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In E-Commerce, Who Pays for 'Free' Shipping?

In the world of e-commerce, "free" shipping isn't really free. The question is, who pays for it?

In E-Commerce, Who Pays for 'Free' Shipping?

In offering free shipping on certain orders, Amazon.com, Inc. set the bar high from the start. While gobbling up an increasingly large slice of the e-tailing pie, it was able to sustain large net losses. (In fact, since its founding 22 years ago, Amazon has posted far more losing quarters than profitable ones.) Smaller e-commerce merchandisers, along with traditional brick-and-mortar retailers, had to decide how to respond. Failure to match the free-shipping option might keep costs down, but it could also mean lost business at the expense of the Amazon behemoth.

Even Amazon couldn’t go on absorbing the cost of shipping forever. In 2005, it launched Amazon Prime, which for $99 a year qualified subscribers for “free” two-day shipping on a wide variety of items, while defraying at least some of the company’s logistics expense. In fact, Amazon’s retail operation wouldn’t be profitable at all without revenues from Prime.

The Prime program is essentially an e-commerce version of membership in a physical store. That’s the model of Costco, which depends heavily on the fee in order to turn a profit on retail sales. Only recently, however, have some of Amazon’s rivals attempted to duplicate the idea on the e-tailing side. Walmart, for one, is rolling out ShippingPass, with an annual fee of $49 and a similar offering of free two-day shipping.

It remains to be seen how many of those separate fees consumers are willing to pay. At the same time, traditional retailers have launched promotional programs to undercut the surge of sales that was expected to occur during Amazon’s second annual Prime Day, featuring deals on numerous items for Prime members. Walmart, in addition to slashing many of its prices, offered free shipping on all online orders for the entire week. Sears and Target Corp. took similar actions around the July 5 date for Prime Day.

The option of a Prime-like program isn’t available to many smaller online merchants, who lack the volume and distribution infrastructure to make it work. Instead, they must find ways to rein in logistics costs and streamline their distribution networks, says Brian Winshall, executive vice president of business development with AFN Logistics. He says other retailers will have to determine their own strengths and respond accordingly.

That could mean a sweeping reorganization of distribution centers, along with a change in how they operate. In addition, legacy systems will have to give way to modern-day material-handling equipment and software that’s specifically designed to handle high volumes of merchandise in small lots.

At the same time, Winshall says, companies will need to equip themselves with a level of business intelligence that provides visibility throughout the supply chain, and allows for the making of strategic decisions that can drive lower operating costs and improve service.

Even packaging is subject to scrutiny. “People overlook the impact that packaging has on transportation costs,” Winshall says. One of his customers was able to reduce freight costs by as much as 30 percent, simply by changing the packaging.

Visibility to inventory, both at rest and in transit, is key. According to Winshall, just 30 percent of companies have some form of transportation-management system (TMS) software in place. Adoption has been especially slow in the middle market, which needs every possible advantage to compete with larger rivals.

Not surprisingly, Winshall recommends that manufacturers and retailers turn to independent logistics service providers (LSPs) for expertise in realizing maximum distribution efficiency. But one LSP doesn’t necessarily meet all needs. Where in the past companies might have sought a single vendor to get cheaper pricing, many today are looking to a collection of niche players with expertise in particular markets, he says. Tying it all together is the information technology that can support critical processes such as inventory and shipment optimization.

None of this guarantees that a smaller e-commerce merchandiser will withstand the assault of Amazon or other mega-retailers. But creative optimization strategies, coupled with the right software and service partners, can go a ways toward leveling the field of battle.

When it comes to “free” shipping, the question of who pays is yet to be fully resolved. As transportation and logistics costs rise, merchandisers could be forced to cut back on promotional pricing programs, or at the very least deploy them more judiciously. “The jury is definitely out on this,” says Winshall, “but I would bet more on the [scenario] that the consumer ultimately winds up having to share more of the cost.”

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In offering free shipping on certain orders, Amazon.com, Inc. set the bar high from the start. While gobbling up an increasingly large slice of the e-tailing pie, it was able to sustain large net losses. (In fact, since its founding 22 years ago, Amazon has posted far more losing quarters than profitable ones.) Smaller e-commerce merchandisers, along with traditional brick-and-mortar retailers, had to decide how to respond. Failure to match the free-shipping option might keep costs down, but it could also mean lost business at the expense of the Amazon behemoth.

Even Amazon couldn’t go on absorbing the cost of shipping forever. In 2005, it launched Amazon Prime, which for $99 a year qualified subscribers for “free” two-day shipping on a wide variety of items, while defraying at least some of the company’s logistics expense. In fact, Amazon’s retail operation wouldn’t be profitable at all without revenues from Prime.

The Prime program is essentially an e-commerce version of membership in a physical store. That’s the model of Costco, which depends heavily on the fee in order to turn a profit on retail sales. Only recently, however, have some of Amazon’s rivals attempted to duplicate the idea on the e-tailing side. Walmart, for one, is rolling out ShippingPass, with an annual fee of $49 and a similar offering of free two-day shipping.

It remains to be seen how many of those separate fees consumers are willing to pay. At the same time, traditional retailers have launched promotional programs to undercut the surge of sales that was expected to occur during Amazon’s second annual Prime Day, featuring deals on numerous items for Prime members. Walmart, in addition to slashing many of its prices, offered free shipping on all online orders for the entire week. Sears and Target Corp. took similar actions around the July 5 date for Prime Day.

The option of a Prime-like program isn’t available to many smaller online merchants, who lack the volume and distribution infrastructure to make it work. Instead, they must find ways to rein in logistics costs and streamline their distribution networks, says Brian Winshall, executive vice president of business development with AFN Logistics. He says other retailers will have to determine their own strengths and respond accordingly.

That could mean a sweeping reorganization of distribution centers, along with a change in how they operate. In addition, legacy systems will have to give way to modern-day material-handling equipment and software that’s specifically designed to handle high volumes of merchandise in small lots.

At the same time, Winshall says, companies will need to equip themselves with a level of business intelligence that provides visibility throughout the supply chain, and allows for the making of strategic decisions that can drive lower operating costs and improve service.

Even packaging is subject to scrutiny. “People overlook the impact that packaging has on transportation costs,” Winshall says. One of his customers was able to reduce freight costs by as much as 30 percent, simply by changing the packaging.

Visibility to inventory, both at rest and in transit, is key. According to Winshall, just 30 percent of companies have some form of transportation-management system (TMS) software in place. Adoption has been especially slow in the middle market, which needs every possible advantage to compete with larger rivals.

Not surprisingly, Winshall recommends that manufacturers and retailers turn to independent logistics service providers (LSPs) for expertise in realizing maximum distribution efficiency. But one LSP doesn’t necessarily meet all needs. Where in the past companies might have sought a single vendor to get cheaper pricing, many today are looking to a collection of niche players with expertise in particular markets, he says. Tying it all together is the information technology that can support critical processes such as inventory and shipment optimization.

None of this guarantees that a smaller e-commerce merchandiser will withstand the assault of Amazon or other mega-retailers. But creative optimization strategies, coupled with the right software and service partners, can go a ways toward leveling the field of battle.

When it comes to “free” shipping, the question of who pays is yet to be fully resolved. As transportation and logistics costs rise, merchandisers could be forced to cut back on promotional pricing programs, or at the very least deploy them more judiciously. “The jury is definitely out on this,” says Winshall, “but I would bet more on the [scenario] that the consumer ultimately winds up having to share more of the cost.”

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In E-Commerce, Who Pays for 'Free' Shipping?