What's so critical about same-day delivery? By the looks of the competition lining up to try to corner that market, the answer to that question must run into the billions of dollars.
A crowded market
We have already seen eBay (NASDAQ:EBAY) and Wal-Mart (NYSE:WMT) throw their hats into the ring with test runs last year. eBay is leveraging its relationship with local merchants in its New York and San Francisco markets, and employing a fleet of runners to hand products to shoppers just hours after they submit their orders online.
Wal-Mart's strategy is a little more conventional. The company is using its massive store base as a distribution network, filling Internet orders from the back room while customers shop in the front of the house.
That's the path that many brick-and-mortar retailers appear to be taking. Macy's (NYSE:M) is another good example. The department store has retrofitted more than 300 of its locations to double as fulfillment centers for online orders. That investment helped it log a 48% boost in online sales last quarter, while also turning same-day delivery into a real possibility for the retailer.
The newest entrant
And now we can add Google (NASDAQ:GOOGL) to the mix. The search king is reportedly testing a same-day delivery service that will mount a challenge to Amazon.com (NASDAQ:AMZN) for e-commerce supremacy. Google's service, called Google Shopping Express, aims to partner with local merchants and use third-party couriers to make same-day deliveries, according to Reuters. Google is toying with the idea of making it a subscription deal, akin to Amazon's yearly Prime membership, which provides unlimited two-day shipping on thousands of products. But why wait two days when you can get your order delivered today?
It's easy to see why Google could be interested in this market. Amazon's runaway success -- $61 billion in sales last year -- has pummeled traditional retailers. But it also threatens to make Google less relevant in e-commerce searches online.
Think about it. If you're shopping for a popular product online, the odds are pretty good that you'll end up buying it from Amazon. A year ago you might have searched Google for the product, and then clicked on a search result that brought you to Amazon's product page before making your purchase. These days you might go straight to Amazon.com or to the company's shopping app and buy it directly. The end result is the same for you, but this second way deprives Google of any advertising revenue from the deal.
An e-commerce marketplace would keep Google entrenched right where it wants to be: connecting buyers with sellers while taking its small cut.
Amazon strikes back
Amazon isn't standing still while all this competition heats up. Sure, it can't claim the thousands of physical locations that Wal-Mart has. And its relationship with local merchants, in contrast to eBay and Google, couldn't be chillier.
But Amazon has its own distribution network to lean on. As recently as a year ago, that network was artificially limited for tax reasons. But now that Amazon is starting to collect taxes in more states, there's no reason it can't expand its physical footprint. To that end, the company has been busy cutting ribbons on brand-new fulfillment centers, most recently by adding 3 million square feet of warehouse space in Texas. Those investments have allowed the e-tailer to boost the selection of products it can offer as part of its two-day shipping service. And having those distribution centers closer to customers makes it easier for one-day or same-day delivery to eventually make its way into Amazon's national offering.
And the investment into new warehouses is already boosting the company's bottom line. Net shipping costs fell dramatically over the holiday quarter, down to 4.5% of sales from the 5.4% it logged a year before.
With improving results like that, Amazon doesn't appear to need same-day delivery. Still, the promise of instant gratification has been lethal to plenty of business models in the past, so the company can't afford to ignore it. While I don't see this fight as a serious challenge to Amazon's retail success, it will keep up the pressure on the company to spend more cash in building out its distribution network. Amazon has been driving down other companies' margins for years. Now it looks like they're eager to return the favor.