Is Same-Day Shipping Worth The Effort For Amazon?

| About:, Inc. (AMZN)


Consumers want low prices and free shipping.

Same day shipping isn't a high priority for online shoppers.

Amazon's push for same day shipping is expanding its overhead and fixed capital, closer to brick and mortar levels.

Same day delivery costs too much.

Who Pays For Shipping?

According to a PwC Strategy & Inc's study, nearly 50% of consumers are unwilling to pay anything for delivery. The study also showed only 10% of participants were willing to pay $10 for same day delivery. PwC wasn't the only firm to find similar consumer sentiments. A Boston Consulting Group's survey tried to find the top factors consumers believed would improve online shopping. Online shoppers thought free shipping (74%) and low prices (50%) were the top factors. Most survey participants didn't feel faster shipping was a high priority, with only 9% of participants saying it was. Consumers shop online for low prices and want free shipping. Most of all, people would like their packages to arrive faster, but don't want to pay extra. These studies show there is demand for faster shipping, but the demand is very low.

Why Amazon (NASDAQ:AMZN) Is Pushing Same Day Delivery?

Amazon's same day shipping was first launched in New York, San Francisco and Los Angeles. Since then, the program has expanded to include several other major cities. The program has two separate pricing systems for prime and non-prime members. Non-prime members can get same day shipping for $8.99 plus $0.99 per item, while prime members can get same day shipping for $5.99. Unlike e-commerce retailers, brick and mortar retailers can give customers instant gratification. Amazon wants to give consumers a reason to think twice before heading to the store.

Expansion Efforts Reducing Fixed Cost Advantage

A McKinsey & Company article estimates U.S. retailers need 3 or 4 strategically located distribution centers for 2-day and 3-day shipping. However, the amount of distribution centers increases to over 12, for 1-day shipping. Even with 12, the distribution centers can only cover 80%, of customers. The shift from 2-day shipping to 1-day shipping drastically increases the need for more distribution centers. This is exactly what Amazon has done. According to Bloomberg, Amazon has spent $13.9 billion to open new fulfillment centers, since 2010. MWPVL reports Amazon has over 100 fulfillment centers throughout the world. As more fulfillment centers open, Amazon has to hire more and more workers. Currently, Amazon has over 117,000 employees. The table below shows, Amazon's employee growth has outpaced revenue growth.






Employee Count






Employee Rate





Revenue Growth





One of e-commerce's competitive advantages over brick and mortar is lower overhead and fixed cost. Yet, Amazon's push is increasing its fixed and overhead cost closer to brick and mortar levels. Amazon has 117,000 employees and Target (TGT) has 366,000 employees. According to MWPVL, Amazon has an estimated 56 distribution centers with 43 million square feet. Target has 37 distribution centers with 50 million square feet. Although not perfectly comparable, Target has 240 million square feet of retail space. Amazon and Target have similar shipping infrastructure. Amazon may not be concerned with its increasing fixed cost structure, but should be concerned with the economics of same day delivery.

Same Day Delivery Is A Nice Option, But Costs Too Much

According to the PwC study, same day delivery costs could reach as low as $15. PwC assumes a brick and mortar company uses its local stores as mini-distribution centers. This isn't the case for Amazon. Amazon charges slightly less than $10 for non-prime and $6 for prime members. At optimal levels, Amazon would have to absorb 33% of total shipping costs. Amazon has shown an extreme willingness to absorb shipping costs. The wire reported Amazon was willing to ship a 1509 lb gun safe for free (normally cost $636 to ship). Since consumers demand free shipping, Amazon's commitment has resulted in customer loyalty and a great return on investment. Yet, same day shipping won't be able to generate the same return on investment. Most, consumers don't care about faster shipping and are unwilling to pay for shipping.

Amazon Offering A Product Most Don't Need

The idea of getting packages the same day is great, but paying an extra $10 isn't. Same day shipping would be a nice option, but caters to a very small market segment. Amazon is expanding its physical footprint too much in an effort to satisfy a tiny market. Since fixed costs are increasing, the expansion has reduced Amazon's ability to control costs and react quickly to market forces. Amazon has constantly been able to give customers what they want. Yet, Amazon is spending significant capital to provide customers with something most don't care about or will use.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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