Amazon.com (NASDAQ:AMZN) has found a new way to hurt its retail competition, offering free next-day delivery for products that cost $5 and under.
The e-commerce giant is making it easier for Prime members to get free shipping on items that are priced below $5. That means customers can get shampoo, soap, toothpaste, and lots of other products in one day without paying for shipping. Previously, Prime members needed a minimum order of $5 for free delivery.
Target and CVS could lose out
By giving shoppers another reason to avoid visiting a store, Amazon could weigh heavily on the likes of CVS (NYSE:CVS) and Target (NYSE:TGT), which make money on cheap necessities like toothpaste, deodorant, and shampoo. Consumers can choose convenience over immediacy, boosting Amazon's sales at the expense of the two retailers, which have already been forced to reinvent themselves by Amazon.
By reducing delivery time for Prime customers to one day on these items, it can quickly become the place to shop for consumer packaged goods commonly purchased at Target, CVS, and other retailers including supermarkets. And more perks should increase the Prime member base even further, pulling more customers away from Target and CVS.
Target has poured hundreds of millions of dollars into redesigning its stores and investing in e-commerce to compete against Amazon. It has rolled out services like same-day delivery and curbside pickup for orders placed over the internet.
That has resonated with consumers. In its second quarter, growth from Target's digital channel was up 34% year over year. Same-day fulfillment services represented close to 1.5 percentage points of its comparable-store sales growth. While Target is firing on all cylinders right now, matching Amazon's lower free-shipping threshold won't make sense. Even with Amazon controlling a lot of the delivery in-house, shipping a $1 makeup brush free the next day isn't going to be profitable.
Meanwhile, CVS has been taking steps to stave off competition from Amazon's entry into the healthcare market. In June 2018, Amazon bought online pharmacy PillPack and has since announced a venture with JPMorgan Chase and Berkshire Hathaway to provide health insurance and access to telemedicine services to employees. CVS, in a counter move, recently hired a former Fitbit executive to lead the drugstore chain in creating consumer-focused health products. It is also creating HealthHUBs in some of its stores, where customers can access digital health tools and shop a wider inventory of products from CVS.com.
Amazon's move could raise red flags
Free shipping on low-priced items will be applauded by consumers and will likely increase Amazon's market share in consumer packaged goods, but it could also raise red flags with regulators and lawmakers. It's going to be hard for retailers to compete with Amazon on this new delivery strategy, which may raise antitrust concerns at a time when it's already under scrutiny.
In September, reports surfaced that the Federal Trade Commission (FTC) had started querying small businesses that sell products on Amazon's marketplace to ascertain if it engaged in anti-competitive behavior. The line of questioning reportedly suggests the FTC isn't buying Amazon's contention that there are a lot of choices for consumers and merchants online.
Then there's the risk Amazon could turn off a segment of its employees who want the company to do more for the environment and to fight climate change. It was only a few weeks ago that Amazon announced its plan to reach net-zero carbon emissions by 2040, 10 years earlier than the timeline set forth by the Paris climate accord signed in 2015.
The U.S. backed out of that accord under President Trump in 2017. Many companies and local governments are adhering to it nonetheless. To meet its goal, Amazon has announced it will purchase 100,000 electric delivery trucks and invest $100 million to preserve forests, peatlands, and wetlands. It plans to use 80% renewable energy by 2024. But if it's spending its days shipping $1.50 toothpaste free, will it really lower emissions? All of the electric trucks aren't expected to be on the road until 2022. That's a lot of shipments of $1 items that can erode employee confidence in Amazon's green initiatives.