Amazon forever altered the retail landscape when it introduced the Prime two-day shipping program 14 years ago. The Seattle company has upped the ante again, pledging to make one-day shipping its new standard and cutting delivery time in half on millions of items just as the competition was starting to catch up.
Amazon CFO Brian Olsavsky caught analysts and reporters off guard with the surprising one-day delivery announcement in the middle of the company’s first quarter earnings call yesterday. Amazon had not previously acknowledged this push, though Olsavsky said the company has already “started down this path.”
“We’re currently working on evolving our Prime free two-day shipping program to be a free one-day shipping program,” Olsavsky said. “We’re able to do this because we’ve spent 20-plus years expanding our fulfillment and logistics network. But this is still a big investment and a lot of work to do ahead of us.”
Amazon just “turned the dial significantly in April,” so there’s still plenty of unknowns about ramping up one-day shipping, Olsavsky said. The company said it would share more at the end of this quarter.
Read on to learn about the key takeaways from Amazon’s big announcement.
One-day shipping is going to cost a lot: Olsavsky said Amazon will spend $800 million during this quarter alone on the new shipping initiative. Amazon has been uncharacteristically raking in profits the last few quarters, but speeding up shipping could put an end to that trend.
Amazon already spends a ton on shipping — $7.3 billion in the first quarter, up 21 percent over a year ago. With the push to cut delivery time, keep an eye on the company’s shipping costs over the next few years.
Amazon wants to keep one-day Prime free for customers: Speeding up delivery is “directly going to be a cost that we bear,” said Olsavsky. Prime Now and other accelerated delivery programs beyond the core two-day shipping come with an extra cost, and it looks Amazon won’t impose any additional fees for one-day shipping.
“We’re going to continue to offer same-day and Prime Now selection in an accelerated basis,” Olsavsky said. “But this is all about the core, free, two-day offer evolving into a free one-day offer.”
USPS and other partners will play an important role: Today, Amazon relies heavily on delivery partners such as USPS, UPS and FedEx, as well as its network of contractors to drop off packages. Though rumors have persisted that Amazon will someday cut out the third-party delivery partners, the move to one-day shipping means it is going to need those carriers more than ever.
“We’re going to be using all of the available levers that we have right now,” Olsavsky said.
Later in the call, Olsavsky said: “We have a network tuned to two-day delivery right now, so we do need to build more one-day capacity with our transportation partners. But we have a head start and we are moving quickly.”
A busy year ahead: Amazon didn’t say when the transition to one-day shipping will be complete but hinted that a lot of that work will be done this year. The company expects to “make steady progress quickly and through the year.”
Most of the spending this quarter is focused on speeding up Prime delivery in North America, but Olsavsky said the initiative will go global. This month alone, Amazon “significantly expanded” the number of items and zip codes eligible for one-day delivery.
However, Olsavsky cautioned that such a major shift in its supply chain won’t happen overnight.
“It’s a significant step and it will take us time to achieve. And we want to ensure that we have a good delivery experience for our customers as we evolve this offer,” Olsavsky said.
Raising the bar again: Thanks to Amazon Prime, consumers now expect fast shipping, and many rival retailers have responded. Companies including Target and Walmart have instituted their own two-day shipping initiatives and turned their stores into mini-warehouses for popular programs that let customers order online and pick up in store. Adobe reported that “Buy Online, Pick Up In Store” saw 50 percent year-over-year growth during the 2018 holiday season.
Amazon set the standard for fast shipping with Prime, and it looks like it will try to do that again. Olsavsky talked up the program as a way to increase convenience for the customer, which could unlock more purchases.
“Although we have many items that are available in one to two hours and also same-day, the vast majority of our selection is available to you in two days,” Olsavsky said. “If we get that to one-day, we literally cut it in half … and we think that will open up a lot of potential purchases and will open up convenience to those customers.”