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Walmart is rolling out next-day delivery. Look out, Amazon

The war over next-day delivery is here.Walmart on Tuesday will begin offering one-day delivery services in Phoenix and Las Vegas. The company also ann...

Posted: May 14, 2019 5:51 AM

The war over next-day delivery is here.

Walmart on Tuesday will begin offering one-day delivery services in Phoenix and Las Vegas. The company also announced plans to expand to Southern California in the coming days.

More than 220,000 items — including pet food, diapers, paper towels and laundry detergent — will qualify for the service. Customers must spend at least $35 to receive next-day shipping.

The nation's largest retailer has big ambitions for faster shipping to catch on quickly. It plans to roll out next-day delivery to reach 75% of the United States this year.

Walmart's next-day delivery service is a show of how aggressive major retailers have to be on shipping goods to customers as quickly and reliably as possible. Just last month, Amazon threw down the gauntlet when it revealed plans to make free next-day shipping the standard offer for Prime members, rather than the two-day shipping that customers have long been familiar with. Amazon said it would invest $800 million this quarter to make the switch happen.

It's not a surprise that Walmart is following suit.

"One-day shipping is going to be the customer expectation now," said Laura Kennedy, analyst at Kantar.

But the decision to offer speedier shipping creates a lot of challenges. Amazon's announcement last month drove down the stocks of Walmart, Target and other retailers. The profits of those companies are already under pressure. Investors feared that if they enacted one-day shipping to compete with Amazon, their margins would be squeezed even tighter.

Walmart thinks it can deal with that problem with its vast fulfillment infrastructure. On Tuesday, the company said it will be able to control costs by using a mix of options: fulfillment centers that handle online orders, 4,700 US stores and other fulfillment centers that carry merchandise for stores to ship products.

Although Walmart's program requires a minimum purchase amount unlike Amazon's, Walmart also hopes that it can distinguish its service from Amazon Prime because Walmart customers won't need a membership to receive next-day delivery.

Kennedy predicted that Walmart's move could spark more rivals to follow suit.

Catering to busy families

One-day shipping marks an evolution of Walmart's online strategy. It has previously offered free two-day delivery on orders above $35, same-day grocery delivery, and same-day grocery pickup in store on online orders.

In-store pickup in particular has taken off with shoppers. UBS analysts estimate that up to 60% of Walmart's online business comes from online grocery pickup.

Walmart's new next-day delivery option will add another layer of convenience for busy shoppers who don't have time to shop in store or pick up their orders, said Janey Whiteside, Walmart's new chief customer officer. She's the first person to have the job.

Customers are increasingly demanding easy ways to shop, she told CNN Business: "Sometimes you just need it tomorrow."

Walmart wants to bolster the loyalty it already has among existing customers with next-day delivery. But Whiteside said the company also hopes to bring in new customers, too.

High costs

Convenience comes at a cost. Online delivery is more expensive for retailers than in-store purchases because they have to pay shipping fees.

To offer one-day shipping in the United States, Walmart will need to invest $215 million in its business, according to an estimate Monday from UBS analysts. That kind of money will bring down Walmart's profit margins 0.5% annually, the analysts estimated.

Walmart disputes those numbers. The company says it will be cheaper to deliver orders the next day because it will use the fulfillment option closest to customers to ship items and use one box to deliver them.

That strategy is different from how Walmart handles its two-day deliveries on millions of eligible items. For those orders, Walmart often ships items in multiple boxes and uses fulfillment centers that are often far away from customers' homes. Walmart often has to pay expensive long-distance shipping fees for those purchases.

Walmart will be limited in which items it can offer for one-day shipping to shoppers based on what's available at its closest fulfillment option. Walmart plans to keep next-day delivery costs low by tailoring the products it will offer based on local market demand. In Phoenix, for example, Walmart's nearby fulfillment centers will carry sunscreen all year. But in Michigan, sunscreen will mainly be available for next-day delivery during the summer.

To avoid long-distance shipping costs, Walmart has to ensure that it keeps the right items in stock at its fulfillment centers closest to customers.

Rival Target, meanwhile, is working on its own strategy. That retailer already offers next-day delivery on orders for household essentials above $35 through a program called Restock. But those orders carry a $2.99 fee.

The company also offers same-day delivery through its Shipt service from 1,500 Target stores. But Shipt requires a $99 annual membership fee.

Target has tried to limit the cost of online shipping by using its stores as fulfillment centers for online orders. Stores fulfilled close to three quarters of Target's digital sales during its most recent quarter.

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