Amazon released an announcement on June 3rd that should please its Prime members as they can now benefit from one-day delivery on more than 10 million items. The rollout service does away with the minimum $35 purchase amount, with Amazon planning on adding more one-day-shipping–eligible products and expanding its delivery areas. The rationale behind the potentially costly move is a way for Amazon to stand out from competitors; since two-day shipping is no longer the big differentiator it once was. Given the strong correlation between delivery speed and customer spend, it is also a way for Amazon to continue to drive growth on the top line, regardless of the inevitable hit on short-term margins. Amazon has staked a claim on trailblazing delivery times to attain competitive advantage – will others follow suit in a move that will one day see next-day shipping as an industry standard?
When Amazon launched two-day shipping with Prime back in 2005, it was a true differentiator in the market. By 2015, Amazon was offering its Prime customers both a same-day service (and one-day service in limited areas) with a $35 threshold on the purchase amount. In its latest announcement, Amazon proclaimed it had invested $800 million in its fulfillment network to increase the speed of its standard Prime delivery down from two-day to one-day shipping. This type of reorganization means a redistribution of inventory so that a higher number of one-day shipments can be delivered via the ground rather than by air. Expansion and optimization of Amazon Air will also occur to maximize utilization and perform effective at a unit cost. In addition, the build-out of additional facilities will better optimize processing times through sorting centers and delivery stations, as well as renegotiations with third parties such as UPS and FedEx to offset last-mile costs at a truly nationwide level. In terms of the effects on the Amazon ecosystem, it is business as usual for Amazon vendors (though they will benefit from the growth driven by the Prime service), yet Marketplace sellers will be under increasing pressure to join the Prime program, and third-party delivery services will be compelled to create more space for processing of Amazon orders by altering cut-off times.
Take your battle stations
The pressure is on for retailers, namely Walmart and Target, to match on deliver speeds. Wal-Mart has been offering free two-day shipping on several million SKUs since 2017 for no extra fee. On May 14th, Walmart announced that one-day delivery services will be offered in Phoenix and Las Vegas, and eventually Southern California. By the end of the year, Walmart will cover 75% of the market and 220,000 products. The company is in a good position to provide faster delivery because of its ‘click and collect’ offering out of its retail network. A move to a model where all products can be shipped in one day is questionable, however, due to inevitable shipping costs. Target, on the other hand, may forego the battle over next-day delivery and continue to simply offer same-day local delivery from online orders sent out from their retail outlets, available to those willing to pay a premium. Essentially, the cost and effort for general retailers to match up to Amazon’s offering will vary because each supply chain is unique. The opportunity does exist for all major retailers to provide a variation of rapid delivery, yet it is a very costly and time-intensive exercise to completely restructure supply chains.
While same-day delivery is certainly possible in urban environments and imposing a minimum spend does help cover the higher costs of delivery, the problem with rolling out same-day delivery nationwide is down to actual physics. To make it achievable, significantly-sized warehouses in close proximity to urban environments would be required. A restructure of the sorting process would also be needed because fulfillment centers are usually located far from standard delivery stations, with less density on routing networks for those fulfillment centers located further outside of urban centers.
Retailers have an opportunity to continue to drive customer benefit through faster delivery times, not only through full-product, one-day shipping but via curbside pickup and same-day ‘click & collect’ as well. Brick and mortar companies have an advantage with the latter model because of their ability to leverage their significant footprint of retail stores as facilities. The companies most likely to succeed need to maintain profit margins on shipments using minimum cart sizes for the fastest delivery speeds. And the retailers who invest most in technology to benefit from the optimization advantage it brings will be in a much stronger position.
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