How Walmart and Target can top Amazon on drone delivery
Among big retailers, Amazon has pushed the potential of drone delivery the hardest. But, according to BI Intelligence’s exclusive analysis of data from The Weather Company, the e-commerce giant isn’t the best positioned to take advantage of drones’ promise. Instead, its brick-and-mortar rivals, Walmart and Target, may be poised to reap the biggest gains.
That’s important because drone delivery is a key part of Amazon’s strategy to extend its massive lead in e-commerce. Fast and free shipping are the top services that attract US consumers to shop online more frequently, and drones could help Amazon slash delivery costs to less than $1 a package by eliminating fuel and labor costs, according to a 2015 analysis by ARK Investment Management. It could also bring same-day (or faster) delivery to more customers.
Walmart and Target are nowhere near Amazon when it comes to e-commerce. In fact, while both have posted respectable growth, there’s little indication they are gaining ground:
Amazon's total online sales last year topped $96 billion.
Target reported $3.1 billion in online sales last year, only about 4% of its overall sales.
Walmart doesn’t report total online sales anymore, but they totaled $13.7 billion in 2015, accounting for just 3% of revenue, according to Internet Retailer estimates.
This has translated to sluggish overall growth for both retailers. Walmart’s total revenue grew just 0.8% during its last fiscal year ending January 2017, and Target’s grew 0.9% from 2015 to 2016. Meanwhile, Amazon’s retail revenue increased nearly 25% last year.
Anything that could help widen (or shrink) that gap has huge potential ramifications for retail. Fortunately for Walmart and Target, the key to cashing in on the disruptive potential of drones and checking Amazon’s advantage in cutting-edge technology is something they have: lots and lots of stores.
These legacy retailers’ extensive networks of stores put them in a better position than Amazon to go all in on drone delivery, according to data from The Weather Company that covers more than 3 million Walmart and Target visitors.
That’s because a drone’s effective range is pretty small. And a big share of Walmart and Target customers live close to one of their stores — especially compared to the percentage of Americans who live within such range of Amazon’s fulfillment centers. That’s crucial to drone delivery’s prospects for success.
About 49% of Weather Company app users who visited a US Walmart location during Q1 2017 live within six miles of a Walmart store, a deliverable range for a drone. And 15.1% of purchases at Walmart are under $10, according to Perfect Price. Most of these purchases are likely light enough to deliver by drone.
Meanwhile, 47% of Weather Company app users who visited a US Target location during Q1 2017 live within a deliverable range, and 14.6% of purchases at Target are similarly under $10.
Amazon reports that 44% of Americans live within 20 miles of one of its fulfillment centers — but that’s too far for today’s drones. In fact, the drones Amazon is testing in the UK only have a range of 15 miles round-trip. So Amazon will need to either build more fulfillment centers, or come up with another strategy, in order to fully embrace drone delivery.
· To be sure, store-launched drone deliveries could prove a powerful tool in helping Walmart and Target boost online sales and close the gap with Amazon. But significant challenges remain — for example, stores will likely have to be redesigned to accommodate drones and new staff hired to manage them. As part of its UK testing, Amazon had to overhaul one of its own fulfillment centers by building an automated track to transport drones through the facility so employees could load them up with packages for delivery.
· What’s more, the retail chains will have to figure out how to track and manage inventory in new ways to account for drone deliveries. Many retailers already have issues with inventory management when implementing in-store fulfillment options for e-commerce purchases, which often deplete stocks when retailers need to take items off shelves to fulfill online orders.
· There are plenty of unanswered questions about drone delivery. How much will it cost to implement? Will consumers embrace it? And the big one — what about regulation? But if these can be resolved, it could be an opportunity for Walmart and Target to radically boost online revenue. Because of their massive store networks, they might even beat Amazon to the punch and keep their online rival from soaring out of sight.