Free Shipping Deemed Important to Online Shoppers this Holiday Season

Posted on: December 6th, 2011 by admin No Comments

Traditional retailers are taking the expensive step of offering more free-shipping deals this holiday season, as they seek to lure the growing number of Internet shoppers to their websites and away from online-only rivals, particularly Inc.

Amazon offers free shipping on most orders over $25, as well as cheap, low-hassle delivery options such as its Prime membership program, which other retailers have found hard to match. The online retail giant also offers low prices, since it doesn’t have to pay for sparkly stores or cheery salespeople and— as rivals like to point out—because it doesn’t collect sales taxes for the most part.

To fight back, Toys “R” Us, which last year had only select items available for free shipping, has made its entire on-line inventory eligible as long as customers spend $49. Similarly, Wal-Mart Stores Inc. has made every consumer-electronics item—rather than just select gadgets—on its website available for free shipping through Dec. 19 with a minimum $45 purchase. And Best Buy Co. is offering free shipping for every product it offers online, including giant TV sets.

For consumers, free shipping can make a big difference in the ultimate price they pay. Amazon and Wal-Mart on Tuesday both were selling a hot holiday toy, Let’s Rock Elmo, for $49.66 and offered free standard shipping—about a $6 savings. To keep up, the Toys “R” Us website is waiving its $10 shipping fee for the holidays. (It is charging $10 more for the toy itself, though.)

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“Free shipping used to be a way to entice customers to your store over another site, but now it’s just the price of entry,” said Kevin Mansell, chief executive of Kohl’s Corp., the discount department store., which specializes in electronics and is the second-biggest online-only retailer, also offers free shipping on many products.

High shipping costs can turn off customers altogether. Amanda Lordy, a 29-year-old from Hoboken, N.J., does about half of her holiday shopping online. She recently canceled an order for $30 of gourmet cheese because the site was charging $14 for shipping.

“It was a great deal for the cheese, but with the price of shipping, all of a sudden it wasn’t anymore,” she says.

For giant retailers such as Wal-Mart and Target Corp., free shipping hasn’t yet started to affect their bottom lines, said Colin McGranahan, retail analyst at Sanford C. Bernstein. Internet sales make up less than 2% of Wal-Mart’s $419 billion of annual sales and Target’s $67 billion.

That could change as the companies seek to increase online sales. Wal-Mart has begun offering free shipping all year round on clothing and household items, with a minimum $45 purchase.

Several department stores, too, are now offering year-round free shipping—and the cost has begun crimping gross margins.

Nordstrom Inc., which in August, began offering free shipping and returns on all online orders, estimates that the free shipping cut its gross margin—of 36.6% in the third quarter—by about 0.15 percentage point.  Even so, the company says that the boost to sales from free shipping outweighs the costs; online inventory offers higher returns because of fewer overhead and labor costs, said Nordstrom’s chief financial officer, Mike Koppel.

Macy’s Inc. and Kohl’s, which now offer free shipping all year on purchases of $99 and generally $75, respectively, said their gross margins were impacted by lost shipping revenue. During the holidays, Kohl’s offers free shipping for purchases of $50.

Internet sales are projected to rise 15% this holiday, while in-store sales are expected to grow by less than 3%. But some of that Internet growth will occur at traditional retailers’ websites rather than at online-only retailers

Amazon, however, is expecting its fourth-quarter sales to jump between 27% and 44%. The company loses more than $1 billion a year in shipping costs, estimates Sucharita Mulpuru, an analyst at Forrester Research. Its operating margin shrank to 0.7% in the third quarter from 3.5% a year earlier as expenses rose 48% to $10.8 billion.

Retailers are trying to find a way to offer a program similar to Amazon Prime, in which customers pay $79 a year for unlimited two-day-delivery service on purchases, as well as other perks, like movie streaming. Some analysts estimate that Amazon Prime will have 10 million customers by the end of the year and that the service accounts for about $7.5 billion of the company’s revenue, although the program still loses money for the company.

One such effort is For $79 a year, or $8.95 a month, customers can get unlimited two-day delivery from—and free returns to—any of about 90 affiliated retailers, including Toys “R” Us, American Eagle Outfitters Inc., and

Toys “R” Us says the Shoprunner option has been popular. “It has been a good option for customers who want to shop across many retailers at one shipping rate,” a spokeswoman said.

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