Amazon.com Inc. has a new, expensive-to-reach target in its quest to sell everything to everyone: last-minute holiday shoppers.
The online store has spent the past year expanding its same-day delivery service to 24 metropolitan areas covering a population of 75.7 million people, or almost one in four U.S. residents, according to data compiled by Bloomberg. One option—Prime Now—gets products to customers in an hour or less.
By promising consumers in Seattle, Chicago, New York, San Francisco and other cities that they can get their purchases right away, Amazon Chief Executive Officer Jeff Bezos is betting that more people will be convinced to buy gifts online instead of trekking out to physical stores. He's also eager to maintain Amazon's dominance of online sales, which are projected to top $95.5 billion in November and December, an 11 percent increase from a year earlier, according to Forrester Research Inc.
"Prime Now is an absolute game changer for the holidays," said Josh Neblett, CEO of Etailz, which sells merchandise on various marketplaces including Amazon. "It opens the door to a whole new group of on-demand customers."
It's an expensive bet. Same-day delivery requires Amazon to keep inventory in cities where land and workers cost more. The company spends four times as much money dropping off packages on the day compared with next-day deliveries, according to Guru Hariharan, who worked at Amazon and EBay Inc. before starting Boomerang Commerce Inc., an e-commerce analytics firm in Sunnyvale, California. The model only works if couriers are handling about three to four deliveries per hour—anything less, and the service becomes a money loser, he said.
"The jury is still out on same-day delivery," Hariharan said.
Amazon Prime members can choose from among tens of thousands of items through Prime Now that can be delivered within an hour by paying $8, or within two hours for free. Another separate service, Prime Free Same Day, ships more than 1 million items by evening if orders are placed by noon.
By combining the convenience of Web shopping with the immediacy of a quick trip to the store, Amazon is becoming even more of a direct threat to Target Corp., Macy's Inc. and other retailers in the final days before Christmas when e-commerce orders start to dry up. It's also helping Amazon to stay ahead of EBay and startup Jet.com Inc., while giving Prime shoppers—who already get delivery discounts and online video and music streaming—another incentive to stick around and spend more. All of this comes against the backdrop of an e-commerce market that's starting to mature, with holiday sales seen slowing from 13 percent growth in 2014, according to Forrester data.
"There are so many reasons to skip a trip to the store," said Kelly Cheeseman, a spokeswoman for Seattle-based Amazon.
For the holidays, Amazon will probably offer same-day services until the last minute, on Dec. 24. That's perfect for shoppers like Bryon Gillis, 24, of Long Beach, California, who recently bought the Call of Duty: Black Ops III video game via Amazon's Prime Now app. "It was waiting for me when I got home, which was pretty nice," he said.
Amazon wouldn't have invested in same-day delivery unless the business proved promising, said Scot Wingo, chairman of ChannelAdvisor Corp., an e-commerce consulting company in Morrisville, North Carolina. Prime Now debuted in Manhattan almost a year ago, and steadily expanded to more cities. At the same time, Amazon has kept its spending under control, helping to more than double its share price this year.
"Amazon doesn't scale something this quickly unless it is seeing some impressive results," Wingo said.