Amazon has set out to cut its two-day free shipping offer to one. It’s a warning shot to competitors — and yet another example of the edge it has in setting the bar in e-commerce.
In a Thursday call discussing its first-quarter earnings, the Seattle-based company said it is in the process of overhauling its Amazon Prime delivery service to offer free one-day shipping instead of two. Amazon CFO Brian Olsavsky said Amazon would spend $800 million in the second quarter to make the necessary improvements to its fulfillment and logistics network to make one-day delivery the rule, not the exception, for members of Amazon Prime.
“It’s a significant step, and it will take us time to achieve,” Olsavsky said.
This is a big deal for Amazon, which a year ago hiked the priced of its Prime membership from $99 to $119 and has spent more than 20 years laying the logistics for its e-commerce business to position itself ahead of its competitors. It has more than 100 million Prime members worldwide.
Shares of Target and Walmart declined on Friday, a sign that Amazon’s one-day shipping threat is to be taken seriously.
“I see it as a major and potentially groundbreaking initiative to go from two-day free shipping to one day,” Tuna Amobi, an analyst at CFRA Research, told Recode. “It’s a massive endeavor that is going to take a lot of details to pull off.”
In other words, one-day shipping for Prime isn’t going to be the norm for all members by June.
Amazon will initially focus much of the one-day initiative on the United States, but the plan is for it to eventually go global. (Some markets, including the United Kingdom, Germany, and France, already have free one-day shipping on some items.) In the US, Amazon has been offering accelerated shipping for a while, depending on the product — one-day, same-day, and even two-hour delivery.
“We have significantly expanded our selection and eligible zip codes in the past month and we aren’t done,” Amazon spokesperson Julie Law said in an email. “We’ve taken a significant step, and it will take some time to achieve. We want to ensure a good delivery experience for customers as we evolve this offer.”
Amazon has the privilege of setting some of the rules in e-commerce
Amazon has positioned itself as the standard-setter for shipping in online shopping and has spent years and billions of dollars refining its supply chain. As Gaby Del Valle at Vox notes, beyond Amazon Prime, which launched in 2005, Amazon has also introduced other delivery streams, including Amazon lockers for customers to pick up their packages and Amazon Day, where customers pick a single day of the week for all their orders to arrive.
Amazon will be able to build on the massive infrastructure it already has in place to get one-day delivery up and running. The service will also depend somewhat on the shippers FedEx, UPS, and USPS, though Amazon has been expanding its own delivery capabilities as well. As Bloomberg notes, Amazon’s announcement will likely put “fresh strain” on shippers to achieve the requisite pace, and Amazon is a big customer for them.
“To me, this whole thing is Amazon flexing their ability to do this,” Juozas Kaziukėnas, the founder and CEO of the business intelligence firm Marketplace Pulse, told Del Valle. “This renders Prime shipping much more valuable, because even if some orders are delayed, the perception of one-day shipping is very valuable, because no one else can do it. That’s what’s going to keep people subscribing to Prime.”
She said that for some competitors, trying to match Amazon will be “borderline impossible.”
Part of the reason Amazon is able to even attempt this one-day Prime rollout is that it’s had so much runway and money to develop its e-commerce business that its competitors do not. Much of this is due to Amazon Web Services, the company’s cloud services solution, which has represented the bulk of its profits for years. Plus, a long leash from Wall Street has allowed it to slash retail prices and spend on building out its logistics network. I outlined part of the story at Vox last year on some of the antitrust concerns surrounding Amazon:
For years, the company — which Bezos founded in 1994 — has had an ethos of prioritizing growth over profits. After it went public in 1997, Wall Street largely accepted losses and razor-thin profits quarter after quarter with the expectation that Amazon would ultimately be a good bet. It has been: Amazon’s stock price has multiplied five times over in the past five years, and it saw $1.9 billion in profits in the last three months of 2017 alone.
Prime is an expensive endeavor for Amazon, and this one-day shipping push will likely make it even more so. As Recode’s Jason Del Rey noted the last time Amazon upped its membership fees, beyond Amazon’s heavy spending on its own logistic network and increase of product offers to more than 100 million, it has also invested heavily in creating a library of movies and television shows for Prime members to stream at no extra cost.
To be sure, Amazon Prime is not a perfect service. In December, Fast Company’s Mark Wilson described a “slow dilution” of Prime, including shipping times much longer than the two-day promise and markups from third-party sellers.
But people generally really like Amazon — it consistently ranks as one of the most liked brands in the United States — and Prime is part of that. Amazon’s latest move is an attempt to improve its standing even more.
“This is something they’re doing to make their Prime membership much stickier and a much bigger catalyst for Prime member growth,” Amobi said.
This article originally appeared on Recode.net.