Are free shipping expectations crushing smaller retailers?

Discussion
May 02, 2016

Described as “the e-tailing equivalent of selling milk below cost to increase grocery-store traffic,” a Wall Street Journal article last week detailed how free shipping has become e-commerce’s loss leader. Worst affected, perhaps, are smaller e-commerce players that can’t absorb the shipping costs.

The bigger players, including Amazon, Target and Walmart, can secure significant volume-driven discounts with the major carriers. The report cited a Shipware survey of about 560 shippers that showed some who spent in the range of $100 million annually on shipping that qualified for savings of more than 80 percent on overnight shipments and up to 60 on residential ground delivery.

A survey last fall from Pitney Bowes found 88 percent of consumers preferred free shipping with a five- to seven-day delivery window rather than paying a fee for one- to two-day delivery. But the popularity of Amazon Prime is particularly raising consumer expectations around free shipping.

Among the websites offering free shipping without purchase minimums are Coach, Dell, Kate Spade, HHGregg, L.L.Bean, Neiman Marcus, Nordstrom, Sunglass Hut and Zappos. Last September, Toys “R” Us reduced its minimum price for free shipping to $19 from $49 while both Target and Best Buy introduced free shipping without minimums over the holidays.

“Without free shipping, you lose a lot of customers,” Brian Yarbrough, an analyst at Edward Jones & Co., told Bloomberg following the holiday moves by Target and Best Buy. “Retailers have been finding that the time when most people abandon their order online is when it shows the shipping charges at the end. That’s when they are most likely to just say, ‘I’m out.'”

The Journal’s report homed in on the challenges facing smaller e-commerce sellers.

Comfort House, a home and garden products e-tailer, reportedly spends about $15 to $20 per order on shipping, or about 12 percent of revenues.

“We are absorbing more and more of it because we can’t pass along the costs to consumers, because of Amazon,” Jeff Gornstein, president, told the Journal.

DISCUSSION QUESTIONS:
Is the ability to absorb free shipping becoming an overwhelming competitive advantage for larger retailers? How should small- to medium-sized retailers respond to greater expectations for free shipping?

Braintrust
"Unique products that the big guys don’t carry allow less competitive players to keep margins up and cover "free" shipping costs."
"Interestingly, the WSJ article also features a quote that Amazon Prime, at $100 a year, means "free" shipping. Perhaps other retailers need "free" paid programs."
"I hate to keep beating this drum, but Amazon gets competitive rates and its shipping costs are still through the roof."

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26 Comments on "Are free shipping expectations crushing smaller retailers?"

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Max Goldberg
BrainTrust

Consumers have indicated that they want free shipping, so retailers that cannot offer it will suffer accordingly. Once again, Amazon has set expectations through its Prime service. With a huge variety of products under the Prime umbrella, it’s difficult for other retailers to compete.

Small and medium-sized retailers can fight back by offering exclusive merchandise, great customer service and free shipping with a minimum purchase. The inability to find a product elsewhere is a strong incentive to pay for shipping.

Ken Lonyai
BrainTrust

Consumer expectation for free shipping is absolutely an issue for small- to medium-sized retailers as more people become conditioned to the fact that it’s normal when purchasing from bigger sellers. However, it’s a symptom of the fact that big retailers can purchase goods at better rates and manage logistics better and can therefore cover it. So I see it as an indicator that selling commodity items (where margin and shipping will always be fiercely competitive) is something e-tailers that can’t eat shipping costs must move away from in a hurry. Unique products that the big guys don’t carry allow less competitive players to keep margins up and cover “free” shipping costs.

Steve Montgomery
BrainTrust

Free shipping has gone from a need-to-win to a need-to-play tactic. Stated differently, it has become the new normal. Retailers try to make it less painful by keeping the purchase value higher but customers are now expecting lower and lower purchase requirements.

There is definitely an advantage to being able to meet the hurdle rates the shipper requires in order to extract discount. It is unlikely that that these will come down and more likely that they will go up.

This may or may not change if Amazon finds that owning its own fleet of planes provides it with even greater savings. It so, two things may happen. One is that other larger retailers may try a variation of the same tactic. The other is if FedEx and UPS loose enough business perhaps they will lower the discount hurdle rates.

One tactic smaller retailers may try to combat this is forming or joining groups to acquire shipping services. The discounts are not likely to be large given the shippers still having to bill each retailer individually, but it may help.

Cathy Hotka
BrainTrust

The retailers who offer unlimited free shipping mentioned above all have healthy margins. It’s not just independents who struggle with shipping costs, but also retailers of lower-priced or commodity items.

Interestingly, the WSJ article also features a quote from a customer who says that Amazon Prime, at $100 a year, means “free” shipping. Perhaps other retailers need “free” paid programs.

Paula Rosenblum
BrainTrust

Free shipping is rapidly becoming table stakes. So there’s not a lot of choice there. You have to offer it, and sending it on a milk run isn’t a good idea either. Speed is also part of the equation.

However, I do NOT think it’s a necessarily a competitive advantage for larger retailers. The rates are dependent on two things: volume and box dimensions. The broader the retailer’s assortment, the harder it is to optimize the cube of shipments.

So a small retailer with a narrow assortment can sometimes do better on shipping costs than a large retailer with a broad assortment. I hate to keep beating this drum, but Amazon gets competitive rates and its shipping costs are still through the roof (I think 17 percent of revenue?).

Do not lose heart, smaller retailers! There is money to be made!

Gene Detroyer
BrainTrust

First, let’s get over the “free shipping” misnomer. It will help us to understand the issues much better. There is no such thing as “free shipping.” It costs something and the customer is paying for it. A $12 item with”free shipping” is no different than a $10 item with a $2 shipping charge … at least to the seller.

The big difference is to the customer. It is what they read and think. There have been several studies that have shown that the $12 item with free shipping with get a better response than the $10 plus $2. Some of those studies even suggest that there would be a better response to $12 and free shipping than $10 and $1 shipping charge.

Small retailers take note. The message is not in the price but the presentation. So offer free shipping and anything else you can present to the customer. You are not going to beat the big guys on cost. Beat them on every other aspect of the retail relationship with your customers. Any small retailer that tries to compete with their big brethren on price will always lose.

Tony Orlando
BrainTrust

Amazon is the Walmart of e-commerce and small business will lose, plain and simple. This is nothing new for brick-and-mortar stores, as we have been dealing with this for years on trying to get products for the prices that the big box stores and clubs pay for the same item, and now it is happening online. Finding a niche that Amazon doesn’t have is very tough, and it will take some serious planning and marketing to figure out how to combat this free shipping demand. Consumers are winning, and don’t expect any sympathy from them, as free delivery plus low prices is what they are used to, so eating the cost of free shipping is something that they will either have to do or perish. I wish things were different, but the landscape for retail has changed big-time in the last 10 years and I expect more small business failures than start ups at least for this year.

Ralph Jacobson
BrainTrust

This is definitely a challenge. Even the biggest retailers still must manage their shipping costs regardless of the discounts received. You might be surprised at the low margins on huge percentages of good shipped. However, another aspect of some retailers’ shipping costs is that the costs charged to the shopper often exceed the true costs incurred. I think that’s as big a problem, in terms of shopper experience, as anything. There needs to be constant assessment of shipping costs and either keep it free and see where it can be made up in other areas or determine actual shipping costs and charge accordingly.

Chris Petersen, PhD.
BrainTrust

For today’s omnichannel consumers, everything is about a friction-free experience. Delivery is about more than cost. For consumers it is also about delivery any time and anywhere they want it at their door.

Amazon is much more than a retailer. They are truly becoming a distribution company with end-to-end solutions worldwide. They don’t see “delivery” as a separate function or cost center, it is an overwhelming competitive advantage built into Prime that will be supported by Prime Air (drones and droids).

Low- or no-cost delivery to the consumer’s door is not just affecting small retailers. Walmart continues to see store sales erosion because of convenient, free shipping. As Walmart responds with click-and-collect and its own strategies, small retailers will be further impacted IF they don’t find ways to offer “free” delivery, and/or differentiate based upon customer experience.

Delivery is no longer a “post-sale” process … it is an integral part of the consumer omnichannel purchase decision. Delivery and logistics are a major competitive battleground unfolding across retail right now, worldwide.

Doug Fleener
Guest

Free shipping is to online retailers what free financing is to furniture retailers. What was once a profit item is now an expected commodity that drags down margins.

My advice to smaller retailers is to offer “discounted” shipping so they’re not eating the entire cost.

Take the $5 or $9.99 rather than shipping for free, or losing the sale by charging full shipping costs.

This strategy is especially successful for those retailers with targeted and differentiated products.

Adrian Weidmann
BrainTrust

Free shipping is definitely a competitive advantage for brands and retailers. I believe that the offer of free shipping has been the key catalyst for the explosion of online retailing. My daughter, who does a tremendous amount of her apparel shopping online, will only shop through websites that offer free shipping, ideally both ways.

Between free shipping and the convenience of the journey, small- to medium-sized retailers face a daunting challenge. Experience, unique selection and a social purpose (Love Your Melon, Tom’s) are three differentiators that some retailers can use to compete — never price!

A local sports retailer has become a national online destination for Nordic ski equipment. Their online business is supported by a brick-and-mortar store and their online business is very strong due to their unique expertise and they don’t need free shipping to attract business. The owner is a national champion and maintains her presence in sports events throughout the year.

Ed Rosenbaum
BrainTrust

The big players are challenging the medium to smaller retailers to find a way to combat free shipping and still maintain a profit. It is becoming increasingly difficult. But it is do or die for many of them. Yes, the consumer will buy from them. But not without free shipping or some other means of off-setting the cost of shipping. I recall the banking industry not that many years ago was made up of local and regional players. Then the bigger regionals wanted to become more national and began buying the local banks to build their portfolios. Today we have nothing but the big nationals and many state or regional banks. The same thing is happening to the retail and grocery industry.

Bob Amster
BrainTrust

It is harder to render a definitive opinion without access to the actual economics. However, it can be said that free shipping after paying membership fees is not so free. Smaller retailers are not in a position to charge a membership fee unless there is an expectation on the part of the consumer that s/he will be doing a lot of business with that retailer to make it financially attractive to pay the membership fee.

From that perspective, absorbing the shipping charges is definitely a competitive advantage.

Free shipping with a certain minimum purchase can work for everybody because there may be enough gross margin in the transaction to leverage economics of scale.

Small-to-medium-sized retailers can only compete with free shipping through uniqueness of product or lifetime warranty. It is hard to conceive that a small retailer selling the same product as one of the majors is going to be able to compete with free shipping if it has to charge for it.

Ross Ely
BrainTrust

Yes, free shipping has become an elemental part of the marketing game in e-commerce, and smaller retailers have to match these offers in order to compete. As always, the smaller players need to offer differentiated products and services in order to out-maneuver the larger retailers which have advantages in scale and cost.

Smaller retailers should bundle value-added services with their products to overcome their scale disadvantage. For example, a year of free technical support or comprehensive information about how to use the product may overcome paying a few more dollars in price. Smaller retailers should seek to establish an emotional bond with users beyond just merely supplying a generic widget at a fair price.

Shep Hyken
BrainTrust

Free shipping has become a general expectation. It is no longer a competitive difference. But not having it may be a disqualifier. Smaller retailers who don’t have the deep discounts that the larger retailers have obtained will have to show value in other ways. Do they have exclusive merchandise, offer better service, more knowledgeable reps, a better customer loyalty program, etc.? Those could make price and free shipping less relevant.

Naomi K. Shapiro
Guest
Naomi K. Shapiro
1 year 3 months ago

Yes, the ability to absorb free shipping is becoming an overwhelming competitive advantage for larger retailers. It’s becoming more and more and more difficult for small- to medium-sized retailers to compete with the greater expectations for free shipping. They just don’t have the margins and buying capabilities that large retailers have. And it’s more and more difficult, if not impossible, to make up for shipping prices somewhere else. Let alone to make the pricing attractive enough to get the sale. Sad for the small retailers.

As to the poll question about how open the small retailers should be to absorbing cost, it’s a nice idea that many of them would embrace, if only they could afford it — which they can’t.

Dan Raftery
BrainTrust

Without a doubt, big retailers have an advantage in negotiating any large-scale purchase from suppliers. This is not new. E-tailers need to figure out how to deal with it, just as their brick-and-mortar independent counterparts who are still around have.

Charles Gentry
Guest
Charles Gentry
1 year 3 months ago

Free shipping has become necessary for us to be competitive. It is not only expected by buyers but has also become a marketing tool for the seller. We have been able to absorb some of the cost with slight price increases and have had to shop our suppliers a little harder. We depend on feedback and satisfaction ratings to encourage buyers to shop with us even when we may be a little higher cost than another seller at a lower cost including added shipping. We have figured out also that many buyers will not take the time to price compare if they have to make any type of simple calculation, they look for free shipping first.

Roger Saunders
BrainTrust

Free shipping and low prices rival for top-of-mind importance for the consumer’s purse/wallet. Those two factors provide larger retailers with an edge. They can capture scale in purchasing power and also set up logistical operations more readily than small- to medium-sized retailers.

These, however, are not the sole arrow in the quiver for merchants. Consumers also value flexible return policies, pick-up or return-at-store, live customer service contact, and website ease of use.

Retailers have to run to their strengths and manage their weaknesses. In today’s omnichannel world, small- to medium-sized retailers can and should effectively compete against the big boys’ free shipping and low prices, if they demonstrate their execution on other services.

Craig Sundstrom
Guest

Are small, underfunded businesses at a disadvantage over established and/or well funded ones? Of course they are. Shipping is a cost, just like any other. It is no more — or less — a cost that is “absorbed” than rent or advertising or legal expenses, and it’s pointless to treat it separately.

Doug Garnett
BrainTrust

Small online retailers should be careful about joining the lemmings rushing over the cliff of free shipping.

Amazon is using the hype to stay in the headlines — but that doesn’t mean free shipping is netting out as profitable for them. In fact, there are very serious concerns buried beneath the recent Amazon profit headlines, like most of the “outstanding” performance seems to be coming from cloud services which are helping make-up for skyrocketing shipping losses.

Yes, consumers prefer free shipping. But having worked in the direct response market for over 20 years, they also don’t generally pay enough to justify that change. We’ve seen this time after time.

So here’s the question smaller online retailers need to ask: If I begin to use a free shipping offer, what strategic advantage do I gain from it? To my mind the advantage MUST be strategic. It’s far too expensive of a move to do it just because “everybody else is.”

Arie Shpanya
Guest

Over 2/3 of shoppers in multiple studies indicated that free shipping was very important to them, and it’s definitely becoming something consumers feel they are entitled to. Small to medium retailers can respond by requiring a minimum order value for free shipping that can raise their AOV while boosting conversions (they just need to find the sweet spot). They can also run a psychological pricing experiment with raising prices on the actual product but offering free shipping, allowing them to potentially maintain their margins depending on the impact on sales. Providing superior value in other areas like customer service, or offering unique products where you have pricing power are other ways to approach this, as mentioned already by others.

Lee Kent
BrainTrust

I am always leery when a new service that has the potential to cross retail brands is owned by just one. I know, I know, Amazon Prime does belong to Amazon. The thing is…they are using carriers that deliver for every retailer. UPS, FedX, USPS.

IMHO these carriers would be smart to offer free delivery for say $100/year direct to customers. Great new channel to look into.

And that’s my 2 cents.

William Hogben
BrainTrust

There’s no such thing as free shipping, we’re just arguing whether it should be built into the sticker price or not. That’s going to depend on the products and the customers. Fortunately, with online, there’s no need to analyze in advance — every merchant should AB test this for themselves.

In the grand scheme of things, smaller merchants are going to continue to lose ground to bigger ones online. There’s nothing that can be done about that, it’s simply the nature of centralization. Small merchants should find a niche out of the big boys’ way and thrive there as long as they can. In the end, though, the finding and delivery of products will inevitably be commodotized, and eCommerce will be centered on the product rather than the merchant.

Shilpa Rao
BrainTrust

It’s difficult for smaller retailers to compete with Amazon on shipping price. They should differentiate on assortment and experience.

gordon arnold
Guest

Most small and medium businesses do not understand how they should compete and who they are in competition. The so called free shipping is usually the cheapest with the longest delay. There are many stipulations and options added as well. For items that are “indefinitely out of stock” removal of free shipping is a retailer option and never a consumer entitlement. Small, medium and large business struggle when they are out of touch with current marketing tools and promotion content. Company business participation with an added measure of differentiation will always keep you in the game.

wpDiscuz
Braintrust
"Unique products that the big guys don’t carry allow less competitive players to keep margins up and cover "free" shipping costs."
"Interestingly, the WSJ article also features a quote that Amazon Prime, at $100 a year, means "free" shipping. Perhaps other retailers need "free" paid programs."
"I hate to keep beating this drum, but Amazon gets competitive rates and its shipping costs are still through the roof."

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