh extends to about 80 Washington ZIP codes, but it remains a local experiment.

A broader rollout of Fresh once seemed unlikely as Amazon's reluctance to charge customers sales taxes prevented it from putting down roots in most parts of the U.S.

That changed in 2011, when Seattle-based Amazon began cutting deals with states to collect sales taxes, paving the way for new distribution centers near major urban hubs, including New York and San Francisco.

While an expanded distribution network could lay the groundwork for Fresh to go national in 2013, it remains to be seen whether its lime-green trucks head elsewhere anytime soon.

Analysts say Amazon has yet to crack the code on how to deliver mass-market groceries at prices that enable it to both compete for customers and turn a profit. What's more, they say, Amazon must convince customers to put aside their misgivings about buying perishable food sight unseen.

"If you order a loaf of French bread online, you don't get to give it that little squeeze before throwing it into your shopping cart," said Melissa Abbott, senior director of culinary insights at the market-research firm Hartman Group in Bellevue, Wash.

Amazon, which declined to make its executives available for an interview, has said little publicly about Fresh. The company's CEO, Jeff Bezos, told shareholders in 2011 that Amazon still was "tinkering" with the business model to make it work.

"It's an expensive service to provide," Bezos said then. "We like the idea of it, but we have a high bar on what we expect in terms of the business economics."

For years, Amazon shipped books and other products nationwide from a distribution network concentrated in a small number of states. That enabled Amazon to offer tax-free sales to a majority of its U.S. customers and hook them on its website.

In contrast, Amazon's grocery-delivery service offers no such tax advantage over local supermarkets. The perishable nature of its core-product offering requires it to have a distribution center and specialized trucks in every market -- a tough proposition given the grocery industry's razor-thin profit margins and fierce competition. 

"It's not like they're pricing things to win market share, which usually is Amazon's M.O.," said Sucharita Mulpuru, an e-commerce analyst at Forrester Research. "The fact that they've been so slow to push it out of Seattle is a testament to how challenging the business model is."

Indeed, some grocery stores, including Safeway, sell groceries online but do not consider it a significant part of their business.

In contrast, Costco Wholesale, which has a fast-growing e-commerce business, ruled out home delivery of fresh foods as too expensive.

"We've looked at home delivery, and we don't think it works. Not with the slim margins we have," said Costco Senior Vice President Joel Benoliel.

Web grocers long have struggled to build a profitable business model. Dot-com pioneer HomeGrocer of Kirkland, Wash., grew to 2,400 employees at 10 U.S. warehouses before it was sold to Webvan for $1.2 billion in 2000.

Webvan later went bankrupt, and Amazon took over the domain name to sell nonperishable food items. Doug Herrington, who worked at Webvan from 1998 to 2001, now is Amazon's vice president of consumables.

Former HomeGrocer CEO Terry Drayton said Amazon approached him in 2006 to lead Fresh, but he turned down the job after a lengthy negotiation.

"I saw them heading into a Webvan-type offering and knew that was a recipe for failure," he said. "Webvan and Fresh viewed themselves as delivery services that happened to sell groceries, not as grocers that happened to be online, like HomeGrocer."

By far, the grocery market represents one of the biggest opportunities in online retail. Research firm IBISWorld estimates that the Internet accounts for only about 2 percent of packaged food sales to U.S. consumers each year.

The firm predicts that over the next five years, online grocery sales will grow at an annual rate of 9.5 percent to $9 billion as more Americans return to work and use mobile Internet connections to shop while on the go. That compares with an anemic growth rate of 1.2 percent during the economic downturn of the past five years.

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