Why Amazon Shuttered Amazon Restaurants, and What to Expect Next

Amazon is shutting down its restaurant delivery business unit (Amazon Restaurants) this month. This comes, contradictorily, after Amazon placed a large investment in UK’s Deliveroo. Why did Amazon shutter the service, and does this mean Amazon is out-for-the-delivery count?

Delivery is crazy competitive right now. Uber, the only of the major delivery providers to make public their economics in their S-1, shows how market pressure is decreasing their “take rate”, or cut of each transaction (post coming next week on our analysis). Uber also finds itself on a treadmill of both consumer and driver promotions to build its marketplace and says this behavior might persist longer than expected.

Amazon is willing to take bets but it won’t lose money forever. According to some analyst research, Amazon is nowhere to be found on the below list of delivery provider market share. GrubHub, which once enjoyed the view from the top, is now finding that first-mover advantage means little when the service is commoditized and investors are happy to subsidize competition.

But those are private investors. Amazon is a public company. While they’ll take losses for some increment of time, they won’t take them if the upside doesn’t look that meaningful. Our guess is that Amazon analyzed the business model realities for third party delivery as they stand in 2019 and found the losses strategically untenable. The likely reasons are:

1. Consumers show no loyalty to 3rd party service providers. Whatever service has the cheapest price (ie investor-subsidized marketing) is the one they’ll choose
2. The service does NOT bring “incremental” customers to merchants and is, fundamentally, a sham. Did Amazon prove this with their own data? Possibly
3. The economics of delivery don’t make sense until autonomous vehicles are involved. Consumers have expressed their delivery price limits on the record before (it’s $5 per delivery), and there’s only so much blood to squeeze from profit-poor restaurant: eventually the restaurant will go bankrupt

Amazon has a history of trying and failing (which is a good thing, mind you). Here’s a list of things that Amazon has kiboshed over the years. One that we really should examine, because it has tons of parallels to third party delivery, is Amazon Local, or Amazon’s response to Groupon.

Groupon was another uneconomic SMB rouse catalyzed by the economic downturn in 2008. Our math showed that customers would need to return an astounding 14 times and pay full price in order for that Groupon merchant to make their margins back. Oh, and Groupon kept the customer data so the merchant would never know if the customer visited again.

Groupon had low barriers to entry and, unsurprisingly, a plethora of competitors cropped up. Amazon even invested $175M into Groupon’s largest competitor, LivingSocial, in 2010. As LivingSocial slipped, Amazon built its own Groupon competitor, Amazon Local.

But in 2015, Amazon closed Amazon Local. Why? Well, for the same reason they folded on Amazon Restaurants:

1. No consumer loyalty
2. Loser business proposition for the merchant (though it took merchants > 5 years to figure it out…)
3. Ultimately unsustainable economics

See the parallels yet?

While daily deals and third party delivery are commoditized services they’re still sufficiently hard to execute well. That even a true innovator the size of Amazon stumbled should make POS and payments companies question if they can monopolize the entire stack of SMB solutions (you know who you are).

But don’t count Amazon out just yet. The delivery market will consolidate, especially if autonomous vehicles become a real thing. And Amazon knows how valuable data is – they use it for just about every decision they make. Amazon could still make larger strategic bets in the delivery space, likely using their data as an olive branch to help their delivery partner compete.

Restaurants can let out a sigh of relief for now, but don’t think that cloud kitchens or delivery “partners” won’t eventually cannibalize your businesses. Amazon’s actions have not avoided the the risk of disaster, just kicked the can down the proverbial road.