Can These Companies Cash In on Your Laziness?
When shopping, a growing number of consumers compare in-store products to online prices. And of those who do, 29% end up buying it online, according to one study, often from Amazon.com (NAS: AMZN) . The usual trade-off for the consumer is price versus their immediate need. Does the customer need that new television now for the premiere of Mad Men? Or can they wait a few days to enjoy Don Draper and Peggy Olson in high definition?
Recently, however, online retailers have been making a push to deliver products the same day they're ordered. Should bricks-and-mortar stores close up now, or will this plan fizzle?
A few days ago, eBay (NAS: EBAY) launched a San Francisco test of eBay Now, which offers same-day shipping for goods purchased from local retailers, including Macy's (NYS: M) , Toys "R" Us, Target (NYS: TGT) , and Best Buy (NYS: BBY) . This is making ordering items easier than ordering a pizza. As an example, one of VentureBeat's writers ordered a hard drive that arrived at his apartment within an hour. And for the delivery, eBay plans on charging $5.
Along with eBay, many have speculated that Amazon.com is looking to provide same-day deliveries. As the Financial Times reported, Amazon's agreement to collect sales taxes has allowed it to place warehouses near large population centers like New York City and Washington, D.C. Even with these investments, Amazon lowered expectations for the service in its recent earnings call, saying that it doesn't "see a way to do same day delivery on a broad scale economically."
Will it work?
Amazon could be very right in its analysis of such a service being economically efficient. Kozmo.com, a 1998 start-up, promised one-hour deliveries for a range of products, and like many of its dot-com brethren, eventually closed up shop. It first offered free delivery, which drove the average order cost for Kozmo to $10, but the customer only paid $7.
Amazon.com's Prime membership, in which customers pay $79 per year in exchange for free two-day shipping and $3.99 one-day shipping, is most likely crimping Amazon's margins. No matter if a customer orders a toothbrush or a TV, Amazon foots the bill. This has increased Amazon's net shipping costs as a percent of revenue from 3.4% in 2009, to 4% in 2010, to 5.1% in 2011. Net margins have correspondingly decreased:
AMZN Profit Margin data by YCharts
While unsustainable for free deliveries, it seems that the right price could cover the costs and earn a return on same-day delivery. Giving a sign of hope, a former member of the defunct Kozmo founded a similar same-day delivery company in Manhattan, and was able to find a profitable model. If eBay and Amazon can deliver, customers may even begin to pay a premium for items ordered online and delivered same-day to avoid the retail environment.
Bricks and e-mortar?
The most interesting fact is that eBay's service pairs up with stores that have traditionally been fighting online retailers. These retailers are throwing everything they can at the Internet to see what sticks.
Last year, Macy's began shipping online orders from a couple hundred of its roughly 800 stores, effectively making each store a mini-warehouse. Online sales for the most recent quarter were up almost 35% over last year, while same-store sales were up 3.7%. Target has added special sales exclusively online this summer, like its "Summer Cyber Week" sale. Its same-store sales were up 3.1% for the quarter. Best Buy added 50 smaller retailers to sell items on its own website to expand its offerings, and its same-store sales were down more than 5% in its latest quarter.
If eBay can successfully position itself as a platform for these larger retailers to stay alive, it can become an indispensable service. This could also funnel more payments through its PayPal subsidiary, cutting out credit card merchants.
The American way
If a business makes it easier to be lazy, it will likely be successful. If it can make being lazy just as efficient as being proactive, it will likely be wildly successful. The question for these companies is whether they can make this laziness profitable on a large scale. It seems Amazon sees a struggle with that problem, while eBay is sticking its toe in the Bay Area to attempt to solve it.
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