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Why Amazon's Willing to Spend Billions on Next-Day Shipping

By Adam Levy - May 4, 2019 at 10:10AM

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Faster shipping means more Amazon Prime members spending more money more often.

Amazon (AMZN 3.66%) CFO Brian Olsavsky revealed late last month that the online retail giant is looking to speed up Prime shipping. The company is investing $800 million in the second quarter alone to improve its fulfillment network and start delivering packages more quickly. Olsavsky gave no indication of how much in total the company will spend revamping its logistics operations, but $800 million is likely just the start.

Faster shipping is one of the best investments Amazon could make: 83% of Prime members in the U.S. said in a February Feedvisor survey that two-day shipping is what they like most about the program. Just 10% of respondents said they like the video and music streaming benefit more than unlimited fast shipping. Just for reference, Amazon is on pace to spend about $7 billion on video and music content this year.

Investing in faster shipping will make Amazon more attractive for both existing and potential members. That's increasingly important, as Amazon has nearly saturated the market in the U.S.

Amazon boxes lined up to get on an Amazon Air cargo plane.

Image source: Amazon

I want it now

There's certainly demand for fast delivery. Amazon itself has rapidly expanded its ability to fulfill orders the same day through its Prime Now program, which is available in more than 8,000 cities. What's more, the majority of shoppers are willing to pay extra for faster delivery, according to various surveys.

Offering shoppers a selection of more than 100 million items available at the doorstep within 24 hours makes Prime quite enticing.

Competitors like Target (TGT 2.41%) and Walmart (WMT 1.97%) have managed to attract customers to their platforms because users can buy online and pick up orders in store the same day. Both have also experimented with same-day delivery. Walmart offers same-day grocery delivery in more than 100 metro areas, but charges $9.95 per delivery. Drivers also might expect a tip.

Still, consumers are taking the big-box retailers up on the offer for faster shipping despite the relatively high price tag. That's indicative of the demand for the service.

Staying ahead of the competition

The massive demand for faster shipping makes Amazon's move a natural fit. It's already well ahead of Walmart's and Target's average shipping speeds for most products, and its push to next-day delivery will put the pressure on both companies to increase their fulfillment capabilities.

Target has been transitioning more online order fulfillment to its stores, but there's a significant challenge in moving from two-day fulfillment from stores to next-day. It might work in certain metro areas, but if Target or Walmart wants to offer next-day delivery from its stores nationwide, they need to either pay more to their shipping partners or rework their entire fulfillment system.

Since Amazon is moving toward owning more of its fulfillment network, it has an easier path to rapidly expand next-day shipping nationwide.

Winning more Prime members for cheap

If Amazon has to spend an extra $800 million a quarter indefinitely to build out its logistics network for next-day shipping, it'll be worth the investment. As mentioned, the company is on pace to spend about $7 billion on digital media this year, and that's not even the most important part of Prime, according to the vast majority of members.

Amazon uses video and music as a way to attract and retain new subscribers, but next-day shipping will likely do an even better job. Not only is it something consumers have shown interest in, but it's also a differentiated service. There are a growing number of competing video and music streaming services competing against Amazon Prime, but nobody's offering unlimited next-day shipping on more than 100 million items.

Getting more Prime members is Amazon's ultimate goal. Prime members are more loyal Amazon shoppers and spend more than twice as much per year on average compared with nonmembers. And with next-day shipping, Prime members may be spending even more as Amazon could win more time-sensitive sales that would have otherwise gone to brick-and-mortar retailers.

More Prime members spending more on Amazon will make the investments in next-day shipping more than worthwhile.

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