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As big-box stores and smaller merchants prioritize expedited delivery, the competition for the speediest shipping is becoming costly.
E-commerce giant Amazon AMZN, -0.15% is taking deliveries to the next level with a hefty investment of money and expanding its network to deliver packages in a single day.
Amazon’s Prime membership was a game-changer in e-commerce when it was unveiled in 2005. The promise of guaranteed, unlimited two-day shipping made the tech giant the big kahuna in retail. Since then the company has upped the ante to fulfill customer orders fast.
What is speedy shipping costing companies?
The cost to ship an item overnight can range from $45 to $120, according to First Insight, a retail analytics platform.
“Consumers want their products in the shortest amount of time possible and that’s what is driving demand for speedy shipping and forcing retailers to figure out the best logistical cycle to get products to them,” said Greg Petro, chief executive of First Insight.
In a crowded marketplace, customer loyalty is hard to capture which means companies are pulling out all stops to ensure the fastest and most convenient options. Some 47% of consumers ranked free delivery as the No. 1 consideration for the majority of their online purchases while 42% of respondents didn’t follow through with a purchase because of a lack of rush delivery options, according to a study conducted by Metapack, an eCommerce delivery management site.
With shipping costs covered through a membership fee, companies absorb the cost for next-day delivery “resulting in a financial loss,” said Petro.
Legacy retailers like Walmart WMT, -0.25% and Target TGT, +1.43% have gotten in on the action by launching expedited delivery programs to put pressure on Amazon. Target’s acquisition of a delivery startup, Shipt, caters to customers by offering same-day delivery for grocery items and other basic necessities like household products. The retailer’s omnichannel strategy is also paying off by driving digital customers to pick up their orders in stores, which has been a growing preference for consumers. Walmart may be Amazon’s biggest contender with its physical dominance of over 5,000 stores nationwide and its free next-day delivery for eligible items over $35 in select markets without a membership fee attached.
There’s no question that Amazon’s optimism has investors wary on whether the return on investment is likely after the company’s net profit tanked by 26% following an $800 million investment in the third quarter of 2019. Yet, the retailer continues to bet big on one-day shipping — pledging to spend another $1.5 billion in the fourth quarter to expand its warehouses and product selection.
Prime has been a key contributor to Amazon’s ever-growing dominance of online shopping. Subscriptions for Prime surpassed 100 million but membership growth is slowing in the U.S, according to a study published by market research firm Consumer Intelligence Research Partners (CIRP).
With the inevitable slowdown in subscribers, the company is hopeful its strategy to pour more cash into speedy delivery will translate into an increase in spending and consumer retention.
“Fast shipping keeps Prime members happy so retention rates are unbelievably high,” said Micheal Levin, partner and chief financial officer of CIRP. While memberships have slowed down, switching from yearly to monthly memberships seems to be the predominant factor in helping Amazon with continued growth.
“The trade-off is growing their customer base,” said Petro. “Each company looks at the long-term life cycle and profitability of each customer even though it may take longer to break even.”
Both Walmart and Target aren’t disclosing actual spend on fast shipping, but the delivery war will continue to be fought as retailers strive to make online orders as fast and convenient as possible for customers.
