Although free two-day shipping is the standard today, it’s only been a decade since consumer delivery expectations were measured in weeks and shipping and handling fees were the norm. The change is in no-small part due to Amazon’s relentless push to extend the bounds of logistical possibilities and to challenge consumer expectations. The strategy yielded a large increase in its market share. Competitors were not ready for this dramatic change in consumer expectations and many were not able to find a way to make two-day shipping profitable without going out of business or significantly eroding the bottom line.
Today, Amazon is drawing from the same playbook by attempting to use same-day delivery to once again raise customer expectations to put massive pressure on traditional retailers to adopt another costly service. Until now, Amazon hasn’t been able provide the service in a cost effective manner enough to garner significant mass market adoption. As recent research from RSR shows, the problem is that consumers want same day delivery, but they don’t want to pay for it. As a result, Amazon has had to subsidize the cost of consumer demands for convenience, even at a loss, to bring same-day delivery to market. With Whole Foods, Amazon has a way to make same-day delivery both profitable and feasible at scale.
Why Amazon’s Strategy Might Work
One of the reasons same day delivery fails is that people want to touch, try, and trust products before buying them. Ordering products online, sight-unseen, no matter how convenient, makes this impossible. By introducing a delivery option with the same assortment of products on top of the existing store experience, Amazon delivers the best of both worlds. Whole Foods shoppers can use the store to see, feel, try, only then using the platform to easily reorder what they like.
Even with the option to outsource delivery, many retailers lack the technical or organizational capabilities or capital needed to support the heavy demands of fulfilling orders the same day. These demands include everything from upgrading in-store and online portals to accommodate new fulfillment options, as well as logistical considerations like expanding supply chains and training employees to support the new model. In this light, it makes sense that many of today’s delivery services such as Fresh Direct source goods directly from warehouses since doing so allows them to bypass these existing retailer logistical and technical constraints. However, doing so introduces the added cost and complexity of running a separate, parallel distribution network that is wholly dependent on the stand-alone same-day delivery service provider to fuel demand. The Whole Foods acquisition gives Amazon the unique ability to merge the distinct distribution networks for Amazon Fresh and Whole Foods into one that can be used as a single channel to service two areas of demand – the store and the delivery service. Combined with the enhanced visibility of the same day option, this will allow Amazon to offer the service in a more cost-effective way than any existing 3rd party platform or retailer.
Long Term Impact?
By raising the bar on how all retailers must service their customers, Amazon will gain a larger hold on the grocery retail market, which makes up almost 7% of retail in the United States (U.S. Census Bureau, 2012 Economic Census). This can be a major expansion beyond the 1.5% of retail sales they capture today. The combination of an improved web experience, enhanced service visibility, and superior distribution efficiency make for a lethal trio for all other grocery delivery businesses.
Other food retailers are going to have to step up and offer the same delivery option and experience, or they are going to fall behind. If they can’t afford to offer same day delivery, the Amazon and Whole Foods duo will most likely run them out of business. And if Amazon’s plan goes well for grocery, what retailer is safe?
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