Amazon is flexing (yet again). CFO Brian T. Olsavsky raised eyebrows during the company’s first-quarter earnings call.
“We're currently working on evolving our Prime free two-day shipping program to be a free one-day shipping program. We're able to do this because we've spent 20-plus years expanding our fulfillment and logistics network, but this is still a big investment and a lot of work to do ahead of us.”
Amazon’s ambitions come with a high price tag. The company will spend $800 million over the next quarter to this effort, according to Olsavsky—a move that will weaken profits in the short term.
But he notes that the company has already “significantly expanded” one-day eligible selection and the number of ZIP codes eligible for one-day shipping. Prime Now will also continue to offer same-day delivery on an accelerated basis.
“The move eclipsed both the day’s good news (a larger than expected quarterly profit) and the bad (dramatically slowing sales growth),” reports Bloomberg about last week’s call. “It set Wall Street’s Amazon watchers into a mad scramble...But Amazon’s announcement likely registered even more loudly in the halls of its competitors.”
All Eyes on Target and Walmart
Amazon’s latest news is like a bad song on repeat for its e-tail competitors. Over the last few years, Target and Walmart have launched their own versions of two-day shipping.
Meanwhile, Amazon has built more than 75 fulfillment centers and 25 sortation centers across North America, investing in robotics, uberfication and modern delivery vehicles.
On one end of the spectrum, analysts praise Amazon for gaining a big advantage.
“[T]he move will widen [Amazon’s] convenience/logistical gap with competitors, which had narrowed in recent years as other retailers enhanced their shipping capabilities,” Stifel analyst Scott Devitt wrote. “Relative to previous investment cycles, Amazon is in a more favorable position from a margin standpoint given the development of AWS and its emerging advertising business.”
On the other end, analysts say that one-day delivery isn’t as big of a stretch as you’d think for Walmart or Target.
“One day shipping is neither shocking nor difficult for retailers at scale,” Bernstein analyst Brandon Fletcher wrote. Citing research conducted by A.T. Kearney, he noted that Walmart could offer one-day shipping with just eight additional distribution facilities.
Walmart itself took a jab at Amazon’s $119 Prime membership fee, hinting at a counterattack.
<center><blockquote class="twitter-tweet" data-lang="en"><p lang="en" dir="ltr">One-day free shipping...without a membership fee. Now THAT would be groundbreaking. Stay tuned.</p>— Walmart (@Walmart) <a href="https://twitter.com/Walmart/status/1121904198960996353?ref_src=twsrc%5Etfw">April 26, 2019</a></blockquote>
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Both Walmart and Target currently offer free two-day shipping for orders over $35. Both also have the advantage of brick-and-mortar stores that can fulfill online orders at a fraction of the cost. (Target saved $3 billion of spending on new warehouses by using its stores to fulfill 75% of all online orders, plus saved 40% on average on orders shipped from stores as opposed to warehouses, according to The Motley Fool.)
Target additionally offers free next-day shipping for Restock items and same-day shipping for Shipt orders.
So, Will One-Day Shipping Become the New Standard?
Yes, in a way. Your customers will likely seek the option for one-day delivery. But whether it becomes a make-it-or-break-it factor has yet to be seen.
Until fast shipping universally means free shipping…your customers will likely wait a few more days to get a better-quality or better-priced product.
Amazon Prime membership, for one, has seen increased churn from customers who don’t feel like they’re getting value for their money even with Prime Video and Whole Foods perks, according to GlobalData Retail Managing Director Neil Saunders. Amazon’s one-day shipping move is dedicated to keeping those Prime members. However, fast shipping might become less of a differentiator if more channels and retailers can offer the same (or similar enough) benefit for less.
The bottom line: shipping is one of many factors considered in a sale. Quality, price, return policy and brand positioning each have a pull on customers.
Don’t neglect these factors and throw caution to the wind when pursuing new shipping options. Moreover, if you have a brick-and-mortar presence, leverage in-store pickup and/or merchant fulfillment to keep options open, costs low and the supply chain in your hands.
P.S. Third-Party Sellers, Amazon Hearts You.
Recently, Amazon has kept third-party sellers on their toes. First, there was the introduction of Amazon’s private label brands. Then, there were whispers of Amazon One Vendor, cued by Amazon’s abrupt removal of thousands of vendors.
Olsavsky whistled a different tune in last week’s earnings call. Two notable soundbites:
“[Our] main goal here is to allow customers to have the broadest selection at the best available price and also the most convenient options on how they receive the item. If we're delivering on those three elements, we're indifferent as to whether it's sold by us or a third-party.”
“We actively recruit sellers to sell on our platform. It's because it adds selection...and we spend billions of dollars a year, as Jeff said, on infrastructure tools and services, not only to allow sellers to sell, but to help them sell more successfully. So we have a vested interest in the success of our sellers...the sellers are as important to us as anything for servicing the customers' need for price selection and convenience.”
In his annual letter to shareholders, Bezos wrote that “third-party sellers are kicking our first-party butt. Badly.” While first-party business has grown dramatically from $1.6 billion in 1999 to $117 billion in 2018, third-party business has grown from $0.1 billion to $160 billion in the same period. Side by side, that’s a 25% compound annual growth rate next to a 52% compound annual growth rate.
Amazon’s growth strategy undoubtedly includes the development of its marketplace and third-party sales.
A word of warning, though: while Amazon is a great launchpad or extension for your business, it’s not a reliable lifeline. Sellers are often lured by the convenience of FBA, among other programs, only to suffer from shrunken profit margins, co-mingled inventory and/or total takeover by Amazon.
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