The Amazon genie is out of the bottle, and it’s not going back in. The introduction of Amazon Prime in 2005 was a highly disruptive force in retail, and, until recently, it was hard to know how successful that foray into two-day free shipping (for a fixed annual fee) would be. Analysts and consumers alike thought it was a risky, expensive venture, but the results are in: Amazon Prime members comprise only 4% of Amazon’s active customers, but they make nearly 10% of all Amazon purchases, and they spend twice as much as non-Prime members.
Prime members purchase products across many categories. They tend to regard brick-and-mortar retailers as showrooms for products that they then go online to actually purchase. And with Prime membership expected to grow from 10 million in 2012 to 25 million in 2017, Amazon will continue to win business away from retailers who cannot adapt quickly enough.
This trend is sobering to traditional brick-and-mortar retailers, who used to feel secure in having the advantage of meeting consumers’ desires for “instant gratification.” Many consumers don’t want to wait to get something in their hands; they want it now, and retail stores have traditionally been the answer. Emboldened by the success of Prime, however, other innovators such as eBay, Google, and Walmart are now offering same-day delivery services, in an increasing number of markets. Only six months after launching the eBay Now one-hour delivery service in limited markets, eBay announced plans to expand it to 25 U.S. markets in 2014. And Amazon continues to push the envelope with its Amazon Fresh offering, where the consumer can select from several different pre-scheduled delivery slots.
You might argue that consumers don’t need same-day delivery, but the fact of the matter is that Amazon Prime is shaping mainstream expectations, and soon enough consumers will expect it to be presented as an option, just as we expect a smartphone to deliver maps, email, and picture-taking capabilities. In a survey by Bizrate Insights of more than 100,000 online buyers, nearly 24% said same-day delivery was important to them, and 6% said they’d consider shopping elsewhere if it was not offered.
For Amazon, delivery is a key component of its overall sales and marketing strategy, and the company is investing heavily in it. Rather than passing all delivery costs on to the consumer, Amazon is subsidizing shipping as a way to increase sales. And, by all accounts, it is meeting with enormous success. Rather than being caught off guard by this phenomenon, the VP of supply chain at a leading home products retailer regards it as a wake-up call that all retailers need to make it part of their overall investment strategy. “It should be like the third shift in retail, or being open on holidays. It is almost never profitable, but you need to do it to maintain your presence.”
Amazon has shaped consumer expectations with its various free shipping options, and it has the power to do it again with same-day delivery; other companies will be forced to follow suit if they want to remain competitive. For those who are still playing catch-up on diversifying the shipping options they offer, the question around implementing a same-day delivery initiative shouldn’t be “if,” but “when” and “how.”
The Evolution of Same-Day Delivery
Same-day delivery is not new. Before 2011, same-day delivery was primarily an offering of business-to-business retailers such as Grainger, the industrial supply distributor, who has been providing same-day delivery services for decades. Its MRO (maintenance, repair, and operations) customers need to receive replacement products immediately in order to continue operating their businesses, and Grainger has in place a knowledge of local inventory, integration with networks of local delivery companies, and operational processes to make it work economically. While Grainger offers an “ASAP” delivery that is similar to the eBay Now offering, that’s a premium service. What they’ve optimized around, rather, is a two-cycle, same-day service, meaning: order something in the morning and get it by the end of the day, or, order by the end of the day and get it the next morning.
Today, omni-channel retailing is blurring the lines between brick-and-mortar retailers and e-commerce retailers, forcing each to reevaluate its business models in order to stay relevant to consumers. Omni-channel retailers strive to deliver a seamless consumer experience through multiple buying channels such as mobile, Internet, brick and mortar, television, and catalogue, in order to catch a wide swath of consumers at their respective key buying moments. And they are starting to invest in updating their systems and processes to enable enterprise-wide inventory visibility and ever-faster product delivery.
Checklist to Implement Same-Day Delivery Services
While Amazon has certainly been giving retailers a lot of heartburn, there is an antidote. Strong competition forces leaders to reevaluate the status quo. Taking steps toward same-day delivery helps retailers meet consumers’ growing expectations for instant gratification, and making the necessary updates to their systems and processes enables them to operate more cost effectively and enhance customer satisfaction. Here is the checklist of what’s needed to offer same-day delivery:
Adopt an Omni-Channel Management Approach
Most retailers manage their e-commerce businesses entirely separately from their retail stores. P&Ls (profits and losses) never cross, customer bases are treated as distinct, and prices frequently differ. Same-day delivery requires planning and coordination across these boundaries. Perhaps the retail stores will need to incur costs such as hiring additional labor to help with online fulfillment, thereby blurring profit and loss across these formerly separate businesses. If your channels aren’t all pulling in the same direction, store managers may, for example, deprioritize activities related to deliveries, so that items show up late and customers are unhappy. Prices need to be aligned and centrally maintained, and loyalty information shared across channels. Delivering a high-quality, consistent customer experience requires that goals are set and shared across the various arms of the business, and incentives must be consistent throughout.
Gain Real-Time Inventory Knowledge Across Your Enterprise
If you already offer online ordering with in-store pickup, you have checked this box. But many retailers out there are still operating in silos that make it painful to correlate sales of products that are purchased via one channel and shipped via another. In order to realize the opportunities inherent in the omni-channel retail model, companies must break down not only the management barriers but also the information barriers that separate stores, e-commerce, and corporate. They must upgrade their inventory systems to enable centralized visibility across the enterprise, take very frequent inventory counts, increase safety stock levels, and integrate their POS, inventory, and e-commerce ordering systems so they know exactly which products they have, in real time.
Expand Your Fulfillment Strategy
The fulfillment strategy determines where you gather the product that has just been sold, which is why local inventory knowledge and integrated systems are so crucial to any same-day delivery strategy. Right now, when you order from eBay or Google and ask for same-day delivery, a company-employed driver goes to a nearby store and either shops for the product or picks it up from will-call, then delivers it to the customer. After analyzing regional sales volume, a company may decide to create “hub stores” or “micro-distribution centers” from which all deliveries to certain zip codes are fulfilled. This may require changing the layout of one store in a market to reduce showroom space, and adjusting staffing allocations to optimize the number of employees pulling and packing products for delivery versus working the floor and the registers. Depending on how heavily “branded” you want your delivery system to be, you may even decide to design special company packing materials. Amazon has invested heavily in local distribution, adding 18 new fulfillment centers in 2012 alone. For Walmart, this model could be especially attractive, since 96% of the U.S. population lives within 20 miles of a Walmart store, and the stores are similar to distribution centers in terms of room to maneuver, layout, and the ratio of floor-to-stockroom square footage.
These tips should get you started. Need more? Not to worry; we'll take a look at some additional strategies to adopt in our June e-update.