Amazon made headlines in late April when their CFO Brian Olsavsky said they would be enhancing their Prime offering from free two-day shipping to free one-day shipping. Olsavsky went on to say that Amazon plans to spend $800 million in the second quarter in order to improve its warehousing and delivery infrastructure to achieve this goal.
Now that the dust has settled from that announcement, it’s important to consider why Amazon would make that move and what advantages it provides Amazon in its quest to dominate ecommerce and increasingly, retail as a whole.
Many news outlets quickly jumped on the story and wrote about the pressure they thought the announcement would put on other retailers like Walmart and Target (CNBC, Yahoo Finance) and shares for both retailers dropped in response.
This negative outlook for Walmart and Target, however, was overblown and didn’t address where the greater pressure would arise. Amazon’s free one-day shipping weighing most heavily on individual brands.
In an age of direct-to-consumer ecommerce, where brands can improve their own margins by selling to customers through their website instead of through retailers, closing the gap in delivery time to customers has become paramount. A brand can have millions of social media followers and a strongly engaged audience, but if they can’t get product into people’s hands fast enough and monetize the attention on their own website, much of the opportunity is wasted or diverted to retailers or online marketplaces.
While it wasn’t all that long ago that many brands were generating positive revenue by charging for standard shipping using programs like “flat-rate shipping”, things quickly changed when Amazon offered free two-day shipping. Since then, brands have spent the better part of the last decade scrambling to catch up to both the speed of delivery and the operational efficiency required to both meet and afford the “free shipping” expectation that customers have. Brands responded by opening additional warehouses, partnering with third-party logistics providers, and streamlining their warehouse operations to keep up with this new cost of doing business online, and for many brands, they made the transition successfully.
Brands made these investments in their infrastructure because they saw the financial opportunity in maintaining the margins that selling through their website afforded them.
Brands also weren’t alone, leading retailers like Walmart and Target had to make massive investments to improve their infrastructure and delivery capabilities to remain competitive with Amazon and brands themselves.
It was a fight for the transaction.
All that investment and the gains in efficiency were great for brands, retailers, and even customers, but now that Amazon has upped the delivery requirements, it’s brands, not retailers that will be left behind.
To make matters worse for brands, the new one-day delivery requirements might be unattainable.
Compared to brands, retailers like Walmart and Target, have the advantage of scale that brands don’t. Where a brand might have invested tens of millions, or even hundreds of millions of dollars in distribution capabilities and more efficient operations in the past three to five years, Walmart and Target have each invested billions of dollars. Target is in the midst of investing $7 billion in capital and $1 billion per year in operating costs between 2017 and the end of 2019 in an effort to modernize their stores and distribution network. Walmart has committed to improving their operations with their most recent plan to invest $11 billion in 2019 in order to emphasize technology in their stores and improve their ecommerce performance.
All this amounts to major advantages in distribution infrastructure for Amazon, Walmart and Target. By sheer square footage and distribution end points, the scale that these companies have achieved in the United States gives them a tremendous advantage in shortening the delivery to each customer and capturing more transactions:
While Amazon has always been known for investing heavily in their distribution network to improve customer deliveries, Walmart and Target are now doing the same. These Big Three can afford the billions of dollars in investment required to expand their distribution infrastructure by spreading the cost across millions of items and hundreds of millions of individual transactions every year. No brand can compete.
Walmart and Target also benefit from their existing infrastructure at their retail locations which they can leverage. For them, the challenge is equal parts connecting each existing endpoint as it is adding new facilities to improve their ecommerce performance.
Very few brands have the infrastructure, the resources, or the volume of transactions required to sustainably offer one-day delivery to their customers.
And what happens when Amazon, Walmart, and Target move to same-day delivery?
If brands thought it was difficult and expensive to support two-day delivery, closing that delivery time to one-day, let along the imminent same-day delivery, is going to be nearly impossible.
What does that leave for customers? Where do you think people will shop when they go to purchase their next jacket, pair of pants, cell phone case, car seat, prescription medication, or groceries? Why would anyone pay more, wait longer, and have to go to multiple websites to buy what they are looking for?
The online marketplace, combined with physical distribution and retail locations, provide Amazon, Walmart, and Target with the ability to offer a customer convenience experience that can’t be matched by a brand, and these companies will continue to dominate transactions, and therefore sales, because of it.
Building a brand without leveraging an online marketplace or retail partner just got a whole lot harder.