How Two-Day Shipping Has Changed Shopping Forever

The convenience offered by two-day delivery has supplanted other qualities as a determinant of customer purchase decisions. And the race now will be to reduce that time frame even more. JL

Christopher Mims reports in the Wall Street Journal:

The future goes to players big enough (or innovative enough) to cut costs on shipping, even while getting goods to everyone in the U.S. in two days or less. And that “or less” is key. While competition mounts, Amazon continues to ratchet up pressure by offering same-day—and even two-hour—delivery. And that’s before delivery drones.
Alongside life, liberty and the pursuit of happiness, you can now add another inalienable right: two-day shipping on practically everything.
Amazon.com Inc. AMZN -1.51% has made its Prime program the gold standard for all other online retailers, according to surveys of consumers. The $119-a-year Prime program—which now includes more than 100 million members world-wide—has triggered an arms race among the largest retailers, and turned many smaller sellers into remoras who cling for life to the bigger fish.

In the past year, Target Corp. , Walmart Inc. WMT 0.16% and many vendors on Google Express have all started offering “free” two-day delivery. (Different vendors have different requirements for no-fee shipping, whether it’s order size or loyalty-club membership.)
Amazon and its competitors are often blamed for the death of bricks-and-mortar retail, but the irony is that these online retailers generally achieve fast shipping by investing in real estate—in the form of warehouses rather than stores. To compete on cost, the vendors must typically ship goods via ground transportation, not faster-but-pricier air. The latest to offer free two-day delivery is Overstock.com , which uses three company-owned distribution warehouses in Pennsylvania, Utah and Kansas, plus a network of thousands of vendor partners who ship directly to customers.
But the biggest online retailers aren’t the only ones building massive fulfillment centers and similar operations. Fulfillment startups and large companies from other sectors are hoping to scale up by luring smaller sellers who want alternatives to Amazon’s warehousing and delivery operations.

Bricks-and-Mortar E-tail

It’s taken so long for other online retailers to catch up to Amazon’s fast delivery because of Amazon’s massive investment in geographically dispersed warehouses—once viewed by analysts as a liability.
Amazon now operates more than 75 fulfillment centers and 25 sortation centers (which group goods by destination) across the U.S., according to the company. Some of these distribution centers are truly gargantuan, exceeding a million square feet, their insides a spaghetti of conveyor belts and furiously busy workers.

‘Using Amazon’s infrastructure isn’t just a matter of cost and convenience. It’s also key to racking up sales.’

To match that, Walmart began opening its own online fulfillment centers—for the most part distinct from store-serving distribution centers—in
2015, says a company spokesman. It now has 6 “campuses,” and supplements those with an indeterminate number of smaller centers, as well as shipping from its own stores. As a result, Walmart can reach 98% of the U.S. with ground shipping in under two days.
Target, meanwhile, adopted a completely different strategy. Over 90% of its orders that arrive within 2 days are shipped from 1,400 of its 1,800 stores, says a company spokesman.

Optimizing Prime

Amazon’s shipping infrastructure isn’t used just by Amazon. As shoppers who read the fine print know, it’s also available to its retail partners through its Amazon Marketplace. Of the top 10,000 sellers on Amazon—collectively representing about half of Amazon’s Marketplace revenue—about 90% have at least one product in the Fulfillment by Amazon program, says Juozas Kaziukėnas, chief executive of Marketplace Pulse, a business-intelligence firm focused on e-commerce. Almost 70% use it to stock and ship at least half their products, he adds.
Sellers in the program pay a fixed shipping rate based on size and weight. One of Amazon’s earliest innovations, it allows these small businesses to project their costs, and know what price they can profitably offer to shoppers.
Using Amazon’s shipping infrastructure isn’t just a matter of cost and convenience. It’s also key to racking up sales. The fulfillment program gives products Prime status with two-day shipping, essential for winning top placement in Amazon’s search results. Being anything other than first in those rankings means having to cut prices by as much as 10% to compete, says Mr. Kaziukėnas.
While opening Amazon’s network to other sellers helps those sellers, it has also helped Amazon finance the expansion of its own distribution network, made Prime a household word, and propelled the company to a trillion-dollar valuation. Its example is one that can only be followed by other giants—or startups trying to beat Amazon at its game.

Competitors Great and Small

Amazon’s nominal competitor in online retail, Walmart, also offers a marketplace for third parties to sell their goods; the big difference is, it doesn’t assist them with fulfillment—and forbids them from using Amazon’s fulfillment services. (It’s not uncommon for items purchased on eBay or Google Express to arrive in Amazon boxes.)
So some sellers are turning to startups like ShipBob, Flexe and Deliverr.
Scale is essential. Mom-and-pop shops and even midsize retailers can no longer assume buyers will put up with getting their goods several days later via the U.S. Postal Service. In response, startups are trying to aggregate enough retail customers that they can offer the all-important fixed rates for nationwide two-day shipping.
Deliverr’s challenge has been figuring out how to match Amazon’s massive infrastructure without building its own, says co-founder Michael Krakaris. The company leases warehouse space nationwide, then uses predictive algorithms to tell sellers where to stock their goods to be within two days of potential buyers.
Established players from related industries that already have massive scale are also seeing a chance to compete with Amazon. Both United Parcel Service Inc. and FedEx Corp. have recently announced their own fulfillment programs.
UPS’s system is the unfortunately named Ware2Go, which pairs companies that need warehousing and fulfillment with firms that have spare capacity. FedEx Fulfillment appears to be a direct equivalent to Amazon’s service: Businesses pay for warehousing and fulfillment out of FedEx-owned facilities. So far, neither service has gained wide adoption.The future, in other words, goes to players big enough (or innovative enough) to cut costs on shipping, even while getting goods to everyone in the U.S. in two days or less. And that “or less” is key. While competition mounts, Amazon continues to ratchet up pressure by offering same-day—and even two-hour—delivery. And that’s before delivery drones.