Dive Brief:

• Amazon's inventory value has ballooned over the last year compared to some of its retail competitors, increasing 25% up to nearly $18.6 billion in its latest quarterly report from more than $14.8 billion during the same period a year ago, according to a review by Supply Chain Dive.
• Other large retailers, including Walmart, Kroger and Home Depot, have also seen inventory increase in their most recent earnings, but not to the same level. Amazon CFO Brian Olsavsky mentioned "new costs" on the company's Q2 earnings call that were the result of "expanding inventory, getting it closer to the customer."
• The increase in inventory is a result of Amazon's plan to roll out next-day delivery, according to Moody's retail analyst Charles O'Shea. "In order to do next day delivery, you've got to have the stuff in the system," O'Shea said in an interview with Supply Chain Dive. "So you've got to buy more because you don't know how much you need."

Dive Insight:

Amazon has already seen some hiccups in its promise of next day delivery. Many customers complained of later than expected shipping times during Prime Day this summer, an early test of the retailer's delivery promises.

But Amazon has learned a lot from Prime Day, according to O'Shea said. These increased inventory levels are a sign of continued tinkering to follow through on the promise of next day.

In addition, the company is investing in its transportation network.

"So we do need to build out more one-day capacity along with our transportation partners, but we're moving quickly and we've got a good head start," Olsavsky​ said on Amazon's Q1 call explaining a multi-million dollar investment in its transportation and fulfillment network. He went on to say "most of this capacity [will come] through the year in 2019."

The investment in next day delivery and the subsequent inventory uptick are a result of "Amazon trying to hold its own against brick and mortar," according to O'Shea.

Amazon is able to control the SKUs it offers for next day delivery, but when Walmart announced its next day offering, it said the entire store was available.

"That's pretty compelling," O'Shea said of Walmart's next day delivery announcement. "And they don't really have to increase the inventory level per se ... they can just replenish faster."

Traditional retailers like Walmart and Target have leveraged their physical footprint with omnichannel offerings like buy-online pick-up-in-store (BOPIS) or ship from store. BOPIS and ship from store already require these stores to act as fulfillment centers for online orders. As a result, "you will not see the same proportional spike in inventory," O'Shea said.

This is something O'Shea wrote about in a research note at the end of last year, saying Amazon could have a hard time competing with BOPIS.

"[B]rick-and-mortar retailers already possess proprietary distribution capability, with vehicle networks that are already stocking the stores," he wrote.

While Prime Day was next day delivery's first big test, peak season will be its next major milestone. All eyes will be on Amazon as it attempts to fulfill its next day promise for the first time during the holiday season.