Amazon.com Inc. shook investors and the retail industry last week, shortly after announcing its first quarter earnings report.
“So, we’re currently working on evolving our Prime free two-day shipping program to be a free one-day shipping program,” Brian Olsavsky, the chief financial officer, said almost nonchalantly a few minutes into his regular conference call with analysts.
The move eclipsed both the day’s good news (a larger than expected quarterly profit) and the bad (dramatically slowing sales growth). It set Wall Street’s Amazon watchers into a mad scramble to calculate the impact of the projected $800 million it will take over the next few months alone to achieve the accelerated shipping feat.
But Amazon’s announcement likely registered even more loudly in the halls of its competitors: e-commerce companies and old-line retailers that will now have to start investing just as furiously to keep up. For some of them, Thursday’s news was an ominous sign of challenging times ahead.
Over the past few years, two-day shipping had become an industry standard, embraced by Amazon’s rivals and by shoppers who were spoiled by the expectation of speedy delivery times. Walmart Inc. launched two-day shipping without an annual membership fee in 2017 for orders over $35. Target Corp. introduced it last year over the holidays. If anything, Prime’s $129 price tag, which entitles members to a selection of movies, TV shows, music and e-books, was starting to look a little hefty.
It turns out that Amazon had been preparing its counterattack for some time. Back in 2005 when it introduced Prime, Amazon had less than a dozen fulfillment centers in North America, mostly in out-of-the-way locales like Fernley, Nevada, and Coffeyville, Kansas, where the company could keep costs down for itself and for customers. Over the past few years, Amazon has shuttered those older warehouses and drawn a tight logistics cordon around its customers, opening more than 100 fulfillment centers, sortation centers and Prime Now hubs in and around major cities. It’s also building its own fleet of planes, trucks and automobiles to get those products to customers faster.
Next-day shipping will likely open new avenues for Amazon. When you’ve run out of toothpaste, Cheerios or Tylenol, two days can feel like an eternity. Those products belong to categories, not coincidentally, that have been the most difficult for Amazon to crack. Some analysts also think one-day shipping is a way station on Amazon’s journey to become a full-fledged logistics company and a rival to some of its closest partners, UPS and FedEx Corp. On the call, Olsavksy assured analysts that Amazon would need “the continued support of our external transportation partners.”
Other major retailers are projecting confidence in the face of an Amazon (AMZN) onslaught. According to one analysis, Walmart (WMT) will need only eight additional distribution centers to get to one-day shipping.
But for smaller stores, without thousands of locations and a large distribution network, one-day shipping will be almost impossible to duplicate and make them even more reliant on Amazon’s network. Currently, more than half the products sold on Amazon come from independent sellers that pay Amazon commissions and fees in exchange for exposure on the site and shipping to buyer’s homes.
Those merchants are already grumbling about the high costs of selling on Amazon. In a world of one-day shipping, and heightened expectations from customers, it’s going to be difficult to find an alternative.
© Copyright 2022 Bloomberg News. All rights reserved.