The bulk of news that came with Amazon.com s (NASDAQ: AMZN) first quarterly report on Thursday was the e-commerce giant's plan to create a day-delivering standard for its Amazon Prime subscription service. Unlimited two-day shipping has been the prime feature of Prime since it was launched in 2005, but it doesn't stand out as much as it once did. For example, both Walmart and Target (NYSE: TGT) offer free two-day shipping on online orders over $ 35, without membership requirements.
Off Moves to a day's shipping, Amazon surely increases the bar. But the idea that this move will leave other dealers in the dust, ignores the progress that Amazon's competition has made. Target Restock, Target's Essential Delivery Service, already offers free delivery today for a large number of customers.
Target Restock has a $ 35 order minimum and a small selection compared to Amazon Prime, but it shows that Target is perfectly capable of delivering orders quickly, without membership fees or an Amazon distribution network. The Amazon's one-day shipping push will surely force Target and other dealers to become more aggressive, but it's not the end of the world.
It's about the stores
Basics of Target Restock, which the dealer renewed last year:
- Thousands of household items and non-perishable groceries are available.
- Minimum order size is $ 35.
- Orders placed by. 7pm on a weekday is delivered the next day.
- There is no delivery fee for orders placed at Target's REDcard or for members of Target's free-to-join loyalty program, Target Circle. Otherwise, a $ 2.99 fee applies.
Target Restock offers a much smaller selection than the millions of items available through Amazon Prime. It is certainly not a substitute for Prime. But the fact that Target is able to offer free delivery the next day, without the large distribution system Amazon having spent decades building and perfecting, and without emptying its bottom line, shows that the dealer has come a long way.
The key to Target's free next day shipping is the foundation of more than 1800 stores. All Target Restock orders, and many standard online orders, are met directly from the store shelves. It may seem ineffective, but it saves Target a boatload of money. The company was able to dispose of about $ 3 billion of new warehouse expenses by using its stores to fulfill orders, and orders from stores stored the company approximately 40% less on average than orders from stock.
Bottom line: Target has already built the infrastructure needed to offer free delivery today. It is limited to Restock orders for now, but it would not be surprising to see Target expanding the efforts of a wider set of goods in the future, especially now that Amazon is moving to a day's shipping.
A little hit to the margins
Target has not felt a great impact on the bottom line of its fast, free shipping initiatives, but they charge a small fee. In the fourth quarter of 2018, TARGET's gross margin doubled by 0.4 percentage points year-on-year to 25.7%, reflecting higher digital implementation and supply chain costs. The company was able to keep the operating margin flat at 4.9%, but this is mainly due to the strong growth in sales in the store.
Target margins will certainly get some pressure as the company continues to increase online sales, especially if the performance of their stores begins to cool. But the dealer has demonstrated with Restock that it can provide convenience on the Amazon level without Amazon membership fees.
A day's shipping from Amazon seems like a disaster for Target, but it's not really. The goal will be fine.