Next day shipping wars: Can etailers compete with Amazon?

In the well-worn fable, the tortoise beats the hare. But in the e-commerce shipping world, speed is money and tortoises lose. This reality is evidenced by the rapid evolution of shipping offers and race to decrease order fulfillment time – from Target announcing it will launch buy online, pick up in-store to Urban Outfitters’ announcement to build a new distribution center in eastern Pennsylvania to service online orders on the East Coast faster. Companies that can offer speedy delivery without breaking the bank will have a sharp competitive advantage. And there’s every reason for companies to get this right.

Shipping issues represent almost half of the top 12 reasons consumers do not shop online.

Shipping issues represent almost half of the top 12 reasons consumers do not shop online. Chief complaints include not wanting to pay for delivery costs (29 percent) and needing the product the next day (26 percent) . Despite the fact that 90 percent of companies’ offer next day shipping, it typically costs four times the amount of standard shipping, which is often free.

This means most consumers still do not see online shopping as a viable option for occasions when time is of the essence – e.g., buying the last minute party gift or the right shoes for this weekend’s wedding. However, Amazon is poised to fill this void and once again revolutionize e-commerce by changing consumer expectations.

Despite the fact that 90 percent of companies’ offer next day shipping, it typically costs four times the amount of standard shipping, which is often free.

Most etailers are unable to offer next-day shipping at an attractive price. This is because the cost of shipping is largely dependent on the distance shipped, which is directly related to the number of distribution centers (DC) used to fulfill online orders. The more distribution centers, the lower average distance shipped to consumers. And most etailers are not large enough to operate more than a handful of DCs.

The numbers are striking. A retailer with one DC would have an average next day cost about $27 per package. With 10 DCs, the cost decreases more than 60% to roughly $10. And with 35 DCs, a number Amazon easily exceeds, the cost decreases to under $5.

This is because with more than 35 separate DC/fulfillment locations, a large etailer like Amazon can reach 91% of consumers within one day via Ground shipping. In contrast, typical e-commerce companies with only two optimally placed fulfillment centers are within one-day reach of just 11% of the population via ground shipping, leaving them with only prohibitively expensive overnight air shipments to match service using their fulfillment centers.