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How Do Amazon and Wal-Mart Shape Up for Drone Delivery?

By Motley Fool Staff – Sep 29, 2016 at 6:30AM

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Drones could be the next arms race as retailers unleash the potential of this growing technology.

Wal-Mart (WMT -2.37%) is the best example of a traditional retailer trying to revamp and revitalize its business via e-commerce. One major aspect of those efforts is delivery, getting goods to customers as quickly and cheaply as possible. Though (AMZN -4.77%) boasts an expansive network of fulfillment centers that put it within a 20-mile reach of 40% of the U.S. population, it is still dwarfed by Wal-Mart's store footprint.

In this segment from Industry Focus: Consumer Goods, Motley Fool analysts Vincent Shen and Sarah Priestley discuss the advantages this footprint gives Wal-Mart and how effective drones could actually be reducing the cost of last-mile delivery. And all of this begs the question: How much are consumers really willing to pay for shipping?

A full transcript follows the video.

This podcast was recorded on Sept. 20, 2016.

Vincent Shen: When you look at, what I consider to be one of the biggest examples, it's the biggest example of a traditional retailer, like Wal-Mart, it's obviously been focused a lot in terms of its e-commerce efforts. We've talked previously on this show about its acquisition and other efforts. I think for the most recent quarter, it's been able to return to more robust levels of growth for its e-commerce efforts. And they are really pushing their shipping option. They have their Shipping Pass package, now, I think it's $50 per year, comparable to Amazon Prime.

Something I thought was really interesting is, Piper Jaffray research analysts estimates that Amazon has successfully built out its network of fulfillment centers at this point to be within 20 miles of 44% of the U.S. population. Back in 2010, that penetration level was just 5%. On the other hand, we know that Wal-Mart has a ton of stores. What's their penetration level?

Sarah Priestley: They have a store within five miles of 70% of the population.

Shen: So, what do you see in terms of shipping, the drone opportunities, how do you see that playing out? Because Amazon, obviously, with about 44% penetration within 20 miles, that seems, potentially, in the future, as the technology develops, as the flight times improve, for them to be able to really deliver and expand what is right now a limited 40 markets for Prime now, essentially, your delivery within one or two hours. What do you think?

Priestley: I think there's a lot of hurdles for them to overcome, not just regulatory. I think it's going to be a societal change, too. How much do you really need to get it within 30 minutes? And, obviously, price will affect that. But, as you said, Wal-Mart's distribution of retail locations is a huge advantage. I don't think people realize, when you talk about drones, the idea is that it will essentially be a single-package short delivery.

Then, this opens up a whole secondary question over how cost-effective is this actually going to be? A lot of people have made the argument that this could be, in fact, cents per mile. The last mile of the delivery is where the opportunity is for retailers. I think the last mile adds 28% of the cost of delivery. So, if you just take this last mile and think about how much cost benefit there is going to be for a drone. And there are some analysts that are pegging this out to be ridiculously cheap, $0.88 for the final delivery. Some of them are pegging it to be $10 to $17 per delivery, depending on what you factor in. So, there's a whole host of issues. There's a whole timeline when we need to find out what the price point is for people; if they actually want this, how much they're willing to pay for it.

Deloitte surveyed last year 4,000 shoppers around the holiday season, and a quarter of them were unwilling to pay for next-day delivery. You can see that expectations are rocket-high from consumers already from what they're expecting.

Sarah Priestley has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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