Send me real-time posts from this site at my email
Motley Fool

One-Day Shipping Will Produce Even More Share Gains for Amazon

Amazon.com (NASDAQ: AMZN) already dominates online shopping in the United States, but the gap between the e-commerce giant and second place will probably get even bigger next year. Research group eMarketer expects Amazon's share of U.S. e-commerce sales to climb 1.4 percentage points this year to 38.7% of all online sales.

Its next closest competitor, Walmart (NYSE: WMT), will account for just 5.3% of online purchases in the U.S. And if you exclude Walmart's click-and-collect online grocery business, the gap is even bigger. eBay (NASDAQ: EBAY) takes third place in eMarketer's estimates with a 4.7% share, but that number is shrinking as the company struggles to grow gross merchandise volume (GMV) on its platform.

The biggest contributor to Amazon's continued share gains, despite already dominating the market, is the move to one-day shipping, says Morgan Stanley analyst Simeon Gutman. Gutman estimates items shipped with one-day delivery from Amazon accounted for 40% of shipments in the fourth quarter, and that number could climb to 50% by the end of this year. That's impressive considering it was close to 0% a year ago.

While competing retailers like Walmart have moved to offer one-day delivery, Amazon holds considerable competitive advantages that will make it practically impossible for even its biggest competitors to cut into its market share. That's why it's winning 65% of incremental sales, according to Gutman.

Image source: Amazon.

Millions of products available next-day

When Amazon officially launched one-day shipping for Prime members last June, it said it could send over 10 million items to any of its U.S. customers' doors within a single day. Gutman estimates that's just about 7% of the total number of items available on Amazon.com. Even so, it represents a massive product selection compared to the 220,000 items Walmart offered in select metro areas when it launched NextDay a few weeks earlier.

Moreover, Gutman estimates Amazon will expand one-day shipping to include about 45% of all items sold on its marketplace by the end of this year. That could be around 70 million items. That's a scale Walmart will never reach with its NextDay service, as it relies on mirroring inventory across its brick-and-mortar stores and warehouses in order to cut down on shipping costs and increase speeds. Walmart's practically capped at a few hundred thousand items for one-day shipping unless it's willing to increase its shipping costs. Even then, its smaller scale will prevent it from reaching nationwide one-day fulfillment like Amazon.

Controlling the supply chain

Walmart also faces the challenge of not controlling the supply chain of practically everything sold on its website. Amazon's broad product selection is in large part thanks to third-party sellers using its Fulfilled-by-Amazon service. In fact, third-party sellers account for a larger percentage of gross merchandise volume (GMV) than Amazon's own sales. But Amazon controls the entire supply chain by warehousing and shipping items for third-party sellers.

Walmart's looking to copy that business model with its own fulfillment service and started testing it last year. Head of Walmart U.S. eCommerce Marc Lore cautioned that the rollout will be slow.

eBay's in a much worse position than other competitors. The company exclusively operates a third-party marketplace, and it exercises practically no control over the fulfillment of items bought on its platform. eBay has incentivized sellers to offer faster fulfillment and shipping speeds, but the nature of the platform creates an inconsistent shopping experience. That may be one reason why eBay's gross merchandise volume shrank considerably in 2019. eBay's U.S. GMV was down 8% in the fourth quarter.

Winning market share with more shipments

Amazon's continued market share gains will come at a considerable cost in the near term. While total sales volume will climb, the amount that customers buy per order will decline. Gutman estimates average order value will decline by $1 to $24 this year and items per order will fall to 1.5 from 1.6. That compares to an estimated average order value of $27 for Walmart.com this year (also down $1), but two items per order (flat).

Amazon continues to grow Prime membership in the U.S., which is now driven primarily by one-day shipping on convenience items. That trend will have a noticeable impact on Amazon's fulfillment and shipping expenses in the near term as it continues to build out its in-house logistics network.

Over time, however, the company should be able to produce greater efficiencies through scale and continued market share gains leading to a virtuous cycle. The gap between Amazon and the retail competition will keep expanding, despite everyone's best efforts to keep up.

Find out why Amazon is one of the 10 best stocks to buy now

Motley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

Tom and David just revealed their ten top stock picks for investors to buy right now. Amazon is on the list -- but there are nine others you may be overlooking.

Click here to get access to the full list!

*Stock Advisor returns as of December 1, 2019

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends eBay and recommends the following options: long January 2021 $18 calls on eBay and short January 2021 $37 calls on eBay. The Motley Fool has a disclosure policy.


Source

Popular posts

Welcome!!! Is it your First time here?

What are you looking for? Select your points of interest to improve your first-time experience:

Apply & Continue