How Can Best Buy Offer for Free Something that Amazon Charges For?
Consumer electronics retailer Best Buy (NYSE:BBY) isn't messing around this holiday season. In a bid to compete online with Amazon.com (NASDAQ:AMZN) and its ever-shortening delivery times for Prime members, Best Buy announced on Tuesday that almost all of its customers would have access to free next-day delivery on thousands of items.
Big items like TVs and major appliances are excluded, but Best Buy is also providing free standard shipping on anything that doesn't qualify for next-day delivery. As Amazon makes one-day delivery the standard for Prime members, this move allows Best Buy to match that faster delivery speed without any membership fees.
How can Best Buy offer for free something that Amazon charges for? The company is leveraging its stores and an improved supply chain to get the job done.
Shipping from stores
One of the key initiatives Best Buy undertook as it turned itself around over the past seven years was using its stores to fulfill online orders. Today, every one of its stores is shipping orders that come in through the company's website and app.
A store is not as efficient as a tailor-made online distribution center, but it has a few benefits. First, it already exists. If Best Buy wanted to match the scale of Amazon's distribution network, it would require billions of dollars of upfront investments for new distribution centers. By using its stores to ship online orders, Best Buy is taking advantage of over 1,000 mini-distribution centers that are already close to where its customers live.
Around 70% of the population lives within 10 miles of a Best Buy store, according to the company. That's benefit No. 2. Instead of an online order being fulfilled from some faraway distribution center, a nearby store can ship it a short distance, saving both time and money. All of this makes next-day shipping for the vast majority of customers possible and profitable for Best Buy.
Supply chain improvements
In addition to leveraging its stores for online orders, Best Buy has made other supply chain improvements that boost its ability to deliver products quickly. The company has invested in automation, installing seven automated storage and retrieval systems and two automated packing systems at its regional distribution centers. This brings down distribution costs across the board.
Best Buy has also added some distribution center capacity since 2017, although not nearly as much as it would have needed to if it wasn't using its stores to ship orders. The company has opened three small-footprint e-commerce fulfillment centers in major cities, and it's added 3.3 million square feet of new distribution center space overall.
These investments, along with new final-mile carrier partnerships, have led to significant improvements. The number of e-commerce orders filled by the next day is up 100%; productivity has been boosted by 20% thanks to automation; and Net Promoter Scores, which measures customer satisfaction, are up for both store pickup and home delivery.
Matching Amazon
While Best Buy doesn't offer the same vast selection as Amazon, the company's progress over the past few years has allowed it to offer the same delivery speed without charging customers any membership fee. This is only the case for the holiday season, but it wouldn't be surprising to see Best Buy eventually offer free next-day shipping as standard for many customers and products. It certainly has the capability to do so.
Best Buy's next-day shipping initiative should help the company hold its own this holiday season against Amazon. It may have a negative impact on margins, but that's probably a price worth paying to keep pace with the e-commerce giant.
