Amazon Again Changing the Retail Landscape
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One thing is certain. Online retailer Amazon.com (NASDAQ: AMZN) has changed the retail landscape in the United States forever. But that change is an ongoing process. The way Amazon does business continues to prod other retailers to change the way the companies relate to their customers.
For instance, take deliveries of items ordered by customers of retailers' websites. Amazon offers same-day delivery in 10 U.S. cities for an $8.99 fee in most cases. The company is able to do this thanks to the expanded number of warehouses it has across the country.
Amazon has invested hundreds of millions of dollars into expanding its portfolio of warehouses. These new warehouses are an effort to both get closer to its customers (speedier deliveries) and to get around the imposition of sales taxes on items ordered online.
Same-Day Delivery Service
Amazon's introduction of same-day delivery service led to some other retailers jumping aboard the ultra-fast deliveries of online purchases bandwagon last year. But the cost of offering such a service may adversely affect retail companies' profit margins that are already pressure.
Retail firms are still flying blind as many continue to search for the answers to vital questions such as how many customers actually will use such a service, the cost of it, and how to divide the cost between the customer and the retailer itself.
Logistics strategist at consultancy Kurt Salmon, Al Sambar, told the Financial Times “It's ultimately a pretty costly service to deliver.” He does not think consumers will be willing to pay for such a service except for a few special circumstances, such as medicines and Christmas toys.
Firms Jumping Aboard the Bandwagon
Nevertheless, many retail firms are pushing ahead with offering same-day delivery services.
One prime example of this is the country's biggest retailer, Wal-Mart (NYSE: WMT). In several markets, it is testing same-day delivery service of goods ordered online. In these markets, customers can have an unlimited number of items delivered for a flat $10 fee.
The company doing the heavy lifting for Wal-Mart is the Supply Chain Solutions division of leading delivery company United Parcel Service (NYSE: UPS) to make these deliveries. This division of UPS is normally used for instances such as the ultra-fast delivery of key machinery parts for a machine that may have broken down.
This business is not completely new for UPS though. Last year, it took a 6% stake in Shutl, a London-based firm that matches up retail orders with couriers that can make high-speed deliveries.
Online auction site eBay (NASDAQ: EBAY) is also trying out a same-day delivery service in New York and San Francisco. Customers using eBay's special iPhone app in those two cities that place an order are charged only $5 for delivery of the product that day.
According to the Financial Times, eBay is working closely with Target, Toys R Us, Best Buy, Home Depot and Urban Outfitters to make this experiment work.
The Future of High-Speed Delivery Services
The real question here is whether the majority of consumers really want the option of same-day delivery service.
After all, it would be a costly option for retail firms to offer. Most retailers would have to upgrade their logistics system. Many simply do not know what items they have and where. That makes it difficult to locate a product and ship it immediately.
So far, results have shown customers are more interested in knowing when an item will arrive and not if it can be delivered same day.
UPS has found that what customers really want is a service that helps them to not miss deliveries. UPS does currently offer such a notice service that gives customers a four-hour window in which the delivery will be made.
A UPS spokesperson told the Financial Times, “Quite honestly, what customers are telling us is as long as they know what the committed delivery date and time is, they are fine.”
Even Amazon's CEO Jeff Bezos told Fortune that he's “a little skeptical that same-day delivery is ever going to be a huge part of the business.”
Bottom line – such a service is going to be offered by more and more retailers. But it really will not be a driver of the business and may actually be a further drag on already tight profit margins.
tdalmoe has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, eBay, and United Parcel Service. The Motley Fool owns shares of Amazon.com and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!