Amazon's retail bulldozer rumbles on

August 1, 2012: 1:58 PM ET

The company's attempt to perfect same-day local delivery should terrify traditional retailers. But it isn't quite ready for prime time -- yet.

By Verne Kopytoff, contributor

FORTUNE -- Amazon.com intends to crush local businesses by offering same-day delivery. Instead of visiting the neighborhood mall, shoppers could have Barbie dolls, designer dresses and laptop computers delivered to their door just a few hours after placing an order online.

Several articles in recent weeks raised the possibility of this ultimate Amazonifiation of retail. Construction of more warehouses is all that stands between the company and total domination, they suggested.

Such conjecture largely ignored an important point: Amazon (AMZN) already offers same-day delivery in 10 cities including New York, Phoenix and Washington, DC. The plan is already well underway, although its success is far from certain.

Asked about same-day delivery during an earnings call with analysts last week, Tom Szkutak, Amazon's chief financial officer, said that it isn't economical enough to offer on a "broad scale." What that means isn't exactly clear.

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Did he mean that it's too costly to make same-day delivery available in rural Wyoming? Almost certainly. But Szkutak's comments leave the door open to a more targeted version of the service for most metropolitan areas. Greater population density and shorter driving distances would make turning a profit easier.

Amazon started its same-day delivery service, Local Express Delivery, three years ago in seven cities. Soon after, it added a few more metropolitan areas. "We want to make online shopping as convenient as possible," Girish Lakshman, vice president of transportation for Amazon, said in a press release when same-day delivery premiered in 2009. "Now, if a customer needs a last-minute present for a birthday or wants a copy of their book club book before the weekend starts, they can order from Amazon instead of the hassle of a last-minute trip to the mall."

To get same day delivery, customers must place their orders for eligible items before the cut-off time. Deadlines vary between 7AM and noon, depending on the city. Local courier services handle the deliveries, which cost an extra $9 per item. Amazon Prime members pay a reduced rate of $4. The company is also testing a separate same-day grocery service in Seattle. Those deliveries can cost $8 for smaller orders and free for larger ones.

So far, Amazon's same-day delivery hasn't exactly killed brick-and-mortar retailers. Granted, the services are not aggressively marketed and relatively few users know they exist.

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But the subject has nevertheless received ample attention recently, mostly because Amazon is on a warehouse building spree. The new distribution facilities will give the company a presence near a number of new cities, making it at least feasible to offer same-day delivery to millions of more customers.

In California, for example, Amazon has promised to spend $500 million on new distribution facilities near Los Angeles and San Francisco. In Texas, the company has committed to spending $200 million on capital improvements.

To clear the way for the building boom, Amazon has to capitulate on collecting sales taxes. For years, the company largely avoided the role of tax collector because it had no offices or warehouses in most states. It was a deliberate strategy that gave Amazon a price advantage of 8 percent or so over its bricks and mortar rivals. But it also limited where the company could set up its vast distribution centers.

In any case, Amazon undoubtedly saw the writing on the wall. A number of states had enacted laws that compelled it to collect sales tax. Fighting them all was getting burdensome and the likelihood of winning them all was remote. By reaching agreements with several states, the company was at least able to postpone collecting the taxes for a few months to a few years.

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Colin Gillis, an analyst with BCG Partners, agreed that Amazon's best strategy is to keep its same day delivery service targeted rather than national. It may be one way, he said, for the company to keep customers happy after it starts charging them sales tax. "One way to get that advantage back is to do same-day delivery," Gillis said. "People always want goods faster rather than slower. We'll see if that's enough incentive."

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