It didn't take long for Amazon.com (AMZN -1.74%) to ramp up its one-day delivery plans. Less than six weeks ago, CFO Brian Olsavsky told investors the company's plans to "evolve" Prime two-day delivery to one-day delivery. On Monday, Amazon started guaranteeing one-day shipping to Prime members nationwide on over 10 million items.
While that's only 10% of all the items eligible for two-day shipping, the company points out that it's 10 times as many items as were available when Prime shipping first launched in 2005. Moreover, the selection is quite a bit broader than Walmart's (WMT 0.56%) NextDay program, which features just 220,000 products and is currently limited to select cities. And Target's (TGT -0.41%) ReStock program offers just 35,000 products for next-day delivery.
Fast shipping is more important to Amazon than it is for Walmart and Target, which have been leveraging their physical stores to fulfill online orders. But Amazon has a massive lead over the competition, and it's just getting started.
Image source: Amazon.com.
Why fast shipping matters
Prime is all about convenience. The more convenient it is to buy an item from Amazon, the more likely a customer will will be to make that purchase. Believe it or not, there are numerous instances where receiving an item in two days simply isn't convenient enough. For example, if a customer runs out of makeup or other beauty product he or she uses every day, that person is going to want a refill the next day.
Walmart and Target have stepped up their fulfillment speeds over the past couple of years. Walmart notably developed a strong service with its grocery pickup option, which caters to more than just grocery shoppers. Health, beauty, and household items make up more than 50% of pickup trips, according to data from research group Numerator. Target's DriveUp service enables consumers to buy pretty much anything available at their local store aside from perishable food, flowers, and adult beverages and pick it up curbside the same day.
Amazon doesn't have local stores with thousands of items available for pickup. But it does have a vast fulfillment network. Not only does it now have 10 million items available for one-day shipping for Prime members, but it also offers same-day delivery on "millions of items" for members in 44 metropolitan areas.
Amazon already reaches about 100 million U.S. consumers with its Prime membership. But it's still seeing those customers tap Walmart or Target for convenience items. Sixty-five percent of Walmart's grocery pickup orders come from Prime members, according to a Numerator survey. Faster shipping is the key to winning more of those sales and attracting more consumers to Prime.
Just getting started
It's important for investors to note that Amazon is just getting started with its investments in faster shipping. The company has been steadily improving shipping speeds over the past several years, but it only just stepped up its investment in fulfillment in April. The company will invest an additional $800 million this quarter, and investment will probably remain elevated indefinitely.
"We will keep adding more products and expanding our delivery areas [for one-day shipping] to ensure Prime members get their products faster than ever," the company wrote in a press release. "We will also continue to offer Prime Now, same-day delivery, as well as millions of items for two-day delivery."
Building out a fulfillment network capable of delivering tens of millions of items to around 100 million consumers seven days a week could have ancillary benefits beyond winning additional sales on convenience items. In January, Olsavsky mentioned that fulfilling orders itself is cheaper than fulfilling orders through its delivery partners. Meanwhile, a network so dense and capable of moving packages across the country quickly and efficiently could be useful to other businesses as well. Amazon might be laying the groundwork for selling extra cargo capacity to enterprises that need shipping services.
Amazon's investments today ought to pay off in greater sales today, as it offers better convenience to compete with in-store fulfillment from Walmart and Target. Long term, it could lower Amazon's fulfillment costs and open the door for another lucrative revenue stream.
