Amazon makes a huge power move. How will retailers respond?


Since our blog last month about the ongoing battle for the last mile in retail delivery, we’ve already seen some monumental shifts. While Google offshoot Wing gained FAA clearance in the United States and Uber announced more plans regarding their drone program, the most Earth-shaking news came from the biggest player in the game, Amazon.

Last week, Amazon turned last mile delivery on its head once again as news began to spread that free one-day shipping would be the new standard for Amazon Prime members, replacing their long-running free two-day shipping program. The bombshell announcement came via Amazon CFO Brian Olsavsky during the company’s first quarter earnings call on April 25th. Oslavsky announced the company had allocated $800 million of incremental spending to get the program into place in Q2 of 2019 – no small investment.

So why the sudden and aggressive shift? Retailers like Walmart, Target, and others are beginning to gain traction with their ‘buy online, pick up in the store’ models and same-day delivery programs, even if there is a fee associated with the service. Amazon knows it needs to be proactive now in order to protect one of its most valuable assets, Prime Members.

Digging into the economics of Prime Membership is an eye-opening experience, to say the least. Last year, Amazon said it has over 100 million Prime Members worldwide. Multiply that by the $119 annual membership fee, and you’re looking at $12 billion in fees alone.

But the fun doesn’t end there, shoppers with a Prime Membership spend an average of around $1,400 per year on Amazon, while non-members only spend about $600 per year on average. That’s a hypothetical difference of about $800 per customer, multiplied by a hundred million members. That’s 80 billion more reasons to try and prevent retailers like Walmart and Target from gaining a foothold.

 

In recent surveys, nearly 80% of Prime Members identified fast shipping as the #1 benefit of membership. Amazon knows protecting their membership model from attrition is absolutely essential to maintain their market dominance. Suddenly that $800 million spend to put one-day shipping in place looks like a drop in the bucket for Bezos and Co.

For many big box retailers, the shift to one-day delivery will come as a blow. Target and Walmart shares both immediately took a hit on Wall Street following the announcement. Walmart didn’t exactly take the news lying down, responding the day after Amazon’s conference call that they would be offering 1-day shipping in the near future as well, with no membership required. The big question is, how will they get there?

Amazon’s infrastructure makes 1-day delivery relatively straightforward, seeing as how they own and control most of their delivery network. For a behemoth like Walmart, it may just mean investing in the necessary infrastructure to build their own in-house delivery network like Amazon. They certainly have the dollars and the footprint to make it possible, if they want to, though scaling to be truly competitive with Amazon might take a while.

The vast majority of other retailers, however, need to lean on 3rd party logistics providers. These companies, large and small, will need to look outside their own walls for answers. For many, Fed-Ex might offer a suitable 3rd party option.

In late 2018, FedEx responded to the growing need for e-commerce-related expedited shipping with their “Extra Hours” program. FedEx Extra Hours offers next day local shipping and two-day shipping to anywhere in the continental United States. For the 99.9999% of retailers who can’t do what Amazon does, it’s at least one option that can keep them competitive for the time being.

The growth of the drone delivery sector may also provide a competitive asset. With UPS and Wing receiving clearance to operate drone programs in the US within the last couple of months and more programs from the likes of FedEx and Uber surely on the way, customer expectations for delivery speed will likely shorten even more in the years to come, perhaps shrinking from days to hours.

If this becomes the standard, one has to imagine several larger retailers may try to invest in their own fleets of drones to combat the financial drain of recurring 3rd party shipping costs. It will certainly be interesting to see what happens. One day in the near future we may look back on Amazon’s announcement as the critical tipping point that shifted shipping times from days to mere minutes. How other retailers respond now will tell the story. Amazon’s power move may have just expedited the process.

What do you think about Amazon’s announcement? How will retailers need to evolve to meet ever-increasing shipping speed demands? We’d love to hear what you think. Sound off on social media now and join the conversation.