Retailers Like Walmart and Target Are Making Big Investments in Speedy Delivery — But Is it Worth it?

While merchant investments in speedy delivery are escalating, the payoff may prove elusive, according to a new report from Moody’s.

Last-mile package delivery to complete the order fulfillment service to consumers is a vital battleground in the brick-and-mortar versus online dynamic, according to Moody’s. Traditional retail has the advantage as the only way for consumers to satisfy their itch for “instant gratification” and get merchandise the same-day in most areas of the U.S., is to visit the store and pick it up.

“With the same-day delivery arms race’ in full swing, and large retailers such as Walmart, Amazon, and Target taking meaningful and costly steps to develop increased capability, the issue of how much is too much remains,” Moody’s lead analyst Charlie O’Shea said. “What is unclear to us is to what degree consumers will ultimately desire and use the service, and then how much they will be willing to pay.”

The same-day delivery competition has seen Walmart Inc., Amazon.com and Target Corp. recently making significant moves to expand these efforts. Walmart announced this month that it will be using its Brooklyn, N.Y., distribution center to expand delivery to include Jet.com customers, with food available on a same-day basis, amid other changes that include redesigning the Jet.com website.

Amazon has also been busy with delivery initiatives, announcing last week plans to expand Prime Now offerings from Whole Foods Markets to a number of new cities. Amazon also expanded its order of Mercedes vans to 20,000 from 4,500 to improve its third-party delivery initiative thanks to higher than expected demand.

Target has grown its same-day delivery offerings by using the capabilities of Shipt, which it acquired in late 2017.

With all these aggressive actions, Moody’s said, “There are some significant unknowns, in our view. For instance, how ‘loudly’ are consumers actually clamoring for same-day delivery and how much are retailers investing in what we view as a costly initiative.”

In addition, the ratings agency said these efforts are beneficial to the consumer, though the question of what’s necessary and what’s excess remains to be determined.

Auto parts retailers like AutoZone, O’Reilly and Advance Auto have employed a “delivery within minutes and hours” strategy for many years to service their commercial and independent garage customers, using local stores as delivery hubs. However, Moody’s said, “For this specific customer category, this delivery capability is considered base level, with a clear demand thesis, which is really the unknown for other retail segments.”

Retailers are really at risk of overspending on what Moody’s called “a costly initiative.”

What’s more, the report noted, “it is unclear how much of the ultimate cost of same-day delivery consumers will be willing to ‘subsidize.’ Given these unknowns, and the time, money and personnel that retailers are devoting to this initiative, we think it is likely that many retailers will overspend in their efforts, potentially including Walmart, Amazon and Target.”

The Moody’s report contends that “the jury is still out regarding how important same-day delivery will be in the eyes of many consumers.” For every program such as Target’s store in the TriBeCa neighborhood of Manhattan charging $7 for same-day shipping in a limited geographic area, “which for a big-ticket item or reasonable-size shopping basket is a decent deal,” there are others that are more difficult to rationalize.

For many such programs, “it is less clear at which purchase level the consumer will recognize that there is in fact a compelling value proposition for the service,” Moody’s said. “Until this happens, it looks like the U.S. consumer will benefit from this ongoing battle for same-day delivery leadership, which could very well result in a Pyrrhic victory for the ultimate winner.”

Editor’s Note: This story was reported by FN’s sister magazine Sourcing Journal. For more, visit SourcingJournal.com.

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