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British Retailers Subsidizing Same-Day Delivery More Than 40 Percent

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As retailers are still trying to work through their new-found infatuation with the idea of same-day deliveries, it's quickly becoming a love-hate relationship. Beyond Amazon's discovery that shoppers loved the concept of same-day but ended up not using it, it now seems that some U.K. retailers are willing to very heavily subsidize same-day delivery charges.

These chains apparently think shoppers would never pay full freight, so they're willing to pay the delivery service £10 and then only charge the shopper £6, according to the CEO of a prominent same-day retail delivery service in London, whose company is trying to move into the U.S. That calculation also assumes not that many shoppers will use the service. After all, there are only so many £4 haircuts a chain selling lower priced goods is willing to take.

Tom Allason, the CEO of Shutl.com and the source of those price comparisons, argues that the perception surrounding same-day delivery is more powerful than the benefits from the slightly faster delivery itself. "It's about more customer responsiveness," he said. "It's more for the halo effect."

In other words, shoppers like the idea that a chain is willing to hand-deliver the products to them in a few hours, but they don't necessarily want the shop to actually do it. It's not necessary, and they may not want to be bothered to be there to accept the item that soon. But customers like being asked. It's one of those weird situations where it could be a powerful—and profitable—sales tool, as long as customers rarely take you up on it. That's fine, because shoppers seem quite willing to do just that.

A lot of the drama surrounding retail same-day delivery efforts—including those from Amazon, talk from Macy's, a trial from eBay, a limited rollout from Walmart and a delayed effort from the U.S. Postal Service (USPS)—is emotion-based.

One theoretical—and potentially highly profitable—advantage is that it can give retailers one, and possibly even two, more sellable days during the critical holiday shopping season. Traditionally, E-Commerce sales pretty much dry up after December 22 or December 23. The ability to deliver same-day on December 23 and December 24 could be extremely lucrative if—and it's a critical if—retailers can get shoppers comfortable with changing their holiday shopping behavior. It's doable, but it may take a few seasons to do it.

Some U.S. retailers who have talked with Shutl have expressed concern that the U.K. firm isn't partnering with well-known distributors such as FedEx or UPS. Shutl's Allason argues that such concerns are based on a lack of understanding of how shipments work.Large firms such as FedEx rely on a hub-and-spoke approach, which works efficiently and powerfully when delivering packages more than 10 miles away, Allason said. But the economic model is reversed when the distance is shorter than 10 miles, he argues, and then his method of hiring lots of local delivery people is the more efficient approach.

By tracking the delivery people and compensating them based on speed, accuracy and customer satisfaction, he uses performance to dictate compensation. In theory, this system would quickly weed out all but the most efficient delivery people.

This approach would theoretically work in urban areas or for other places with a very concentrated population (such as suburban areas with lots of corporate campuses or huge concentrations of high-rise apartment buildings), thus leaving rural and other suburban areas to be handled by the FedExes and UPSes of the world.

Allason said the U.S. market is "completely different from the U.K." retail market because of one word: Amazon. The fear of Amazon's shipments motivates "every retailer we go to here" in the U.S., he said.

As for why British—and presumably U.S.—retailers are willing to so heavily subsidize delivery costs, Allason argued that it's a lot more than merely impressing shoppers with the offered courtesy. "It's making consumers much more likely to purchase," he said, an experience that was mirrored by initial Amazon same-day delivery tests.

The subsidies, of course, could be dealt with easily enough; for example, by limiting the service to orders of more than $XX, where the margin can absorb the extra delivery costs. The last thing a chain would want to do, though, is fully subsidize same-day delivery. That would remove the cost from the shopper and thereby remove the disincentive to actually do it. If it morphed into truly free shipping, then everyone would likely take advantage of it and there goes the margin.

Even if the a minimum order preserved the margin, there is a physical limit to capacity. No, the unsubsidized payment from the shopper does its job by limiting the number of shoppers who actually do it.

In the Amazon trial, though, even when the cost was the same, many shoppers still preferred next-day to same-day. Sometimes, trying to fully understand shopper behavior is a futile effort.