The Dot-Com Delivery Challenge

Many e-tailers are contemplating the next holiday shopping season with a mixture of anticipation and dread. With increasing pressure from investors to show some black ink, companies like Amazon, Macy’s, Toys “R” Us and CDNow are hopeful that shoppers will feel expansive about gift giving and will turn to the Web to place their orders. But the firms are also experiencing a measure of apprehension concerning their ability to deliver on time.

Amazon warmed up earlier this summer by executing an order fulfillment coup with its record-breaking one-day delivery of more than a quarter million copies of the latest Harry Potter book. The company more than made up for the few glitches that occurred by giving full refunds for late deliveries, allowing the affected customers to keep their books as well.

Ultimately, the performance raised the bar for e-tailers who hope to attract and retain large numbers of loyal customers during the upcoming holiday season, and especially for those who have troubled fulfillment histories.

Broken Promises

In July, the U.S. Federal Trade Commission (FTC) fined seven e-commerce firms, including Macys.com, Toysrus.com and CDNow, a total of $1.5 million (US$) in a settlement of its lawsuit over bungled deliveries last year.

The FTC suit charged the e-tailers with breaking the agency’s mail-and-telephone order rule by promising delivery dates they could not meet and failing to notify their customers that shipments would be late. FTC spokesperson Eric London told the E-Commerce Times that “The mail and telephone order rule is not a requirement for brick-and-mortar companies or catalogs only, but applies to e-commerce as well. The strict penalties were designed to put e-commerce on notice that the FTC will continue to monitor their actions.”

Panic set in a few days before Christmas last year, and a number of e-commerce sites posted disclaimers stating that they could not guarantee delivery prior to the holiday. To some observers, it seemed as though e-commerce was failing the test of whether it could successfully challenge brick-and-mortar retailing.

Toys ‘R’ Late

The speed of the Internet did not carry over into order fulfillment. Amazon stopped taking orders on December 22nd, shutting out a multitude of last minute shoppers. As early as December 15th, Macys.com informed customers that they would have to pay for second day express shipping if they wanted guaranteed delivery before Christmas.

Meanwhile, Toys “R” Us was in the throes of a holiday nightmare. Even though it had cut off orders by December 14th, the company was unable to fulfill thousands of expected deliveries on time and was later smacked with a class action lawsuit.

Plaintiff attorney Steve Berman said in a statement, “There are lots of things in life that are excusable, but ruining Christmas for thousands of children isn’t one of them. The thought that Toysrus.com had full knowledge they couldn’t keep the Christmas Eve date but continued to accept orders makes it even worse. To thousands of kids, Toysrus.com is the e-grinch that stole Christmas.”

Earlier this year, Toys “R” Us unveiled plans to open two new fulfillment centers, with CEO Jonathan Foster saying, “Our number one priority in 2000 is to strengthen our infrastructure. Last year, we learned some valuable lessons.”

Barely There

CDNow has hardly been in a position to improve its delivery methods. Until it was bought out recently by German media giant Bertelsmann AG, the company was barely treading water. When Bertelsmann took over, paying $141 million for the privilege, CDNow was deep in debt, and still losing wads of cash.

The online music company reportedly lost more than $212 million since 1994, and was a prominent entry on every dot-com death watch list. As if to underscore the absurdity of the deal, Bertelsmann not only paid more per share than CDNow was currently getting on Wall Street, but also agreed to take on the failing dot-com’s considerable debts.

Though Bertelsmann undoubtedly has a long-term strategy that will make sense of its purchase decision, it is questionable whether the new owner will be willing and able — given the lateness of the day — to sink enough of an investment into the new staff and infrastructure that CDNow will need to meet delivery expectations this year.

Long Waits, Steep Fees

A glance at the Web sites of Macy’s, Toys “R” Us and CDNow — three of the companies fined by the FTC for failing to deliver last year — suggests that rather than making radical changes in their procedures, the companies are being more careful about what they promise. None are offering an order fulfillment schedule that even comes close to the instant gratification of making a purchase at a brick-and-mortar store, and all three are charging daunting fees.

Macy’s states that customers should generally expect deliveries to take 12 to 14 business days, for ground shipment at a minimum cost of $6.00. Second day air costs at least $15, and shipment by next day air costs a minimum of $19.00.

CDNow posts detailed shipping costs, with minimums of $2.99 to $4.95 depending on the type of item ordered, plus additional per item charges. The company states in bold print that orders delivered via the U.S. Postal Service “are not guaranteed within a certain time frame and may take up to two weeks to arrive.”

Toys “R” Us offers “standard” or “quick” delivery with prices based on the size of the items ordered. Standard delivery takes ten business days and quick delivery takes three to five business days, the statement says. The base cost for standard delivery is $3.00 plus $1.25 to $25.00 per item, depending on size. Quick delivery costs $7.00 plus $1.95 to $50.00 per item, again depending on size.

Do-or-Die Delivery

The year 2000 holiday season is unlikely to be an unbridled e-commerce success. Revenues will almost certainly be impressive, but that is nothing new in the dot-com world. Investors and customers alike are looking for signs of stability and maturity as well as ever-elusive profits.

E-tailers who make the Herculean effort required to ramp up their delivery procedures in time for the holidays this year are likely to bear some negative consequences in spite of their best efforts. The investments in additional employees, hardware and software may offset potential gains and destroy their dreams of turning the profitability corner this year.