What’s Better Than 2-Day Amazon Shipping? 1 Day
(Bloomberg Opinion) -- In announcing its plan to soon make one-day shipping the standard offer of its Prime program, Amazon.com Inc. just acknowledged — and took a significant step toward fixing — a nagging problem: The $119-a-year membership program that made it an e-commerce juggernaut was starting to look less like a good deal.
On a Thursday earnings call with investors, CFO Brian Olsavsky casually dropped into his remarks that the company would be moving toward this speed goal, an effort that he said would add $800 million in costs in the second quarter. He didn’t offer predictions of the costs beyond that.
But that hefty investment may turn out to be plenty worth it. Sure, Amazon’s Prime membership has a wide range of goodies: Users get special discounts at Whole Foods Market and get to watch Amazon’s web-video series “The Marvelous Mrs. Maisel.” But the original lure of the program — the thing that got millions of people shopping on Amazon almost as if on autopilot — was two-day shipping on millions of items at no additional cost. For a while, that one-two punch of value and speed was unmatched in retail.
But lately, the brick-and-mortar giants have caught up and, in some ways, have even undercut Amazon. Walmart Inc. and Target Corp. both offer free two-day shipping on many of their goods with no membership fee. Department stores and major specialty clothing stores, too, routinely offer free shipping and get packages on doorsteps much more quickly than they did several years ago.
As these retailers have improved their supply chains, revamped their inventory management tactics and, in some cases, made the choice to sacrifice profit margin to grab digital sales, Prime’s value proposition has faded. And that threatens the entire Amazon consumer-facing ecosystem.
Olsavsky told investors this offering would be not only boon to Prime members but to Amazon itself and to the million of merchants that sell their goods on the site. He said Amazon believes faster delivery will spur more people to buy goods on Amazon that they need immediately. That’s the same idea behind Amazon’s Prime Now, which offers one- or two-hour delivery on select items to Prime members.
Amazon, in essence, is narrowing the gap between Prime Now and regular Prime. For merchants on Amazon, Olsavsky said, one-day shipping helps them, too, because many of them use Amazon’s logistics machine — for an extra fee, of course — to get packages to shoppers’ doors.
Amazon said Thursday that it needs its shipping partners such as the U.S. Postal Service and UPS, as well as the company’s own network of delivery couriers, to make one-day standard shipping a reality. The change will be gradual, and it won’t be cheap for Amazon.
The company spends about 12 percent of its sales — or $30 billion in the last year — for sorting, transporting and other shipping-related tasks. Presumably those costs will rise if quicker delivery turnarounds spur more people to shop on Amazon, or if shipping partners charge more for one-day shipping. More costs will also crimp the growing profit margins that investors now like about Amazon, as a trade-off to suddenly mediocre revenue growth.
You can’t help but think this leaves Amazon’s delivery partners feeling a touch of anxiety. UPS and FedEx are wary of Amazon, which has been doing more to build its own shipping capabilities and perhaps eventually become a direct competitor. And it might put fresh strain on their networks to achieve this desired pace for one of their most important customers.
But if Amazon wants to remain king of online shopping, it needs to flex its package-delivery expertise like never before. The company’s shift to one-day Prime shipping is the company playing both offense and defense to keep its crown.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.
Shira Ovide is a Bloomberg Opinion columnist covering technology. She previously was a reporter for the Wall Street Journal.
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