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Holiday Retail Madness: Who Will Pay for 'Free' Shipping?

There was a time, not too long ago, when retail industry analysts were predicting that online merchandisers would soon stop offering free shipping on orders. How wrong they were.

Holiday Retail Madness: Who Will Pay for 'Free' Shipping?

The trend has clearly gone in the opposite direction. Today, free shipping appears to be the price of admission for many e-tailers. Granted, Amazon.com has begun to monetize its expedited delivery option with a $99 annual fee for its Amazon Prime service, which qualifies members for “free” two-day shipping on many orders. The online giant also offers outright free shipping on orders of more than $35. Other online sellers, especially those with brick-and-mortar stores, are matching Amazon under certain conditions, usually tied to the value of the order. They include Nordstrom, Inc., Best Buy Co. Inc., Barnes & Noble, Dick’s Sporting Goods and Old Navy.

Most recently, Target Corp. has thrown its hat into the free-shipping ring, offering the perk for all holiday orders. The announcement came just a few weeks before the beginning of the Christmas shopping season, suggesting a last-minute change of heart by the old-line retailer. (Or perhaps an acknowledgment of reality.)

Whether any of those merchants can afford to absorb the cost of free shipping is another question entirely. (Amazon, of course, has shown itself willing to operate for years without turning a profit.) But they seem convinced that the consumer won’t settle for anything less.

“It’s pretty basic,” says Tom Racciatti, senior manager of the supply chain practice of West Monroe Partners. “They’re doing this to drive volume.”

Fair enough. But the offer of free shipping has implications that resonate throughout the supply chain. Retailers need to become more efficient in their distribution methods than ever before. (Buyers aren’t likely to be satisfied with free delivery if it takes a week or more to receive their purchases.) The model for fulfilling online orders is far more complex and demanding than the one that keeps stores shelves stocked. It’s a matter of picking and expediting individual orders, instead of loading up pallets for shipment to the store.

Retailers are devising a number of creative strategies to support their online operations. In addition to shipping to homes and businesses, they’re offering buyers the option of picking up orders at the store. Retail sites are also serving as fulfillment centers, with store associates picking product for shipment as if they were in a traditional warehouse.

The question now is how long brick-and-mortar retailers can maintain the free shipping option. It remains to be seen whether Target and its rivals will extend the offer beyond the holiday season. Racciatti notes Amazon’s propensity for operating at a loss in order to capture market share. “I don’t think this is a profitable and sustainable market for Target, either,” he says. “It’s all top-line related. They’re hoping that the lift sustains them through the rest of the year.”

More than other retail chains, Target needs a win, after its botched attempt last year to expand into Canada. The company is currently mopping up the damage from that effort, which saw it trying to open up too many stores at once, supported by an inadequate distribution network. The offer of free shipping during the holidays could be one way for Target to recover its momentum.

Racciatti wouldn’t be surprised to see some merchants go the way of Amazon Prime and impose an annual fee on consumers who want free and fast shipping. But even that strategy wouldn’t fully recover their fulfillment costs. And the cutthroat nature of retailing today might dictate an indefinite continuation of totally free shipping on certain orders. Retailers and e-tailers could find themselves playing an expensive game of chicken, betting that their rivals will be first over the cliff.

Meanwhile, online sellers face the question of whether they can get orders to consumers in a timely fashion, whether or not delivery is free. Last year’s holiday shopping season saw some 2 million packages arrive late, with both UPS and FedEx overwhelmed by the volume of internet orders. For the most part, the culprit was retailers who promised express delivery right up to Christmas Eve, without paying for the option or confirming the ability of parcel companies to make good on it.

Both UPS and FedEx Corp. were determined not to see a replay of that disaster this year. They undertook the expansion of distribution facilities and hired thousands of additional workers to handle the surge of volumes. (UPS and FedEx have projected increases of 11 percent and 9 percent, respectively, in the number of packages that they will deliver during December of 2014, compared with the same period of last year.) Retailers, meanwhile, were faced with the need to be more realistic about what they could deliver to demanding consumers – even as they set themselves up to lose money on the deal.

Economic sanity occasionally prevails. One thing that e-tailers and retailers alike are refusing to subsidize is the cost of same-day delivery, an option that is rapidly gaining popularity in urban areas. Once again, Amazon has taken the lead with its Amazon Fresh service. Similar ventures have been launched by Google and eBay, although the latter service is reported to be on the verge of termination. Brick-and-mortar stores are offering their own version of same-day delivery with the help of third parties such as Deliv. All of those services entail an additional charge (not counting some introductory offers).

Will the next competitive move involve an online retailer promising same-day delivery for free? It seems unlikely, but one should never underestimate the desire of merchants to grab market share at any cost. The omnichannel is not a place for the faint of heart – or for sellers with shallow pockets.

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The trend has clearly gone in the opposite direction. Today, free shipping appears to be the price of admission for many e-tailers. Granted, Amazon.com has begun to monetize its expedited delivery option with a $99 annual fee for its Amazon Prime service, which qualifies members for “free” two-day shipping on many orders. The online giant also offers outright free shipping on orders of more than $35. Other online sellers, especially those with brick-and-mortar stores, are matching Amazon under certain conditions, usually tied to the value of the order. They include Nordstrom, Inc., Best Buy Co. Inc., Barnes & Noble, Dick’s Sporting Goods and Old Navy.

Most recently, Target Corp. has thrown its hat into the free-shipping ring, offering the perk for all holiday orders. The announcement came just a few weeks before the beginning of the Christmas shopping season, suggesting a last-minute change of heart by the old-line retailer. (Or perhaps an acknowledgment of reality.)

Whether any of those merchants can afford to absorb the cost of free shipping is another question entirely. (Amazon, of course, has shown itself willing to operate for years without turning a profit.) But they seem convinced that the consumer won’t settle for anything less.

“It’s pretty basic,” says Tom Racciatti, senior manager of the supply chain practice of West Monroe Partners. “They’re doing this to drive volume.”

Fair enough. But the offer of free shipping has implications that resonate throughout the supply chain. Retailers need to become more efficient in their distribution methods than ever before. (Buyers aren’t likely to be satisfied with free delivery if it takes a week or more to receive their purchases.) The model for fulfilling online orders is far more complex and demanding than the one that keeps stores shelves stocked. It’s a matter of picking and expediting individual orders, instead of loading up pallets for shipment to the store.

Retailers are devising a number of creative strategies to support their online operations. In addition to shipping to homes and businesses, they’re offering buyers the option of picking up orders at the store. Retail sites are also serving as fulfillment centers, with store associates picking product for shipment as if they were in a traditional warehouse.

The question now is how long brick-and-mortar retailers can maintain the free shipping option. It remains to be seen whether Target and its rivals will extend the offer beyond the holiday season. Racciatti notes Amazon’s propensity for operating at a loss in order to capture market share. “I don’t think this is a profitable and sustainable market for Target, either,” he says. “It’s all top-line related. They’re hoping that the lift sustains them through the rest of the year.”

More than other retail chains, Target needs a win, after its botched attempt last year to expand into Canada. The company is currently mopping up the damage from that effort, which saw it trying to open up too many stores at once, supported by an inadequate distribution network. The offer of free shipping during the holidays could be one way for Target to recover its momentum.

Racciatti wouldn’t be surprised to see some merchants go the way of Amazon Prime and impose an annual fee on consumers who want free and fast shipping. But even that strategy wouldn’t fully recover their fulfillment costs. And the cutthroat nature of retailing today might dictate an indefinite continuation of totally free shipping on certain orders. Retailers and e-tailers could find themselves playing an expensive game of chicken, betting that their rivals will be first over the cliff.

Meanwhile, online sellers face the question of whether they can get orders to consumers in a timely fashion, whether or not delivery is free. Last year’s holiday shopping season saw some 2 million packages arrive late, with both UPS and FedEx overwhelmed by the volume of internet orders. For the most part, the culprit was retailers who promised express delivery right up to Christmas Eve, without paying for the option or confirming the ability of parcel companies to make good on it.

Both UPS and FedEx Corp. were determined not to see a replay of that disaster this year. They undertook the expansion of distribution facilities and hired thousands of additional workers to handle the surge of volumes. (UPS and FedEx have projected increases of 11 percent and 9 percent, respectively, in the number of packages that they will deliver during December of 2014, compared with the same period of last year.) Retailers, meanwhile, were faced with the need to be more realistic about what they could deliver to demanding consumers – even as they set themselves up to lose money on the deal.

Economic sanity occasionally prevails. One thing that e-tailers and retailers alike are refusing to subsidize is the cost of same-day delivery, an option that is rapidly gaining popularity in urban areas. Once again, Amazon has taken the lead with its Amazon Fresh service. Similar ventures have been launched by Google and eBay, although the latter service is reported to be on the verge of termination. Brick-and-mortar stores are offering their own version of same-day delivery with the help of third parties such as Deliv. All of those services entail an additional charge (not counting some introductory offers).

Will the next competitive move involve an online retailer promising same-day delivery for free? It seems unlikely, but one should never underestimate the desire of merchants to grab market share at any cost. The omnichannel is not a place for the faint of heart – or for sellers with shallow pockets.

Comment on This Article

Holiday Retail Madness: Who Will Pay for 'Free' Shipping?