story by Kim Souza
When it comes to ordering products online more consumers of all ages are becoming active shoppers, but the vast majority of them are not willing to pay shipping costs and do not require same-day service, according to studies completed by PwC and The Boston Consulting Group.
So why have so many retailers from Amazon to Wal-Mart invested in testing same-day delivery options? Research indicates same-day delivery for a fee appeals to roughly 5% of the U.S. population. Meanwhile retailers invest heavily in making same-day delivery available at a staggering cost.
Amazon has spent $13.9 billion to open new fulfillment centers since 2010. Wal-Mart has added two, and announced a third online fulfillment center to get them in delivery proximity to 160 million U.S. consumers by 2016. Wal-Mart’s fulfillment infrastructure, which includes its 4,200 U.S. stores, puts the retailer within 5 miles of two-thirds of the U.S. population.
As retailers expand these fulfillment centers PwC research estimates that same-day delivery costs could come down for consumers as low as $15, but that’s still more than most consumers are willing to pay. At just $10, the PwC researchers found only 10% of the respondents would pay for the expedited delivery.
Carol Spieckerman, CEO of NewMarketBuilders, said retailers pursue same-day delivery efficiencies in an effort to provide more delivery options.
“The fact that a low percentage of shoppers choose same-day delivery is great news for retailers since it is more expensive to execute. The current low demand in no way should discourage retailers from pursuing it, however. Retailers have come to the realization that offering a portfolio of shipping and delivery options is critical for customer retention. Attempting to force shoppers into one or two options that are easier and cheaper for retailers to execute only encourages comparison and cart abandonment. It’s high-risk behavior these days,” Spieckerman said.
She said retailers have no choice but to focus on same-day delivery because their competitors and third-party platforms like Google Shopping Express are raising expectations among consumers.
“Resistance is futile,” Spieckerman said.
Matt Nemer, retail analyst with Wells Fargo, said same-day delivery introduces a a service that will one day prove more popular.
“I think this is something that consumers don’t know they want yet, but will — much like a tablet,” he said.
Retail giant Wal-Mart has been very vocal on the importance of giving consumers options. With its recent grocery delivery test in Denver, Wal-Mart also began offering a curb-side pick-up option for the online orders for no added charge. The home delivery charge is $30.
Bill Simon, CEO of Walmart U.S., has said consumers in Denver have rated the Walmart To Go delivery and store pick-up services at 90% approval in four out of five surveys. He said the curbside pick-up option at the store, which is free, has become more popular and more widely used than the home delivery service. Wal-Mart believes that in markets where driving is the common mode of travel, pick-up depots and curbside pick-up options at the store nearby will become mainstream long before home delivery, according to Simon.
Wal-Mart also launched a same-day delivery service for general merchandise called “To Go” in five markets, including Minneapolis late last year. Wal-Mart has since temporarily suspended the same-day service in Minneapolis because of a technical issue. Wal-Mart says these are tests to determine feasibility and access demand and it has the scale and infrastructure in place to roll them out more widely anytime demand dictates.
“Walmart is a great example of how to steer customers into more easily executed options simply by making them convenient, free and fast,” Spieckerman said, adding that she applauds retailers who are testing multiple delivery and pick-up options.
“It goes back to the portfolio approach. Retailers can’t afford to force options on consumers since every customer has a different idea of ‘convenience’ and ‘affordability’ that can also vary by category, need state, usage occasion, time of day and other factors. The old wisdom was that certain shoppers preferred a single option across the board. These days, retailers have to be able to cover on all possibilities or risk losing customers,” Spieckerman said.
Analysts with the Boston Consulting Group note that same-day delivery will be niche service in the near future and retailers may choose to offer it to build customer loyalty, enhance brand awareness or keep up with competition.
“That said, same-day delivery is unlikely to generate significant revenues for retailers or carriers,” according to Rob Souza, partner at BCG. (Souza is no relation to the reporter of this story.)