A wide range of products, low prices and a delivery time that could compete with a shopping spree in the city, same-day delivery could further boost online retail sales, but also challenge logistic processes.
High investment, low response
Several pilot projects have been launched, mainly in the U.S., testing the new service model in the field. Many big players like Amazon, Google, ebay and Walmart have invested heavily in same-day delivery, with Amazon alone having spent $13.9 billion on new fulfillment centers since 2010. At this point, offering the more impatient customers their goods within a day of the order being placed has evolved into a fierce competition, with more and more players entering the market.
Interestingly, the vast majority of American consumers are not willing to pay for the steep shipping costs, and as suggested by studies completed by PwC and The Boston Consulting Group, may not require same-day delivery. The researchers at PwC, regarding the investments by retailers, estimate that same-day delivery costs could come down to as low as $15 for consumers, of which only 10% were willing to pay even $10 for this kind of service.
A study completed in Europe by the consulting group McKinsey shows a slightly different picture. McKinsey estimates that the market for same-day delivery in Western Europe will increase to €3 billion in 2020 and that same-day shipping will account for 15% of total shipping revenues (today: 1%). European consumers are also more sympathetic to paying extra shipping fees: about 50% are willing to pay between € 6 and €7 (between $9 and $10) for same-day delivery when the order value lies above €59 ($80).
The consumer somehow wants it anyway
While the outlook in Western Europe might be slightly better for the new service model, overall consumer enthusiasm has not been very high. This may sound like good news for retailers since establishing same-day delivery is very expensive, but this should not discourage them from pursuing same-day shipping, as the offer alone may be critical for customer retention. While the new service may not actually be used by many customers, simply offering a same-day delivery service raises customer perception of service level quality. Retailers unable to cover all shipping possibilities risk losing customers.
A study by Amazon, conducted with its Amazon Prime customers, revealed how merely offering customers a delivery time of a few hours for ordered items leads to more online conversions. In the tests, displaying an icon that indicated same-day availability led to an increase of 20 to 25% in conversions. Furthermore, of the customers who were lured to a purchase with the icon, most of them opted for next-day delivery.
With the big players expanding their same-day delivery service and the resulting psychological effect on consumers, smaller retailers need to consider if they also want to offer the new service model. Four major obstacles stand in the way.
4 major obstacles
The obvious benefits for the consumer come with some major drawbacks for retailers, which make the service model not necessarily attractive for all companies. Here they are:
1. High initial investment
In order to allow for service times of a few hours, additional local warehouses have to be set up, which require a high initial investment into infrastructure and additional operating costs.
2. Marginal scaling effects
Since the local warehouses need a higher stock level to guarantee fast service times, the scaling effects of a central warehouse, which are generated by the higher dispatch volumes, can hardly be drawn upon in a same-day delivery scenario.
3. Article redundancies
Local warehouses will need to store a higher level of stock for many items, which will create redundancies across the warehouse network, locking up high levels of capital.
4. Optimization restrictions
If you need to have a maximum target service level at all outer nodes of your distribution network, inventory optimization measures may have only a minimum effect.
It’s easier for multi-channel retailers
These four factors may discourage smaller retailers from offering same-day delivery, especially if they have a very wide product range. The silver bullet could be a double-tracked strategy, where the service will only be offered for selected products. A high target service-level for e.g. expensive slow-movers, will generally not be the best idea.
In the end, the high investments into infrastructure have to be compared to the supposed competitive advantage. Multi-channel retailers could have an easier entrance to the same-day delivery market as necessary infrastructure is already in place.
Profitable only for big logistics companies
Going for same-day delivery should be a well-considered step, because there have been quite prominent companies like Webvan, which already fell prey to same-day delivery during the Dotcom-years. In the medium term, the service model might only be profitable for big logistics companies that operate with high volumes. Same-day delivery will probably only be offered in highly populated areas, in order to keep the delivery routes from the warehouses to the customers as short as possible.
What are your thoughts on same-day delivery? Do you foresee this as a service that will soon become prominent for online consumer goods purchases?