Same-Day Delivery War Heats Up

What do Google Inc. (NASDAQ: GOOG), Walmart Stores Inc. (NYSE: WMT), Kroger (NYSE: KR), eBay Inc. (NASDAQ: EBAY), privately-held Uber Technologies Inc., and Amazon.com (NASDAQ: AMZN) have in common? They’re all in intense competition for a piece of the same-day delivery pie.

Same-day delivery is widely regarded as the next frontier of online retail, but it’s also far harder and more complex than traditional delivery, even for those with a lot of experience in the field. The organization with the most experience in delivery in America, the United States Postal Services, quietly shut down its same-day delivery scheme Metro Post last year.

The challenge is that same-day delivery involves a completely set of challenges than traditional online retail and delivery. In online retail, there are basically three models, and the largest and most successful is what we might call the Amazon model.

In that model, the online retailer uses a shipping service, such as UPS (NYSE: UPS), FedEx (NYSE: FDX) or the USPS for the delivery. This service works well with traditional online retail, in which a person places an order and waits a few days for the delivery. The retailer operates a fulfillment center and a truck from the shipper picks the goods up and takes them to the delivery service’s facility, where they are sorted and sent on for final delivery.

The Same-Day Challenge

The challenge with same-day delivery is that the item has to be taken straight to the customer, often in less than an hour. The challenge here is that the delivery logistics networks in the U.S. and other countries are not set up for this. The Amazon model simply does not work with same-day delivery.

That brings us to another delivery model that might hold the answer. We could call the Domino’s model, in which the company that originates the order handles shipping and delivery. The model here is Domino’s, which ships a pizza directly to your house. Domino’s itself employs the delivery person directly.

Walmart, Amazon, and Kroger are experimenting with something like this in a number of American cities. Kroger HomeShop and Walmart to Go use branded trucks to take merchandise directly from their stores to customers. The idea is to turn the local Kroger’s or Walmart store into a fulfillment center.

This presents a problem for Amazon.com, which operates massive fulfillment centers designed to feed merchandise into the postal system (or UPS) and FedEx’s delivery networks. It has no location in your neighborhood where a driver can pick up an order. This hasn’t stopped Amazon, which is testing Amazon Prime Now, a service that’s used a variety of methods of delivery, including bicycle messengers and taxis.

Amazon has created a facility in New York that is sort of a clubhouse and staging area for bicycle messengers. The facility also contains a warehouse for some items. The service sounds interesting, but one has to wonder how it will work in your typical spread-out American city like Denver or Los Angeles. In Denver, some neighborhoods are 40 miles from downtown. Perhaps Amazon will contract with taxi companies or a courier service in those places. It might also start hiring contract drivers that provide their own cars or vans like Uber does.

Uber operates something called Uber Rush, which is basically a courier service. In New York, it uses bicycles, but it could also use cars. Another solution would be to give Uber drivers the option to pick up and deliver packages. The advantage to this is that Uber does not provide infrastructure. The disadvantage is that it is dependent on a steady flow of contract drivers.

Google may have the answer here; it operates Google Express, in which a Google driver picks up orders from existing retailers, such as Target (NYSE: TGT), Walgreens (NYSE: WAG soon to become NASDAQ: WBA), Whole Foods Market (NASDAQ: WFM), and Costco Wholesale (NASDAQ: COST), and takes them to customers. People order through the Google Express website, which also handles payment.

The advantage to this arrangement is that Google does not have to operate its own fulfillment centers. It does have to have to pay drivers and maintain vehicles, which will be expensive. Some news stories indicate that Google is willing to spend up to $500 million to roll out the service.

The Real Challenge: Who pays the Driver?

Another option, which is offered by Uber and a Silicon Valley startup called Deliv, is to hire contract drivers for the delivery, much like Uber hires drivers. Like Google Express, Deliv is trying to build a relationship with retailers. The problem with this is who pays the drivers; Dominos, of course, relies on tips to attract drivers. People are not used to tipping the UPS man or the letter carrier.

Most services add a charge for same-day delivery. The charge is often small, say around $5. That means you would have to get a high volume of deliveries to make money; UPS and FedEx are profitable because of the huge volume of packages they ship. It took them decades to build up that volume, and it’s hard to see Google Express or Deliv or Uber building up that kind of volume overnight.

Uber or Lyft drivers can make good money because the service is mileage-based, like a taxi. One has to wonder what the delivery model will be. Google simply pays its drivers directly; they’re salaried employees hired through contractors or temporary services, which must have the Teamsters’ Union salivating about all those potential recruits.

Same-Day Delivery Challenge not solved

The real problem is that the same-day delivery challenge has not been solved yet. Google and Kroger both seem to be close to solving it. Another problem that both services face is that customers do not seem to be willing to pay extra for same-day delivery.

My guess is that, as with traditional online retail, it will take a long time, years or perhaps decades, to get customers used to the idea. It took 20 years for Amazon to become accepted in Middle America. It’ll probably take several years for Americans to get used to the idea of same-day shopping.

The same-day delivery war will be won by the company willing to stick it out, invest money, and spend several years slowly building up and rolling out its service. In that time, we’re liable to see consolidation and alliances Walmart or Amazon.com teaming up with Google Express, or Google contracting with Kroger or Uber to provide deliveries.

One thing is certain though, don’t expect same-day delivery to make money or appear in your neighborhood anytime soon, unless you live in Brooklyn or San Francisco.