Amazon has put speed at the heart of its online retail offer. It recently launched Prime Now, a city-based local delivery service offering up to 25,000 lines in a two-hour delivery window. We’re also seeing a new generation of ultra-fast delivery companies in sectors such as meal delivery. Hundreds of bike and motorbike couriers now criss-cross most cities every evening, racing to get meals delivered within an hour of the order being placed.
But how important is delivery speed to most customers and how does it affect the profitability of the retailers considering speedier delivery options? I’ll be examining these questions in my upcoming series of blogs and it’s a key theme of my forthcoming book: Retail's Last Mile:The Race to the Doorstep.
The premise of Amazon’s strategy is that consumers prefer speedier delivery and over time, the quickest will win. But does that hold true? I learned a long time ago in retail that there’s no such thing as an “average” consumer; just lots of different segments. A good way to look at this question is by breaking it down to look at the underlying needs of different customer segments.
One clear segment of demand is for urgent deliveries. It’s 7pm after a long day at work and you’ve just realised there’s nothing in your fridge. A 45-minute delivery from your favourite restaurant can look very attractive. This drives the business model of hyper-local food delivery services, such as Deliveroo and Delivery Hero. These firms may even allocate drivers to a single suburb to ensure customers receive their orders as quickly as possible.
At the other extreme there are products which customers are likely to be indifferent about receiving earlier. If I’ve ordered a staple item such as flour or sugar and already have enough in my home to last a few days, I’m probably unwilling to pay for a delivery to arrive earlier. It’s more important that I can arrange when the delivery will arrive so I know I will be home to receive it.
Between the two extremes are discretionary items: for example a new dress or a pair of jeans ordered as a treat. This is where there is huge variation in delivery speeds. For a wanted item it’s likely the customer will prefer to receive it sooner even though they may be unwilling to pay much of a premium. Other things being equal the speedier retailer is likely to come out on top in the long run.
So what does this mean in practice and can retailers focus on just one approach? In reality most consumers will switch between segments, even for the same product. I may be happy with a long lead-time for flour most weeks, but if it’s Friday and I need more flour for a cake I’m baking on Saturday then only one-day delivery will work. Amazon is doing a great job of offering flexibility: Prime Now caters for urgent delivery but it also has cheaper delivery models that allow customers to order products up to one year in advance using a “subscribe and save” fixed monthly delivery day.
To keep their customer happy retailers need to be able to flex their delivery offer to suit their customers, or risk them moving away when their needs change.