The Dark Ages
Online shopping 20 years ago was a simpler time. Purchases arrived at your door in 5–6 days ( the horror) for a reasonable price. If you wanted that purchase faster, you’d select an express shipping option and pay more.
So how did we arrive at today’s next-day or same-day expectation? You guessed it, Amazon Prime!
We didn’t know we wanted two-day shipping until one day, we absolutely needed it. But how did Amazon offer such an experience without breaking their own bank? The answer revolutionized e-commerce fulfillment, but don’t worry, we will detail how your online store can keep up with even the biggest of retail players.
When announcing Amazon Prime, Jeff Bezos referred to the service as “All-you-can-eat Express Shipping”. As you know, Prime offered unlimited 2-day shipping on millions of items for the low price point of $79 a year.
So how could Amazon offer “free” express shipping with razor thin retail margins?
First, the price was right and the service was in demand. At the time, consumers ordered ~11 items a year online, so pre-paying for 9 packages via the Prime membership made sense.¹ We also have the benefit of hindsight and the numbers speak for themselves: from 2008–2020 Prime membership grew ~200x with ~43% of US adults being members. People loved Prime and bought more online as a member.
Second, starting slowly in 2000 but ramping up from 2012 on, Amazon began to invest in their own distribution and sortation facilities. This was a capital-intensive move that appeared counterintuitive (pivoting from the trusted hub and spoke network that most logistic networks are built on). Amazon prioritized placing inventory closer to the end-customer and spending more on warehousing over spending less on warehousing and more on shipping.
A National Bureau of Economic Research (NBER) study suggests that from 2000 to 2018, Amazon added 123 fulfillment centers and 35 sorting facilities (They funded these infrastructure investments with profits from the commercial success of other parts of their business). This allowed Amazon to move inventory closer to their end-consumers which lowered shipping costs. In fact, the NBER suggests that their final mile shipping costs fell 85% over the 18-year period (this is without including the better negotiated rates they likely received from the major final mile carriers). This decrease in shipping costs more than offset the cost to manage the additional facilities, leading to a total savings of 55%.
In addition to the cost savings, Amazon’s new distribution network better positioned them for cost-effective same and next day delivery (they have already announced same-day coverage for 12 metros). This is true for both 1st and 3rd party deliveries. For 1P, transportation expense is lower on shorter distances, especially if you can avoid more costly modes of transport like air. For 3P the same rules apply: you push more volume to guaranteed ground pricing instead of expedited.
Why is hitting these shorter delivery times important? Because Amazon is pushing it as their next market expectation and the results are already starting to show. Customers who have tried same day shipping is up 12% year over year to 36% while 35% of customers expect next-day or better to be available. This demand is also 13% higher in younger segments, meaning it is here to stay.
How can I compete with Amazon?
First, make sure you need to. Understanding the right strategy for your category and customer base should be your first assessment as expectations do vary. A recent McKinsey report explains that younger customers and customers living in major cities will expect faster delivery times. Outside of demographics, category of item also impacts the need for speedy delivery. The following list details the expected delivery days by category:
Food and Grocery
Examine your biggest segments to determine the optimal delivery speeds for the best customer experience at the lowest price to you.
If you find that your segment and customer base expect fast (next or same day) delivery, all retailers can compete by outsourcing their inventory to 3rd party logistics providers that offer next day through an Amazon-style warehouse footprint.
Here are some of the options in the market today:
UPS launched a fulfillment solution supplemented by their nationwide shipping fleet in 2019. Last year, they added two new warehouses in Dallas and Atlanta to supplement local next-day in key markets.
Ware2Go uses their platform to connect their network of 32 warehouses across the US. Their solution enables a customized warehouse footprint, allowing fast delivery only where needed.
If you are managing multiple warehouses, it can be more difficult to optimize inventory allocation. Items are spread thin across the network leading to increased precision necessary to maintain in-stock and, just as important, in-stock within a desirable delivery window levels (46% of customers abandon shopping carts as a result of longer delivery times). Fortunately, the services above provide technology or expertise to guide you in allocating your inbound inventory in their network.
Unfortunately, most of these platforms require you to manage your own returns processing manually, which can be up to 30% of your inventory. For this reason, optimizing stockable returns quickly and accurately can be critical to having an item in-stock in the right location. This makes returns pickup (adds 22 days of shelf time) and optimal returns routing (adds 20 days of shelf time) key pieces to a successful wide fulfillment footprint (not to mention that fact that getting products back on the shelves quickly improves the expected value of your inventory by up to 15%).
At Boomerang we have experience optimizing returns for multiple large retailers and would work with your shop to create the same efficiencies. Click here to sit down with us and get started.
¹In 2005, 46% of American adults bought a product online or ~100m people (18+). Total e-commerce sales reached $109b or ~1.1b orders (assuming an average order value of $100). Under these assumptions, the average online shopper was ordering ~11 packages. Granted not every order was on Amazon, this still shows that the average consumer making 9 orders to recoup their Prime fee was possible.