Same Day Delivery = Don't Hold Your Breath

By Chad Henage - August 19, 2012 | Tickers: AMZN, EBAY, TGT, WAG | 0 Comments

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Much has been made of the potential death of traditional retail from the threat of same-day delivery from online retailers. There have been multiple articles and videos on The Motley Fool suggesting that the leader in this charge is Amazon.com (NASDAQ: AMZN). While it's true that Amazon does offer same-day shipping in certain cases, Even Amazon's CFO Tom Szkutak says, “ we don't really see a way to do same day delivery on a broad scale economically.” Adding new fuel to the fire was a recent Reuters article, suggesting that eBay (NASDAQ: EBAY) was beginning to test out same-day delivery in conjunction with big retailers. In the future same-day shipping will be more of a reality than it is today, but to call this the death knell of traditional retail is overstating quite a bit.

How Does This Work?

EBay's test is happening in the San Francisco area in conjunction with large retailers such as Target (NYSE: TGT), Best Buy, Macy's, Walgreen (NYSE: WAG), and others. Ebay suggests that delivery can take as little as an hour and customers can choose products from hundreds of local stores. Free delivery is available for the first 3 orders, and after that a $5 charge applies with a minimum order of $25 required. Where Amazon is concerned, the company does offer same-day shipping in certain major metropolitan hubs at a cost of $8.99 per shipment and $.99 per item. When you compare the two offerings, an individual buying $25 worth of items could pay as little as $5 with eBay, or well over $10 depending on the number of items ordered from Amazon. Depending on what the person is ordering, these deals may sound great to certain customers. However, there are multiple challenges facing any online retailer trying to make this a reality on a broad scale.

Distribution Matters and Traditional Retail is Better at it:

The first challenge is that of the distribution network. Many people believe that as Amazon builds out new warehouses across the country, that the company can leverage this large distribution model to create faster shipping times for their customers. While this is true to an extent, large warehouses do not come without a cost. In fact, you could make the argument that traditional retailers such as Target already have better distribution than Amazon will in many years, with their over 1,700 retail locations. While it's true that a retail location is not the same as a warehouse, it is a presence that even after years of building, Amazon will not likely match. To take this comparison further, consider the fact that Walgreen operates nearly 8,000 retail locations in all 50 states. Even if Amazon built warehouses in multiple locations in every state, it would be centuries before the company could match this number of points of presence. This is likely why eBay is choosing to partner with traditional retailers rather than attempt to build out its own distribution network. The second challenge is the inevitable cost that is unavoidable with each delivery.

Additional Points of Distribution Cost Real Money:

Proponents would say that eventually the additional business offsets the additional cost of the expanded distribution network. While this is somewhat true, as with anything the law of large numbers comes into play. The real question should be, can a company like Amazon operate more cheaply if they run more warehouses? Unless sales increase at a tremendous amount, the additional cost of running more warehouses is an unavoidable fixed cost that the company must overcome. In addition, even if the scale of operations gets to the point where the additional warehouses fixed costs can be spread across greater sales, there is no way to avoid the individual cost of delivering each order. This is why the company's CFO is saying the company doesn't see a way to make this work economically on a large scale. What is much more likely is that delivery times will shorten, but to suggest that same day delivery will become the norm doesn't consider all of the facts. Last but not least, there's a big roadblock in the way of any online retailer setting up true same-day delivery across the board.

Oh Yeah, and Then There are Thousands of Traditional Retailers Standing in the Way:

It's highly unlikely that well-run companies such as Walgreen, Target, Wal-Mart, and Home Depot just to name a few, would sit idly by as online retailers offer same-day delivery on everything. Each of these companies has the size and distribution network to offer same-day delivery if they had to. Additionally, all four of these companies have better margins than Amazon.com, which is probably the primary company looking to make same day delivery a reality. Long story short, though this is an intriguing idea, it will probably not be economically feasible for most customers to pay the additional amount to get their items the same day. Think about the numbers, if you place an order for $25 worth of goods through this eBay test you pay $5 delivery charge. This delivery charge has now added 20% to the cost of a $25 order. Unless the customer has a critical need for whatever is in the order, and cannot go to a physical store to make the same purchase, this 20% premium is probably more than enough to prevent customers from making this choice. It sounds like a great idea, but don't hold your breath.

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