Why Same Day Delivery Matters

There’s talk from many quarters pointing out that while customers might covet same day shipping, they’re not willing to pay much for it on a wide variety of goods. Generally, the topic then goes to “don’t overinvest.” The issue is that Amazon is indirectly the one forcing people’s hand in this. Amazon loves tentative approaches – by their competition.

With programs announced in the last six months by WalMart, eBay and Google among others, retailers and other internet giants are pushing harder, faster for better customer services. But the question “does same day shipping matter to customers?” keeps getting asked. Recently, BCG published a perspective on this, with their analysis largely leaning on a survey of 1,500 customers. It’s a good study, well worth a read, and will lead to better short term results … but also likely get the long term wrong.

The study starts with “what would consumers pay for same day delivery” and addresses what types of goods are most appealing — and likely to generate a premium priced service.  The conclusions found are that retailers and carriers ought to test same day delivery in limited fashion by focusing on higher ticket items and targeting affluent millenials in a couple of representative cities. The demographic targeting makes sense as does testing on its face. But testing willingness to pay for fast delivery on a limited selection of high value goods will likely have a predictable result: not enough customers will pay enough for sufficient volume of goods to make the service economically viable. The test fails and the program gets killed; probably good for near term profits (so would be not trying). The bigger challenge is long term — what if your largest retail competitor has better prices, wider selection and better delivery?

Invert the issue: What if I could offer same day delivery for the same total cost of you driving to the store? How much of your total purchase volume could I get?

That’s the game Amazon is playing.

The economics of same day or next day delivery is a function of three components: volume being delivered, cost of delivery and the profits tied to that delivery service.  The relative cost of delivery of any type is largely dependent on the density of the route (i.e., how far between stops) defrayed by how much margin you make on the delivery (i.e., value of the package) along with some added benefits and additional “profit pools” that can be tapped.

A few thoughts on how Amazon is approaching this issue:

  • Lowering cost by getting closer to customers: by expanding fulfillment centers (FCs) across the US, Amazon gets increasingly closer to customers. Amazon has spent billions – and added 18 new FCs in 2012, having started the year with 32 FCs in the US and nearly 23 million square feet of space. Amazon’s third party business continues to grow – but successful 3P sellers know that they get 3X the growth if their products are in Amazon FCs through the Fulfillment by Amazon (FBA) program.  BTW, one of the largest gripes sellers have about FBA is that Amazon sometimes splits up shipments – to get the products closer to end customers. The agreement to collect and remit taxes in California in return for the ability to move FCs into California was long term smart for Amazon. More centers, closer to dense urban areas.
  • Expanding volume and selection: Online commerce continues to grow ~15% per year but Amazon grows a >$60 billion online business at twice that rate and wants more.  Amazon has started same day with groceries in Seattle and expanded tests on wider same day selection in other markets. Over time, they’ll provide a range of services that enables any product to get delivered next day and in large markets same day because they know the objective: move more of your overall purchases to them. Amazon continues to expand selection – business supplies being a great example last year. The more goods they have available – at rock bottom prices – the better the odds that you’ll pick multiple items and drive a sizable basket of goods.
  • Profit pools: Amazon’s “Other” business will be over $3.5 billion in 2013; money garnered through advertising, AWS and co-op credit cards. Amazon has consistently used the funds from these businesses to drive lower prices and more efficient operations. These profits fuel programs that are initially unprofitable, like Prime and same day delivery.

As BCG notes, Amazon Prime is already a proven winner on volume: Prime members pay $79 a year and buy up to 4X the volume of non-Prime subscribers. Once you’re in the program, you want to use it: two day delivery (which is often done in one day) for anything you can get from Amazon or a third party seller who uses FBA – on prices that are almost always as good or better than elsewhere as multiple studies have shown.

Prime may be unprofitable and same day delivery is almost certainly unprofitable today — but Amazon will subsidize it as long as they think long term it builds a competitive moat for them.

Amazon doesn’t want to sell same day shipping as a premium service – Amazon wants you to move to Amazon as the primary retailer of everything you buy. Being your primary online store isn’t enough.

Even if it’s not “same day shipping” as part of Prime, I would expect Amazon to have “next day” Prime and “same day” available to major metro markets by the time holiday 2013 rolls around.

So what’s everyone else supposed to do?  Join forces.

Some retailer, like WalMart, have the scale to do this themselves — but most do not, hence BCG’s recommendations. Today, the best option to overcome the investments that Amazon has made in FC capabilities, selection and user base is to join into larger aggregated offerings. Google and eBay are both creating programs; they could each potentially match Amazon’s advantages as long as they get sufficient retailer participation and draw in a large, local base of customers. I would expect to see one or more of the major carriers partner up with these players as well — as BCG notes, Amazon and others already use local and regional carriers and the big guys need volume. ShopRunner also has a program that’s been competing with Amazon Prime for a few years but doesn’t seem to have gained sufficient traction in retailer or consumer usage.

While each needs to build out a local base of users and a delivery network that work, eBay and Google each have some distinct advantages:

  • eBay has a network of retailers already, GSI having more enterprise relationships and eBay’s Marketplace business more SMBs while PayPal runs the range. But those three groups don’t always get along. Google certainly has the enterprise relationships but less experience in shopping and fulfillment solutions.
  • Google has local reach – and more of it than Amazon. Leveraging Google’s own reach, the reach of its Ad network and its increasing capabilities in Mobile will matter tremendously.
  • Both have additional “profit pools” that they can tap but Google’s are stronger.  Google can see this as a means to driving use of advertising through Google over time – and helping its retailer clients stay healthy.

So if you’re a retailer, get the pitch from eBay, Google and Shoprunner while you’re at it – and participate. Before it’s too late.

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