After Amazon (AMZN -0.66%) announced plans to "evolve" its Prime two-day shipping to one-day shipping during its first-quarter earnings call last month, it was only a matter of time before the big brick-and-mortar competitors stepped up to the challenge. Walmart (WMT 0.60%) even teased that it was working on something to compete.
Not three weeks after Amazon's announcement, Walmart on Tuesday revealed its plans to offer "free" next-day delivery on a selection of items. The program starts immediately in Phoenix and Las Vegas with Southern California to follow soon. The company expects to cover 75% of the U.S. population by the end of the year, including 40 of the 50 biggest cities in the country. Customers will be able to select from up to 220,000 items for delivery within one day.
The move is a necessary step for Walmart to keep up with Amazon, but it also shows just how far behind it is compared to the competition. Here's what investors need to know about Walmart's "NextDay" service.
How NextDay works
Walmart is adding a special NextDay section on its website that will show online shoppers the selection of items available for next-day shipping. As long as customers add at least $35 worth of those items -- and only those items -- to their cart, they'll receive their delivery the next day.
Behind the scenes, Walmart is sourcing inventory from fulfillment centers closest to shoppers. So, someone in Phoenix will see different product availability than someone in Las Vegas, for example. Walmart says shipping items from a single nearby fulfillment center not only enables it to deliver orders the next day, but it also cuts down on shipping expenses.
Walmart currently offers free two-day shipping on a few million items. But sometimes Walmart has to cobble together orders from multiple facilities, leading to costlier fulfillment. Walmart is sacrificing some margin today in order to stay competitive with Amazon -- a very Jeff Bezos-esque move.
Just catching up with other brick-and-mortar competitors
Walmart's NextDay program sounds a lot more like Target's (TGT -3.26%) ReStock program than Amazon's Prime one-day shipping ambitions. Target ReStock offers 35,000 items available for next-day delivery with similar constraints as Walmart's NextDay. It's also free for Target RedCard credit or debit card holders (which has no fee), or $2.99 per delivery for those without a RedCard. The company expanded the service nationwide one year ago.
Walmart's service will offer a broader selection, but customers are still largely limited to everyday essential items in both services. Neither is supposed to be a replacement for making a trip to the store for a lot of items you'd normally purchase more sporadically.
Still way behind Amazon
Walmart's ambitions to offer free next-day delivery of more than 200,000 items to 75% of the population by year-end is a great achievement and a necessary move to keep up with the competition.
But Amazon is already in a position to offer one-day shipping on tens of millions of items to more than 70% of the country. That number is rapidly expanding as it invests in additional fulfillment capacity and delivery operations. It's the last 20% or so that's the hardest to reach.
Moreover, Amazon offers Prime Now delivery for everyday essentials in more than 50 cities around the world. The service offers free same-day delivery for tens of thousands of items. After purchasing Whole Foods, Amazon incorporated grocery delivery into the Prime Now program, expanding it to dozens more cities. Walmart, notably, also offers a same-day grocery delivery program, but for an additional fee.
Walmart won't be catching up with Amazon anytime soon. Amazon is investing an extra $800 million in fulfillment and logistics capabilities this quarter alone. The brick-and-mortar retailer's NextDay plans merely puts it on par with other leading big-box retailers.
Amazon expects that the faster shipping speeds it offers will steal sales from brick-and-mortar competitors by increasing the number of items shoppers will consider buying online. As the largest brick-and-mortar retailer in the world, Walmart needs to do its best to keep up with Amazon, since it has the most to lose.