Is Amazon UK struggling to deliver on its current promise?

While consumers once saw price as the main appeal of online retail, in the omni-channel world, customer service is coming to the fore as a differentiator between retailers, both in store and online. Increasingly, retailers need to understand how far to go to meet customer expectations while still maintaining profitability.

Until relatively recently, perceived wisdom in multi / omni-channel retailing was that the customer is continually chasing a ‘faster / freer’ delivery with the ultimate manifestation being free next day delivery.

Yet next day delivery is a very expensive option for a retailer to fulfil. Late cut-offs for next day delivery effectively mean that the retailer has to be agile enough to pick, pack and despatch orders with very little dwell time in the fulfilment centre which adds significantly to operational costs.

Many retailers today are waking up to the fact that their customers do not  want next day delivery … they want convenience and consistency, assurance that they will receive their delivery at a time, in a location of their choosing and with the certainty of timings.

Has this change in consumer expectations around delivery service standards taken Amazon by surprise? Recently we have seen some very telling changes introduced by Amazon that hint at problems within.

As a pure play retailer, the cost of home delivery is finally stacking up. Pushing the charges back onto the customer appears to signify that the retailer is struggling with its Supply Chain in an ever competitive marketplace.

By far the majority of retailers in the UK manage volumes by distribution channel by using tiered pricing. They understand the relativity between the customer’s desire to get their goods as soon as possible and the price they are willing to pay for that level of service. By actively managing delivery price points, retailers that funnel volume into different classes of operational activity within the DCs and so can smooth workflow volumes more evenly throughout the working day.

• Standard delivery volume on 3-4 day lead time can be pulled forward or pushed back in order to manage DC workload without impacting service
• Next day pick volumes can be artificially constrained through picking to ensure that service levels are not threatened and the delivery promise can be maintained to the customer
• Resource levels within the fulfilment centre become more predictable and manageable

In Amazon’s case, the question is … have they shot themselves in the foot with the Prime offer?

The Prime offer provides every customer with a ‘free’ next day delivery for an annual fee. This means that the customer is no longer placing a value judgement on whether they need the goods next day or not. Amazon has lost the ability to manage next day volumes and the associated pressures that this imparts on the logistics operations. They no longer have a means of adjusting the flow of orders that require immediate, short notice pick, pack and dispatch from the fulfilment centre as by default every Prime customer will be offered next day delivery.

The impact is simple: short term operational pressures on service levels and a dramatic increase in operational costs.

Amazon appear to be countering with some pretty dramatic changes in their customer proposition, including:

• Next day order cut offs are getting earlier and earlier

Cut offs for ‘next day’ delivery are slowly creeping earlier and earlier; with times ranging from around 5pm (black Friday) to around 7:30pm. Amazon manages their cut-off times based on capacity available – meaning that customers cannot be assured of a stable cut off time and increasingly failing to deliver a competitive offer, especially when compared to retailers such as Next who offer an 11:00pm cut off for next day delivery.

• Delivery charges are creeping up – especially the threshold for free delivery

Before July 2013, standard delivery from Amazon was free for all categories. This was initially changed with introduction of a minimum spend of £10 for ‘un-postable’ items. However, 6 months later, ‘postable’ items were also required a minimum spend in order to qualify for free delivery.

Recently, the thresholds have been upped again to £10 minimum spend for books and £20 for all other merchandise. With standard class delivery usually costing between £1.19 and £4.28 per parcel, this can add significantly to the cost of a sub £20 order.

• Prime costs are increasing

Prime is Amazon’s USP in the market providing free next day delivery for an annual fee. However, the cost of the service has increased dramatically, up from £49 to £79 since February 2014, which Amazon say is due to the additional services it has added to Prime (VOD, free kindle books). 

• Prime now features a ‘No Rush’ option

Amazon is now offering Prime customers a "No-rush” option – perhaps the biggest hint that they have got their numbers wrong on next day volumes and costs. Amazon is now offering a future discount voucher in return for not accepting a next day delivery. Essentially, trying to influence existing Prime customers away from the promised next day service onto a longer lead time option in order to lessen the impact on the fulfilment centres.

In Summary
We posed the question "Is Amazon UK struggling to deliver on its current promise?”

The answer would appear to be ‘Yes”. In today’s retail environment, differentiation is about a suite of service offers, not just speed. While markets seem to be shifting towards faster and freer, it is by no means certain that speed is the name of the game. It is true that pure-play retailers, including Amazon, are pursuing this as a means of differentiation in the marketplace. However, the rapid growth of click-and-collect suggests that customers are placing convenience over speed in the majority of instances.

Customers will make trade-offs between speed, price, convenience and personalisation. For their part, retailers must provide a suite of service offerings to cater for what customers want. This, in turn, drives back-end complexity and challenges existing systems and physical infrastructures that must then be adapted or fundamentally redesigned and re-implemented.

While a focus on free next day delivery for Prime customers may give an apparently competitive brand positioning and customer offer when a customer places an order, Amazon is clearly at risk of delivering an inconsistent experience when fulfilling that order - how likely are customers to return when the experience doesn’t match the promise?

This will have profound implications for the brand’s reputation and it appears that Amazon have acted to alleviate risk before it turns into service failure … the key question is whether the customer will see it that way or whether price increases and an apparent reduction in the benefits of Prime will risk major customer dissatisfaction and footfall loss in the long term.

The authors are Stuart Higgins and Will Dawson of LCP Consulting. LCP are a leading international specialist consultancy in business operations and customer-driven supply chain management.