E-Commerce Delivery: The High Cost of Santa’s Sleigh
Who’s going to pay for Santa’s sleigh? It’s an expensive proposition: delivering presents to every home in the world in record time. As kids, we imagined magical energy propelling that tiny sleigh and flying reindeer around the globe.
Modern retailers are aware that no such magic exists. They are increasingly aware of the cold hard costs associated with such a plan. What seemed like fantasy when we were young — packages flying through the air at record speed and arriving at our doorstep — is now the reality for most retailers.
The retailers that do the best job of conquering the costs and logistics of fast delivery will emerge on top. Let’s see how the race is shaping up.
With the economy humming along and unemployment at record low levels, most retailers expect buoyant consumer demand this December. Many employers are offering higher wages to lure new workers or providing raises to those they want to keep. The labor department reported a 3.1% jump in hourly earnings in October, the highest wage growth seen in years. All of this should translate into increased holiday spending.
Stephen Sadove, a former Saks Fifth Avenue chief and now a senior adviser for Mastercard (NYSE: MA), noted recently: “You see momentum going into the season, cutting across a large range of categories. It’s probably the healthiest growth we’ve seen in the past half-dozen years.”
But demand is only part of the equation. The recent squall of retailer earnings reports met with weaker stocks illustrates the other half of the profit math. This half is the expense of meeting that consumer demand.
Walmart (NYSE: WMT) and Target (NYSE: TGT), in particular, are two of the industry giants spending big bucks to ensure a speedy and smooth delivery of the packages ordered.
On its recent earnings call for the quarter ending October, Target’s CEO Brian Cornell discussed online order growth:
“Comparable sales in our digital channels grew 49% in the third quarter, far outpacing the industry and the vast majority of our peers. This growth was driven by our guests’ response to our team’s efforts to make the digital shopping experience easy and seamless.
“On the fulfillment side, the progress we have made this year is truly amazing. At this time a year ago, we were in the early stages of testing Drive-Up at about 50 stores here in the Twin Cities. Today, we offer this service in nearly 1,000 stores, and the ability of our team to deliver consistently outstanding service while scaling up at that pace is remarkable.”
Target’s been investing in its delivery options for many years. The retail chain is one of the early adopters of the multiple choice menu offered to customers purchasing online. Those customers can choose home delivery, store pick-up or store drive-up. This option allows the customer to set a pickup time, drive to the store and then meet a customer service rep who brings the packages out to the car. This service is a huge convenience. You skip the check out line, remain in your dry, warm car and don’t have to drag your two-year-old out of his car seat.
Target hopes more customers continue to choose drive-up. Management notes that most of the drive-up orders seem to be replacing those that might have otherwise been shipped directly to the customer’s home. By avoiding shipping costs, the economics of these orders are quite favorable to the store.
Walmart came crashing into the home delivery space with its $3 billion purchase of Jet.com in August 2016. After two years, the company might finally be getting a handle on the costs associated with e-commerce. Higher shipping costs and lower-than-expected digital sales haunted the company for several quarters, but the firm’s recent sales release highlighted 32% growth in e-commerce sales, a sign the company is over that hurdle.
For its foray into home-delivery Target bought Shipt for $550 million last December. In less than a year, the company made heady progress. The Shipt service fulfills online orders from more than 1,400 Target stores, which service over 60% of the U.S. population. According to Target, customers receive a “meaningful number” of these orders in less than two hours. Not even Blitzen is that fast.
Faster Than Blitzen
All of this investment is to compete with Amazon (NSDQ: AMZN), the king of e-commerce. Amazon spent almost $22 billion on shipping costs last year, a massive delivery budget other retailers simply can’t match.
Of course, Amazon charges customers for “free” shipping via its Prime membership. Prime’s annual membership fee last spring increased 20% from $99 to $119. Retailers aren’t so lucky. They don’t charge membership fees and are often forced to offer free shipping during particularly competitive sales seasons, like December.
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