Sept. 22 (Bloomberg) -- Amazon.com Inc., saying it’s learned from the mistakes of supermarket-delivery failures, is expanding its fresh-grocery business to the entire Seattle metropolitan area in the next three months.

Amazon Fresh, the company’s grocery-delivery division, is keeping costs low by limiting advertising and not expanding into multiple cities at the same time, said Doug Herrington, Amazon.com’s vice president of consumables. That contrasts with Webvan Group Inc., the grocery business that went bankrupt in 2001 after expanding into 10 U.S. cities.

Amazon Fresh, which began as a test project in 2007, is currently limited to 49 Seattle ZIP codes. By growing slowly, it aims to manage distribution costs and cope with the grocery industry’s tight margins -- the downfall of previous competitors. Another online-supermarket service, PublixDirect, closed in 2003 after sales volumes didn’t meet expectations.

“We have a lot of confidence in the long-term economics,” Herrington said in an interview. “For a significant portion of the population, they’re going to find that the convenience, selection and pricing of online grocery shopping is going to be really compelling.”

Amazon.com, already the largest online retailer, is expanding its range of products in a bid to become a general merchandiser. The Seattle-based company began offering office supplies and motorcycle parts in the U.S. last year. Last weekend, it opened a new category of private-label electronics called AmazonBasics.

Razor Thin

U.S. online grocery sales may reach $9 billion this year, according to Forrester Research Inc. By 2013, sales will climb to $15 billion, the Cambridge, Massachusetts-based research firm forecasts. Total supermarket sales reached $547.1 billion last year, according to the Food Marketing Institute.

Online groceries have been slow to take off because consumers prefer to pick up their food immediately and not wait for delivery, said Sucharita Mulpuru, an analyst at Forrester. It’s also costly to build the distribution infrastructure to support a delivery business, she said.

“Essentially they’re trying to build out a UPS or FedEx for the grocery store, and that’s expensive,” Mulpuru said. “Somebody has to bear the cost of it. Either the consumer has to bear the cost or the retailer has to take a hit to their margin.”

Supermarkets typically have to get by on a few percentage points of profit margin. Kroger Co., the largest U.S. supermarket chain, had a profit margin of 1.6 percent last year -- less than half what Amazon.com earned, according to data compiled by Bloomberg.

‘Eyes Open’

“We are certainly entering the grocery business eyes open,” said Herrington, a former executive at Webvan. “We understand the cautionary tales that are out there.”

Amazon Fresh lets users shop for groceries and fresh produce online, and select delivery times. A minimum order of $30 is required, and any purchase of less than $75 carries a $5 delivery fee. The company uses temperature-controlled crates, allowing it to deliver food even when customers aren’t home.

The market exists for a fresh-grocery delivery business, particularly if advertising costs and expansion plans are reined in, Herrington said. The model also only makes sense in cities. It’s not economical to deliver groceries in sparsely populated areas, he said.

Amazon.com rose $3.19, or 3.5 percent, to $93.75 at 4 p.m. New York time in Nasdaq Stock Market trading. The shares have gained 83 percent this year.

Amazon.com may have an edge because of its existing warehouse and technology infrastructure, said Jason Gissing, co- founder of Ocado Ltd., a grocery-delivery business near London.

“Half of the retail spend in any developed country is in the food market,” Gissing said. “If you can crack food, you’ve cracked the retailing holy grail.”

Webvan, meanwhile, lives on -- in name, at least. Amazon.com now owns the Webvan site and uses it to sell nonperishable food items through the mail.

“We want to be the place where you can discover and buy anything online,” Herrington said.

To contact the reporter on this story: Joseph Galante in San Francisco at jgalante3@bloomberg.net

Last Updated: September 22, 2009 16:20 EDT