Once again, Amazon is the center of attention. The company is in the news again now for expanding its one-day delivery services. In July this year, the company’s Prime Day featured one-day delivery for over 10 million products.
The Prime Day event was a huge success. The company was able to celebrate with its customers while at the same time testing its abilities to deliver a huge quantity of products in an extremely short period of time. The company aims to establish one-day delivery as a standard option for all Prime members. This makes Prime membership even more exclusive.
Although this all seems like a good idea, it’s not a simple one. Amazon has millions of Prime users, and delivering products to all of them in one day is no easy feat.
Back to the Start of Prime One-Day Delivery
One-day delivery was first announced earlier this year when Amazon’s chief financial officer, Brian Olsavsky, said that the company is looking to upgrade its Prime shipping by cutting delivery times in half – from two days to one.
When he was asked how the company plans to do this, he replied that Amazon would invest an additional $800 million during the second quarter to improve its shipping network and make the whole process a lot faster.
Amazon’s top line has already improved thanks to these changes in operations. During the second quarter, the revenue from North American retail grew noticeably. However, even though this is good news for Amazon, these results came at a cost.
J.P. Morgan analyst Brian Nowak recently estimated that Amazon is spending over two times more on average for its one-day shipping. Even though there aren’t any exact numbers yet, this does sound concerning.
Walmart’s NextDay Shipping
The fact that the products are moving twice as fast doesn’t fully explain the price rise. For example, Amazon’s competitor Walmart has reported lower costs with NextDay, which is its version of the one-day delivery network.
When you look a little deeper, you start to see that these two companies have entirely different strategies. First of all, Walmart offers one-day delivery for much fewer products; some areas don’t offer this kind of delivery at all.
This is because the company often ships products straight out of its stores. Marc Lore, head of Walmart’s e-commerce, says that the company can deliver overnight to 75% of the population in the United States. This means that the remaining 25% are out of luck.
Walmart’s NextDay delivery is also only available with a minimum order of $35. Even worse, customers can’t combine products that aren’t in the NextDay category or products from warehouses and stores. This can make getting to that minimum difficult, and the company can only offer NextDay shipping when all the products are shipped from the same location.
Why One-Day Delivery is so Costly
Compared to Walmart, Amazon doesn’t have as many restrictions for its customers. Amazon offers over 10 million products on its site that can be delivered in one day to all Prime members, no matter where they are in the United States.
Customers aren’t limited by minimum order values either, meaning the company often sends just one or two products with this kind of shipping. With such small orders, the shipping costs per single unit increase significantly. The current one-day shipping average value is about 30% of all the other requests made on Amazon.
The primary difference between Amazon’s and Walmart’s strategies is how the companies use their distribution networks. Amazon stores unique items in all warehouses while making sure there is as little overlap as possible. On the other hand, Walmart has identical inventories throughout all its warehouses.
This means that Amazon has to ship several products from different warehouses to a hub, where they are combined into packages ordered by the customers. This is why Amazon’s process is more expensive but also makes its products more readily available.
Can Amazon Reduce These Costs?
Amazon is a large giant that’s continually expanding with new fulfillment centers, warehouses, and storage areas to support its growth. However, new storage facilities with unique inventory won’t bring one-day shipping costs down. On the other hand, replicating warehouses and adding restrictions to products will mean offering the same service as Walmart.
One of the ways Amazon could reduce shipping expenses is by directly acquiring hubs and planes and controlling fulfillment operations. The company should look to become the primary owner of its logistics network.
Even though Amazon has been slowly going down this path, we can expect the one-day delivery investments to speed up this process. By reducing the margins of fulfillment and logistics partners, Amazon can cut down on its costs. Additionally, it could end up offering its shipping services for other companies.
Given the fact that there is significant demand for one-day delivery, Amazon has no reason to stop investing in logistics and fulfillment capabilities. Not only will this reduce operational costs and enable the company to deliver products to more customers, it might open up a new source of revenue.
Even though its costs have risen, one-day shipping has been a significant hit with customers, and Amazon has seen a 22% sales increase in stores. This is the most considerable growth Amazon has had in the last two years, and the company will probably be looking to expand on these opportunities. The Q3 earnings also show good numbers. The future looks bright my friends.
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