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Amazon's 1-day shipping program could see more coronavirus-induced delays

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Amazon's 1-day shipping program could see more coronavirus-induced delays Inc. is working to resume its one-day shipping program to pre-pandemic levels while navigating long-standing challenges and new issues from the coronavirus outbreak that could hinder the company's ability to offer speedier delivery times, experts say.

Even before the pandemic, Amazon was facing logistics obstacles with the program due to its reliance on an unpredictable system of third-party carriers and infrastructure set up for two-day deliveries. Those challenges were exacerbated by the unanticipated surge in volume as quarantined consumers moved online, causing weeks of shipping delays for the company and its delivery partners like the U.S. Postal Service and independent contractors.

Amazon is now taking steps to catch up on demand while committing $4 billion or more of its second-quarter operating profit to coronavirus costs, including virus testing for all employees, providing workers with protective equipment and raising wages. The company may even consider acquiring a retailer to enhance distribution capabilities in rural areas, experts say.

"I think they are going to have a very hard time, for quite a long time, to be able to execute on the one-day," said Brandon Fletcher, an analyst at Sanford C. Bernstein & Co., in an interview. "The program, as designed, will be delayed."

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One-day shipping is available for many items today, but Amazon CFO Brian Olsavsky said in a first-quarter call with analysts that he could not predict an eventual return to pre-pandemic one-day shipping levels. It is taking longer to get items in and out of warehouses, something that needs to speed up in order to see a "resumption of more one-day service," he said.

"But right now, things are still so up in the air that I can't really project when that day will be or at what point in Q2 or Q3 or beyond," he said.

Amazon spokesman Timothy Carter declined to comment on when the one-day program would return on a regular basis, other than to say that the company has removed quantity limits on products its suppliers can send to Amazon fulfillment centers and continues to "adhere to extensive health and safety measures to protect our associates as they pick, pack and ship products to customers."

Soaring shipping costs

Amazon has become synonymous with speedy delivery over the years as it beefed up a logistics network that now includes more than 175 fulfillment centers, mostly in North America and Europe. Amazon's annual shipping costs reached $37.9 billion in 2019, more than tripling from $11.5 billion in 2015, according to S&P Global Market Intelligence.

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Amazon raised the shipping bar in April 2019 when the company announced plans for its one-day program that would cut standard delivery time on Prime orders to a single day, down from two days. The company devoted slightly under $1.5 billion to the program in the fourth quarter of 2019 and $1 billion in the first quarter of 2020.

Amazon did not specify how much it would invest in the program in the second quarter, but Amazon CEO Jeff Bezos said the $4 billion devoted to COVID-19-related expenses included "getting products to customers" faster.

Sudden surge

Like many retailers in the early days of the pandemic, Amazon was unprepared for the sudden surge in online goods, forcing it to introduce a wait-list for new online grocery customers and temporarily block shipments for products other than those classified as essentials such as medical supplies. Amazon's net sales in the first quarter rose 26% to $75.45 billion from $59.70 billion.

"This was like Black Friday, the holidays and Prime Day rolled into one and multiplied by some ridiculous number in stress to the network," Charlie O'Shea, an analyst with Moody's, said in an interview. "Any retailer out there is seeing stresses that no one could have foreseen, and they are all doing the absolute best they can."

Amazon is now working on a number of initiatives to absorb demand and increase shipping times, including hiring 175,000 new employees, allowing shipments of nonessential goods after temporarily halting them and expanding grocery pickup service at Whole Foods Market Inc.

Amazon declined to comment, but the e-commerce company is reportedly planning to hold its Prime Day sales event in September instead of July to help it catch up with demand, according to media reports.

Despite these efforts, Jason Goldberg, chief commerce strategy officer with Publicis, said he thinks it could take a year or so for Amazon to resume one-day shipping to pre-pandemic levels.

"As they get a few months to fix their supply chain and flex for this new demand model, I have every expectation that they are going to be able to accommodate that," he said in an interview. "We see some early indications that they are already getting ahead of the curve."

Bite at Amazon's apple

Until then, competitors like Walmart Inc. and Target Corp. can leverage their online and delivery services to capture would-be Amazon customers and win over the company's third-party sellers, experts say.

Walmart's e-commerce sales grew 74% during the first quarter as shoppers turned to grocery delivery and curbside pickup for online orders. The company also began offering free next-day delivery service without a membership fee in 2019 and launched a fulfillment service for third-party sellers in February.

Target, meanwhile, has also benefited from the virus-induced surge of online goods, with comparable digital sales rising 141% during the first quarter. Target also has its own third-party marketplace called Target Plus and has been working to enhance same-day services through its order pickup and drive-up offerings.

Higher online sales traffic at companies like Walmart and Target can be traced in part to "customers looking for faster delivery," said Juozas Kaziukenas, CEO of e-commerce consultancy Marketplace Pulse, in an interview.

"People started to do delivery comparison because the things they wanted from Amazon were now taking a month, which is the opposite of the promise that Amazon has built over the last decade," he said.

Walmart did not return inquiries for this story. Steven Yates, CEO of Texas management consultancy Prime Guidance, said in an interview that Walmart has captured business from Amazon third-party sellers of nonessential products who lost sales when Amazon temporarily halted shipping for those goods in March. "Most were probably down 30% to 50% [in sales] but some even more," he said.

He said many sellers began migrating to Walmart's third-party platform or began selling goods on eBay Inc. to make up for lost sales, said Yates, whose company advises more than 350 Amazon sellers in nearly every category.

"This basically forced them to start paying attention to those other sales channels," he said.

Urban rural divide

Amazon's lack of a significant supply chain infrastructure in rural areas could impact the company's capacity to fulfill its one-day promise in less-populated areas of the U.S., analysts say.

"Amazon hasn't been able to build 10 new warehouses in the last six weeks," said James Thomson, a former Amazon executive and partner with Buy Box Experts, in an interview. "The problem Amazon has right now is not can we get things to people super quickly. It's more do we actually have the distribution ability to get products to people all over the country with the massive amount of demand they have?"

Thomson said Amazon can easily ship an item in one day over to consumers sitting 150 miles away from a company warehouse, but not if they are sitting 600 miles away, he said. "So the more warehouses Amazon has, the easier this becomes," he said. "The problem is there is no huge warehouse out in central Montana."

Continued supply chain issues could force Amazon to narrow what it can deliver within one day to just essential goods and in certain areas such as large cities, said Fletcher of Sanford C. Bernstein & Co.

"You can get one-day in New York, and [Philadelphia] and San Francisco; you're not going to get a one-day promise in upper Maine or in rural Texas," he said.

To ship goods to all of America, Amazon would have to replace its reliance on the U.S. Postal Service, especially for rural deliveries, he said.

That is why Fletcher believes Amazon may consider purchasing a company like Dollar General Corp., whose stores are mostly in towns of 20,000 or fewer people. Amazon declined to comment, but the company has made other acquisitions to expand its footprint, including the 2007 purchase of Whole Foods, which gave it more than 500 stores in North America and the U.K.

"In some cities, [Amazon] can become your immediate go-to bucket for items to keep your life running," Fletcher said. "For everybody else, Amazon may get a flash drive to a rural area, but maybe it's two days, maybe it's four days."