Correct: There is No Such Thing as a Free Lunch

Online Customer Demands, Delivery Speed and the Value of Patience

When I was learning to drive, there was a public service commercial on television with the theme “Speed Kills.” That ad and the scary association has stayed with me ever since.

When I consider the impact changing consumer demands are having on the eCommerce last mile delivery times, I am reminded speed may not kill, but it can wound. Most retailers would go out of business if they bet the business on being able to offer the same speedy free shipping year round to match Amazon’s offering.

At Least This Part is Easy
Building and managing a world class fulfillment operation is terribly complex. Acknowledging the trade-off between delivery speed and cost of delivery is not.

There is no such thing as “free shipping.” Fulfillment and shipping costs end up coming partially or totally out of the retailer’s margin or some or all the true cost is coming out of the customer’s pocket. As for Amazon, the Prime membership fees collected from its estimated 65 million members do help offset a portion of the cost of offering “free” shipping. There remains, however, a significant net cost to that benchmark delivery offering. The different ways retailers respond to customer demands around delivery go a long way to determining which players struggle and which keep up. Many retailers analyze data to understand customer demands – including how much they value speed vs. delivery cost. Others go by gut. Others need to get a clue. And fast.

The Bar is High, or The Moat is Deep
There is no question as I travel through the market meeting with existing and future retailer and 3PL clients that among the many ways Amazon is disrupting the world of retail, logistics and customer experience, one of the most impactful is the speed at which Amazon can get that package to your home. Bezos and company have set a maddeningly high bar for other online players to have to contend with. When you’re the early innovator, the largest share owner, builder of a market-leading logistics network and growing at a faster rate than online retail as a whole – all at the same time – you can set customer expectations that are painfully hard for other players to be evaluated by. This is exactly what Amazon has done so effectively.

The rest of the online retailer universe is faced with deciding what kind of delivery experience it needs to offer its customer to compete with the scale and profit proposition of Amazon. Every retailer is different. The challenge, however, is common.

As we have discussed in this space previously, Amazon has been masterful in building its fulfillment network aligned with its focus to bring the broadest selection, to the largest potential customer base and to deliver it faster and more seamlessly than any other company. Historically, Wall Street has embraced the Amazon proposition that free cash flow is more important than profits. This has enabled Bezos to continue to build scale without having to obsess over creating significant profits to mollify the Street, much to the consternation of other players. While recent quarters have begun to return above-expectation profits, the focus remains on free cash flow and delivering the lowest possible cost to the customer.

The larger the network, the faster (and cheaper) Amazon can bring wider selection to more customers the same day. What powerful leverage this creates. The growth of the Amazon Logistics network of sortation centers, the hugely successful partnership with the US Postal Service including direct postal injection and Sunday delivery, and the explosion of PrimeNow and last mile delivery have trained customers to search and shop on Amazon first, knowing they can get a wide range of products (tens of thousands and growing rapidly) as fast as two hours.

As I have said for a long time, Amazon has gotten us addicted to the drug of instant gratification. Bezos has trained us to expect instant delivery because it’s there.

How Do You Compete with That?
Not all retailers may decide they need to. They don’t necessarily have to match Amazon if there are other features of the value proposition for which customers are willing trade in exchange for speed.

I have met recently with multiple retailers who either by measurable customer feedback or intuition contend their shoppers are willing to wait in some case 5-7 days to receive online orders in light of the remarkably loyalty to the brand. For certain retailers this is likely true. For others this might be viewed as rationalization of a less-than-ideal offering. Intrinsic in each retailer’s value proposition is a service level agreement – for some being able to provide same day delivery at little or no cost is required. For others speed of delivery and associated costs look very different. The key is knowing the customer intimately enough that retailers can make data-driven decisions on delivery offerings. Hoping they know their customer is not a winning strategy.

Select online retailers – including Amazon – are experimenting with incentives to induce customers to opt for slower, less expensive delivery options. It is still early to deduce meaningful impacts (a.k.a. savings), but offering a small discount or other such benefits will likely entice some share of online customers to be patient and select slower delivery. When customers are patient enough to wait for that item, the net effect to the retailer is margin relief. Delayed fulfillment also enables retailers to schedule picking and packing of such orders – and most importantly the associated labor – more cost effectively.

The next time you order that pair of socks online that you don’t absolutely have to have today, look for the retailer to try to entice you to wait until, say, Friday with a few music downloads or a dollar or two of “reward.”

Ship From Store – Harder Than it Sounds
One common strategy physical retailers have deployed to be “omni-channel ready” is to try to leverage something Amazon does not yet have: significant networks of stores. Ship from store, however, is not for the weak at heart. It is very difficult to execute economically. Sure it appears that if an item is in-store it could be delivered to the local customer faster and cheaper than from a remote fulfillment center.

Getting the in-store inventory placement correct whereby the right SKUs are in the right stores at the right times to meet demand from both walk-ins and changing online demand profiles is challenging. Building up additional inventory in the store network in anticipation of shipping online orders from stores is very expensive insurance again damaging stock outs. Finally, picking, packing and shipping requires a different labor profile than trained sales staff. Many retailers who have gone to ship from store will find the perceived advantages may not pan out.

How Do Customers Weigh Speed and Cost?
McKinsey recently conducted a survey of 4,700 active online customers that concluded for the majority price remains the key decision criterion in selecting delivery options.

The same survey concluded demand for faster delivery options is very elastic up to point: 50% of respondents indicated a willingness to pay for same day delivery, but only up to $3.00 per (presumably low price) single order. Only 5% were willing to pay greater than $3.00 per single order for same day.

If this study is representative of the greater online market, it suggests that retailers do not have much leeway to explicitly pass on costs of faster delivery to the customer. Cultural norms can be significant factors as well. The McKinsey study concludes that Chinese online customers are twice as likely as US shoppers to value the importance of speed over cost in selecting delivery options.

Who Has Compressed Time the Most?
A two year assessment of retailer delivery performance conducted by market data analysis consultants Slice Intelligence finds that finds in 2015, 50% of the top 30 largest eCommerce retailers featured a “free” shipping offering through most of the year, up from 33% in 2014. In addition, the average actual delivery time among the 30 largest eCommerce retailers in the US is currently 4 days.

Average actual delivery time among the top 240 largest eCommerce retailers (excluding) AMZN decreased from 8.3 days to 5.1 days between spring of 2014 and spring of 2016. Data for the study was drawn from analysis of just over 100 million shipments over the three years. As summarized below, top retailers have made significant strides in shortening delivery times over the last two years. Investment in additional fulfillment centers, enhanced supply chains and improvements in service from major carriers such as UPS and FedEx is paying off in shorter delivery offerings.

Conclusion
As market leader and with the significant penetration of Prime, Amazon has set exceptionally high standards for customer experience, including free shipping and ever-faster delivery. This does not mean there is not a significant share of the online space that is still up for grabs. Trying to match Amazon feature for feature is a fool’s errand for many retailers. Many will fail trying to do so. Speed in this context can kill if it gets out of hand.

It is imperative that with continued investment in fulfillment networks and supply chains, retailers carefully monitor the changing tradeoffs between cost to the customer and speed of delivery options. The most successful online players will be those that intimately understand their customers’ expectations, build their delivery offerings in keeping with their value propositions and leverage the differentiators that set them apart – from Amazon and each other.
Ben Conwell
Senior Managing Director – Americas Practice Leader
eCommerce and Electronic Fulfillment Specialty Practice Group
Logistics & Industrial Services
[email protected]