Amazon preps for One-Day Free Shipping

Global e-commerce bellwether continues to show that it is not slowing down, nor taking any shortcuts, in its ongoing quest for “customer obsession.” And that motivation continues to be increasingly coming in the form of tactical logistics moves geared towards constantly meeting and exceeding customers expectations, which are firmly in the crosshairs of its competitors, too.

The most recent move came last week in conjunction with its first quarter earnings release, in which Amazon said it is at work in evolving its ubiquitous Prime Two-Day Shipping program into a One-Day Shipping program.

On the company’s earning conference call, Amazon CFO Brian Olsavsky said that Amazon is able to make this move, due to having spent more than 20 years expanding its fulfillment and logistics network, while acknowledging it is a big investment, with $800 million allocated, that will require a lot of work, too.

“We have been offering…faster than Two-Day Shipping for Prime members for years, one day, same day, even down to one-to-two hour delivery for Prime now,” so we are going to continue to offer same day and Prime Now selection on an accelerated basis. But this is all about the core free Two-Day offer morphing into - or evolving into a free One-Day offer. We've already started down this path. We've in the past months significantly expanded our one-day eligible selection and also expanded the number of zip codes eligible for one-day shipping.”

Olsavsky noted that Amazon’s while Amazon’s 20-year head start in investments in logistics and fulfillment capacity and partner networks that it has built are helping the company, he said that comes with the caveat that it has a network that is tuned to two-day delivery right now, principally for two-day delivery.

“So we do need to build out more one-day capacity along with our transportation partners, but we're moving quickly and we've got a good head start,” he said. “There is a certain tranche that we can dial up quickly, and we've started to do that and you'll see that very quickly in Q2. And then stay tuned, because we'll be building this - most of this capacity through the year in 2019.”

A major objective in transitioning from two-day free shipping to one-day free shipping, according to Olsavsky, centers on capacity it will need to add and changes it has to make to its supply chain in order to deliver on that, adding that it is trying to take advantage of the fulfillment capacity and transportation capacity, especially, with its third-party partners and also vet the potential changes it needs to make to get more selection into the one-day category.

A good amount of that capacity comes from key transportation and logistics services partners, with Olsavsky saying Amazon will “definitely need continued support of our external transportation providers.”

As for the key rationale behind this move, he pointed to price selection and convenience, stating that by going to one-day it increases convenience and the available selection, while also open up a lot of potential purchases and convenience to customers.

As for how this impacts the competitive landscape, Ben Hartford, senior transportation analyst for Robert W. Baird and Co., wrote in a research note that while One-Day prime is not necessarily new, as Amazon has been offering one-day and same-day delivery to Prime members for some time, this change represents the migration from core free Two-Day to free One-Day.

What’s more, since Amazon initially introduced Prime Two-Day shipping in 2005, Hartford cited how domestic margins for UPS fell from 15.7% in 2005 to 8.9% in 2018. 

“Amazon has been increasingly developing its own logistics capabilities since the early 2000s, leading some investors to believe that insourcing from Amazon's logistics efforts have led to margin erosion at UPS (and FDX),” he wrote. “We think the impact has been less direct but nonetheless still very consequential: Amazon's creation of customer demand and expectations for B2C led to e-commerce's rapid development over the past 10-15 years. As a result, we recognize the risk a similar headwind being presented to parcel providers if the migration to free ‘One-Day’ becomes adopted and expected in customer preferences.”

Jerry Hempstead, president of Hempstead Consulting, explained that this development is, in a sense, an extension of Amazon’s original air network.

In offering up an example, he posited how Amazon uses DHLs hub to sort their air business and because DHL needs its hub at night for their core business Amazon sorts during the day when the DHL hub would otherwise be idle, which precludes its air network from being used for next day… 

Alternatively, he said Amazon could double-trip their aircraft and get better utilization of the assets and instead of flying to Cincinnati to the DHL hub at night, it can fly a few miles more to Wilmington Ohio to the legacy Airborne Hub (formerly Clinton County Air Force Base) and is also the home of ATSG one of the airlines that operates for Amazon and do an overnight turn for it.

“Amazon will just be utilizing existing assets (planes and building) although the automated sort will most likely be state-of-the art Amazon,” he said. “This is just Amazon turning up the heat on other retailers. Either join their switch or suffer the consequences. Amazon has been very vocal that they need their delivery partners (UPS & USPS in particular) and that this is not a fundamental attack at their core business or a threat. As Amazon grows so do their partners in my humble opinion.”

As for other retailers, it is clear they are responding, with Walmart indicating in a Tweet posted late last week that Amazon may not be the sole retailer offering one-day free shipping for long: “One-day free shipping…without a membership fee. Now THAT would be groundbreaking. Stay tuned.”

Parcel consultancy Shipware observed that with both Amazon and Walmart ostensibly committed to one-day free shipping in the future, they are each leveraging their major respective assets, with Amazon’s being a vast e-commerce fulfillment network and for Walmart, a vast store footprint.