An Opposing View: The Bottom Line Costs of Free Shipping This Season

Posted on: December 12th, 2011 by admin No Comments

Retailers may have spoiled their shoppers this Christmas—with free shipping.

Some 63% of Internet retail sales were shipped for free during the week through Dec. 4, according to comScore. That is up from 51% in the same week of 2010 and 44% in 2009. While there is a regular spike during the holidays, the average during the rest of the year is well above 40%.

One reason: Many retailers need to offer free shipping to keep shoppers’ attention once they visit websites. Indeed, a recent comScore study found that 46% of online shoppers have canceled purchases at least once after finding free shipping was unavailable at checkout.

Keeping shoppers keen comes at a price, though. Amazon.com, which has been at the forefront of free shipping, has experienced shrinking margins for years. Free shipping has likely played a meaningful role in this, although the company hasn’t detailed the cost. And with online competition heating up, the company recently said it may have an operating loss in the fourth quarter.

Even retailers that offer free shipping stand to lose out when customers notice differences between offers. Bed Bath & Beyond, for instance, will offer free standard shipping for orders of $99 or more through Dec. 17. Amazon, meanwhile, offers a similar service for orders of at least $25 all year round.

Retailers are also going for speed to entice shoppers. Amazon’s Prime program includes two-day shipping on most items for a fixed $79 a year. A service called ShopRunner charges the same annual fee for a similar shipping service with a network of 90 retailers, including Lord & Taylor and Toys “R” Us.

And even faster deliveries may be on the way. Matt Nemer of Wells Fargo points out that Amazon already has enough distribution centers to make next-day service possible for many customers, and the network is growing quickly.

Traditional retailers also can exploit their scale to get packages to consumers faster. At Wal-Mart, for instance, more than half of online orders are picked up at stores. The company is also testing a program that would use stores like warehouses and make local deliveries.

Of course, there are some retailers that probably won’t feel as much pressure to offer free and fast shipping. Williams-Sonoma, for instance, focuses on many unique items that help to insulate it from competition. And some brick-and-mortar retailers like Dollar Tree and Family Dollar Stores have stores in convenient locations, so shipping isn’t necessary.

But for many retailers looking to expand Internet sales, free shipping will be tough to ignore. And while Internet sales tend to have higher margins than sales from physical stores, shipping costs could narrow the gap.

For retailers not willing to sacrifice profits like Amazon, a booming Internet business may not prove as lucrative as it once looked.

Reposted article By JOHN JANNARONE

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