Retail delivery wars: Smart strategy or an inevitable race to the bottom?

It wasn't so long ago that Amazon's "Prime" two-day delivery benefit was a real game changer. Once a consumer paid the annual fee, the incremental cost of getting what (at the time) seemed like pretty fast delivery became zero. This is a "wow" for the customer, but it also creates adverse selection that's not necessarily so good for Amazon's marginal economics as evidenced by Amazon's growing fulfillment costs as a percentage of sales. But there is no denying that Prime is a major contributor to Amazon's ever growing dominance of online shopping.

Now, as the stores strike back, ever more convenient delivery is part of an escalating arms race. While retailers have used free delivery as a promotional weapon for years, things really ratcheted up last fall when Target offered free two-day delivery over the holidays. Since then the Big 3—Amazon, Walmart and Target—keep upping the ante.

Amazon, in particular, continues to push the envelope on the so-called last mile of retail, recently announcing the expansion of one-day delivery to more than 10 million products as part of its Prime offering. The beast from Seattle also offers its in-home delivery service (Key by Amazon) in 50 cities. And if my in-box is any indication, the company continues to aggressively promote same-day and two hour delivery with significant discounts for an initial trial.

Now, in the most obvious challenge to Amazon's position as the ultimate in shopping convenience, Walmart is stepping up its game. The world's biggest retailer has been touting its offering of enhanced delivery without having to pay a membership fee for some time, as well as the convenience of grocery pick up from many of its stores. Last month it went a step further, by launching free next day delivery in many markets.

Target is hardly standing still. Leveraging Shipt, the same-day delivery platform it acquired in late 2017, the Minneapolis based retailer is now leap-frogging Walmart in some respects by making it easier for customers to get same-day delivery. While consumers need to pay a fee or opt into a Shipt trial membership, the range of delivery options is now far better integrated into the buying process.

Moreover, in another sign of a growing battle for the hearts, minds and wallets of consumers, Amazon announced that this year "Prime Day" won't be a day at all, but rather two days. Of course, it didn't take long for both Target and Walmart to respond with their own aggressive promotions. Ebay and many other retailers are also joining the fray. My bet is we will see more join the party before July 15 rolls along.

So what should we make of all this? The one rather obvious conclusion is that more, cheaper and faster home delivery and local pick-up options are a bonanza for consumers. Another thing that appears clear is that layering on all these additional features probably doesn't expand overall spending. So for the brands engaged in this escalating service battle it's all about preserving market share. I'm no mathematician, but it seems like if you lower prices, raise your operating costs and are mostly trying to retain your piece of the pie, that's rather unlikely to be accretive to profits.

As Seth Godin reminds us, "the problem with a race to the bottom is you might win. Or worse, finish second."

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts here.  

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