January 29, 2010, 12:00 AM

Testing the speed limit

Amazon raises the bar with same-day delivery, but few rivals are ready to take the leap.

Amazon.com Inc. aims to sweep aside barriers to shopping online, including in the crucial area of delivery. Online shoppers want free shipping? Amazon offers Prime, which promises free two-day shipping on all orders for $79 a year. Consumers want their purchases immediately? Amazon will deliver the same day. The same day? Yes, the same day. Amazon announced the offering in October, although it`s only available for certain products in seven big cities, and the fees are steep for consumers not enrolled in the Prime program.

Still, Amazon says it aims to expand the program in the coming months. And competitors can`t afford to ignore such a bold move by the leading online retailer.

But e-commerce analysts are skeptical same-day delivery makes sense, even for Amazon, which has more than twice the volume of its nearest e-retail competitor and thus delivers a lot of packages each day in densely populated areas.

"People underestimate what home delivery is all about—it isn`t simple," says Paula Rosenblum, Retail Systems Research LLC managing partner. "99% of the time you have to rely on a third party to do delivery for you, and that third party is focused on its own delivery density. And there are endless variables that make it hard to narrow delivery windows, particularly in big cities. With so many moving parts, there are any number of things that can go wrong."

Amazon`s offer
Amazon isn`t the first online retailer to offer same-day delivery. When investors were pouring money into all things Internet a decade ago web startups Kozmo.com and Urbanfetch promised free one-hour delivery of anything from DVD rentals to a Kit Kat bar by using bicycle messengers. And some retailers deliver quickly in limited areas, such as Barnes & Noble Inc., which has offered same-day delivery in Manhattan since 2000.

But Amazon is offering same-day delivery on a larger scale than anyone ever has. The leading e-retailer is aiming to appeal to the 13% of U.S. consumers who say they go to bricks-and-mortar stores because they want the item they buy right away, according to Forrester Research Inc.`s "North American Technographics Retail Online Survey."

Amazon`s program offers weekday same-day delivery on thousands of items—Amazon will not say how many—ranging from luggage to groceries in Baltimore, Boston, Las Vegas, New York, Philadelphia, Seattle and Washington, D.C. Amazon says it plans to extend the program to Chicago, Indianapolis and Phoenix. To qualify, orders must be placed by 10 a.m. in New York and Philadelphia, 10:30 a.m. in Boston, Washington and Baltimore, 11 a.m. in Las Vegas, and 1 p.m. in Seattle.

Consumers enrolled in Amazon Prime pay $5.99 per item for same-day delivery. For other customers, shipping rates range in per-item price from $9.99 to $18.99, plus up to $1.99 per pound, per item. Items may be delivered until 8 p.m. local time.

The price will be an obstacle to the program succeeding, says Rosenblum. "The delivery rates are more than people are willing to pay," she says. "I don`t see the point. If I really want instant gratification, it`s usually for something small. And, if it`s something small, I`ll hop out and go to a store."

Then there are the logistical hurdles, which include operating distribution centers near all the markets to be served and working out arrangements with delivery services—Dynamex Inc. and A-1 International in Amazon`s case—and ensuring they provide quality service.

Those logistical challenges are why most retailers are taking a wait-and-see approach, says Fiona Dias, executive vice president of strategy and marketing at e-commerce technology provider GSI Commerce Inc. "I`d love to say Amazon has it figured out, but it doesn`t. What it has now is a pilot," she says, pointing out that Amazon is making the same-day offer only on certain products in several markets. "Once other retailers look at the delivery economics and complex algorithms necessary to make it work, I think it will dissuade them from doing this anytime soon."

The challenge
One retailer that has looked closely at same-day delivery, and implemented it in Manhattan, is retail bookselling chain Barnes & Noble.

Limiting the service to customers in Manhattan is the only way to ensure the customer concentration necessary to make the service make sense, says Kevin Frain, the company`s executive vice president of e-commerce operations. Because there are so many customers, Barnes & Noble charges no more for the same-day service, including free shipping on orders of $10 or more for members of its rewards program and on orders of $25 or more for non-members.

The multichannel bookseller has toyed with expanding the offering to other cities within driving distance of Barnes & Noble`s New Jersey distribution center, namely Philadelphia and Washington, D.C. But it decided against it after determining that neither market offered the necessary customer density or clearly defined boundaries as a single borough of New York City.

One reason Barnes & Noble decided against expanding its same-day service is that most customers in the Philadelphia and Washington, D.C., areas already receive their order the next day. "Given that we already deliver their orders in one day, we didn`t think it would improve sales enough to justify offering same-day service."

But, in Manhattan, Barnes & Noble views the offering as a means of differentiating itself from its competition, Frain says. One sign that it works: The percentage of repeat customers is higher in Manhattan than in the rest of the country. "It`s not necessarily a loss leader but it`s something we decided to invest in," Frain says, declining to provide details on the program`s cost.

Other options
Same-day delivery would represent a big step forward for most online retailers. While the average time it took to receive an order from 100 major e-retailers dropped to 4.05 days during the 2009 holiday season from 4.76 days in 2008, according to e-commerce consultancy The E-tailing Group, that`s a far cry from delivering items the day they`re purchased.

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