Same-day delivery and home delivery were once utopian retailing concepts, but might soon become almost banal. Many large retailers, both online as well as brick and mortar types, have their own versions of same-day delivery. Online purveyors in particular, including Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY), seem to have perfected the art of instant gratification for customers who want their goods delivered almost instantaneously at the push of a button. But old retailers, such as Wal-Mart (NYSE:WMT) and Target (NYSE:TGT), have now jumped into the bandwagon and want a piece of the same-day delivery pie too.
Although Amazon is the undisputed leader in this arena with its highly popular Amazon Prime service, eBay might soon be making waves too. Amazon Prime subscribers spend about 2.5 times as much as the average Amazon shopper. eBay recently upped the ante by acquiring a major competitor in the space, U.K.-based start-up Shutl in October 2013. Shutl has been wildly successful in same-day deliveries, and eBay will no doubt benefit from its expertise.
eBay announced that it intends to roll out its promising eBay Now same-day delivery service to 25 cities across the U.S. in 2014. The giant online auction site sweetened the deal even further by announcing that it intends to soon allow its eBay Now customers to schedule the exact time of delivery of their merchandise. A Mom working on a 9-5 job will be able to order using eBay Now during the day, but delay the delivery till 6 pm when she's finally home. eBay Now has been offering same-day delivery in New York and San Francisco for about a year now.
Who needs same-day delivery?
A lot of investors have been wondering if there is any real demand for same-day delivery to justify the high costs associated with this business model. Many still avidly remember the highly public failures of WebVan, and Kozmo.com, the poster child of same-day delivery, which went belly up about a decade ago.
Perhaps the best real-life case argument that aptly demonstrates that there is a real demand for same-day delivery is the ringing success of upstarts such as Instacart and Postmates. Instacart operates a same-day grocery delivery service in Chicago and San Francisco. Postmates, on the other hand, is a bike courier service that delivers customers' merchandise right at their doorsteps on the same day it is ordered. Postmates operates in Chicago, Seattle and San Francisco. Yummy Foods, the international quick-service restaurant chain, is reportedly looking to bring from the dead the Kozmo brand sometime next year.
In its defense, eBay can probably afford to gamble a little with same-day delivery. Its gross margins are among the highest for both online and old retailers.
But of course there has to a better reason why the company is doing it- and there is. eBay CEO John Donahue recently pointed out that the company is more interested in growing its overall revenues, even if it ends up just breaking even with this service. eBay will charge just $5 for the service, hardly enough to cover the cost of delivery. In the eyes of investors, revenue growth in this space seems to trump earnings, at least in the near-term. The price (and valuation) changes of companies operating in the retail space seem to closely mirror their revenue growth.
Amazon has for years spent billions of dollars on free and subsidized shipping, and has seen its revenues skyrocket as a result. Investors have rewarded it accordingly and its stock price commands stratospheric P/E multiples. Little wonder it has earned itself a reputation as the most disruptive force in the online business.
eBay has learned from past mistakes
Same-day delivery was probably doomed to fail for upstarts WebVan and Kozmo. Online shopping was still a relatively new concept back then, and the existing Internet infrastructure was barely adequate. Snail-speed dial-up modems were the norm, and high speed Wi-Fi almost unknown. Internet security was also a nagging concern for many online shoppers.
Apart from the inadequate web infrastructure, the two companies had a steep learning curve to negotiate since no one else had done it before. They built expensive infrastructure, used wrong customer segmentation and pricing and tried to expand too fast. The result: they failed even before they got started.
Fast forward to the present times. Good Internet infrastructure is almost a byword in most developed economies, and usually taken for granted. Online shoppers seldom worry about security matters nowadays. Companies such as Instacart and Postmates have shown that it can be done. The two leverage already existing infrastructure instead of trying to build everything from scratch. Instacart in particular has cornered the pricing problem by marking up its merchandise instead of charging a big delivery fee.
eBay seems to be doing everything right so far with its eBay Now service. The firm is leveraging its existing technologies instead of building everything from scratch. eBay Now uses Milo, the start-up eBay acquired in 2010, to provide consumers with data about products in stock. For payment processing, eBay already uses well-developed and popular payment platforms such as Paypal Here, so that customers can use any major credit cards without any need for a Paypal account. Customers who prefer to use Paypal are free to do so too.
eBay Now uses a smartphone app that lets customers browse for products, place them on their shopping carts then order. The app lets customers even track the progress of their deliveries by calling the courier if they so wish. But all technologies have their glitches, and eBay Now is no exception. The app uses geolocation to determine the user's location. Geolocation is an imprecise technique and mistakes can, and do sometimes, happen. Still, the app seems to be quite popular in New York and San Francisco where it has been in operation since October 2012.
Can Wal-Mart and Target match online sellers in same-day deliveries?
But not everybody is going to succeed in this game. Old brick and mortar retailers might be some of the unfortunate victims. Amazon and eBay can afford to lose money on same-day deliveries because the resulting revenue growth could easily translate into profits later. As eBay's CEO John Donahue pointed out, the firm can afford to just break even with eBay Now since it has other bigger, well-established and highly profitable operations.
But the same can hardly be said for Wal-Mart and Target. These two have owned online operations for years, but these have remained more of a sidekick than their main forte, accounting for a minuscule percentage of total revenues. Worse still, unlike online companies, old retailer investors do not seriously believe that sacrificing profit margins with same-day deliveries will result in significant revenue growth for the old boys. Same-day delivery might only help brick and mortar retailers to minimize the risk of market share erosion, as customers rush to other retailers that offer the service.
eBay's foray into same-day delivery in a bid to grow its revenue might erode its profit margins a bit in the near-term, but end up being highly beneficial in the long-term. The fact that the company has decided to roll out the service to 25 large cities across the U.S. in 2014, after being in beta for one year, is no doubt a healthy sign.
Fool contributor Alex Murigu has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, eBay, and Google. The Motley Fool owns shares of Amazon.com, eBay, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.