Will irrational shipping prices doom brick and mortar stores?

Discussion
Photo: UPS
Feb 27, 2017

Dan Gilmore, Editor-in-Chief, Supply Chain Digest

Through a special arrangement, presented here for discussion is an excerpt of a
current article from Supply Chain Digest.

In 2015, just before I led a presentation on e-commerce at a supply chain forum at Penn State, a retail exec gave me an interesting take on omnichannel, which included this emphatic statement: “There is no free shipping!”

He explained: “The last time I negotiated with UPS or FedEx or the United States Post Office, none of them were talking about shipping our orders for free.”

The session inspired me to write a column, “Amazon’s Stock Price and the Fate of Omnichannel Commerce.” Its main point: In a normal world, Amazon’s lack of profitability would lead to the stock getting hammered. The presumption: soon Amazon would be forced to ease up on free shipping to shore up its bottom line.

Come 2017, I’m taking this a step further. The free/highly discounted shipping policies of Amazon, other retailers, and even UPS is accelerating the demise of brick and mortar retail at a faster rate — perhaps much faster — than would otherwise be the case.

Despite minimal profits, Amazon’s stock just heads up and Prime free two-day shipping has set the bar for retail.

How is UPS complicit? Its fourth-quarter earnings declined because its e-commerce business grew too much. UPS (and we assume FedEx) either can’t or for some reason hasn’t lifted e-commerce delivery rates to equal its B2B margins.

And it gets worse for about everyone but Amazon. For Amazon, every online order is new revenue and margin. For traditional retailers, much of their e-commerce sales (it varies) cannibalize sales at their brick and mortar stores, where profits are higher for each sales dollar, after considering order picking and shipping costs, returns, etc. required for e-commerce.

So retailers are shifting to money-losing e-commerce channels, thereby seeing a need for fewer actual stores, because they don’t charge what it costs to pick, pack and ship online orders. What would happen to ecommerce growth if they did?

In the end though, that retail exec I spoke with will finally be right, and investors will demand that shipping costs are indeed paid for by the buyer — after much of brick and mortar is gone.

DISCUSSION QUESTIONS: Are the challenges at brick & mortar directly tied to unsustainable shipping price breaks for online deliveries? What would happen if retailers actually charged what it costs to pick, pack and ship e-commerce orders?

Braintrust
"Brick-and-mortar retailers have many challenges and unsustainable shipping charges are merely one of the issues."
"Going omnichannel and promoting it vigorously means more customers will pick up in-store, which cuts shipping costs."
"Brick and mortar offers too much consumer value to see the “free shipping” kill it. But it will change brick and mortar..."

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18 Comments on "Will irrational shipping prices doom brick and mortar stores?"

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Ken Lonyai
BrainTrust

The dot-com bubble was heavily fueled by customer acquisition at all costs. Since then, Amazon and others have been acquiring customers at a lesser cost and that investment/cash flow has sustained, enabling them to slowly and steadily habitualize customers to e-commerce shopping. Bolstered by convenience as well, the tactic has worked and slowly web-only players are growing their profits. Help from carriers in the form of discounts also makes the strategy possible.

One day however, when physical retail is damaged enough, the market conditions allow it and the desire for bigger profits is vocal enough, “free shipping” is certain to be reflected in pricing that exhibits the true costs of e-commerce. A good measure of this can be gleaned today: Amazon is quite often not the lowest-priced vendor for many goods, even with shipping factored in, but with their dominant market position they make it work. It’s a telling sign for the future, especially the future of “free shipping.”

Charles Dimov
BrainTrust

What is important is for today’s retailer to compete online — and to market and emphasize to customers that they have click and collect capabilities. Going omnichannel and promoting it vigorously means more customers will pick up in-store, which cuts shipping costs. As online is pressured into increasing order sizes for free shipping, or is forced to charge for shipping, the opportunity for omnichannel retail will grow.

Omnichannel retailers are just NOT promoting their in-store pickup services enough. There is a big opportunity to both cut costs and to grow sales as in-store pickups result in around 59 percent more purchases.

Actually charging for what it cost to pick, pack and ship will be a boon for brick-and-mortar, and omnichannel retail is the way thrive.

Lyle Bunn (Ph.D. Hon)
BrainTrust

The retail ecosystem, that is the omnichannel elements, each have a cost. Where taking on shipping costs has served as a business development strategy, this must inevitably come to an end in a sustainable business model, making ship-to-store or drop-box more economical for the retailer and ultimately the customers they serve. The e-commerce channel is betting that the overall value proposition allows shipping costs to be assumed by fulfillment efficiencies or the consumer. Shipping costs are the price of low price, selection and convenience. A holistic view of customer fulfillment is the only viable assessment approach.

Bob Amster
BrainTrust

The challenges of retailers are directly but not exclusively related to shipping costs. No one ships for free as evidenced by the huge losses in shipping costs that Amazon incurred. To think that this paradigm can continue indefinitely is unrealistic, unless retailers can make up for the losses to such an extent that free shipping becomes an affordable loss leader, which is doubtful.

Mark Ryski
BrainTrust

Brick-and-mortar retailers have many challenges and unsustainable shipping charges are merely one of the issues. These retailers are in a difficult spot. They must do online business to compete, but by doing so they put further pressure on already tight profit margins and profitability. If retailers charged a fair price for what it actually costs to process and ship e-commerce orders, I suspect that many shoppers would perceive this as price-gouging relative to Amazon (and others), which could hurt the retailer even more. I don’t think it’s a coincidence that some of the best performing brick-and-mortar retailers today (Costco, T.J.Maxx, Ikea, Home Depot) do not have significant online sales that require shipping.

Shep Hyken
BrainTrust

Dan Gilmore is right. There is no free shipping. Someone is paying for it. Is it the retailer? Highly doubtful. That model is not sustainable. Yes, when the margin is big enough you can include shipping as part of the cost of goods sold. Or, with a modest increase in the retail price, thereby inflating the margin a bit, the cost of shipping can be included. Smart retailers are figuring out how to bundle it into the retail price. It’s about that simple. Or a retailer like Amazon, with a Prime-like membership, can figure out how a $99 annual fee might offset the cost of “free shipping.” I’m sure that model has two types of customers: One type spends more than $99 per year. The other doesn’t. The average can ease the cost to the retailer. Somewhere (and by somebody — probably the customer) the shipping is being paid for.

Tony Orlando
BrainTrust
I have been saying this for years. Making shipping free for brick-and-mortar retailers is another losing proposition. Consumers demand in their minds that shipping must be free. They want free returns, and free coupons when something goes wrong, and the lowest price and on and on. This is impossible to do, but we as retailers are expected to do the impossible, and this scenario will only get worse and more retailers will perish. The giants will become super-mega giants. It saddens me to see how many very good retailers are being forced to lower their margins even further in order to exist, which eventually they can’t. I have spoken to UPS about this subject at our local store and they explained to me how their customers are struggling with paying for the very expensive shipping at costs of two to three times that of the big stores, which is crazy. I do not have any solutions to this, as the e-commerce train is moving at speeds many of us can not keep up with. Delivering food, especially with perishables, is very expensive and unless you are in a high-income foodie town, you can not price your way to success. Either… Read more »
Ben Ball
BrainTrust
The reason the retail community has so much trouble understanding “free shipping” is because we always think of “pick, pack, ship” as “in addition to” rather than “instead of.” To be sure, it’s not a one-to-one relationship. But there are substantial trade-offs. Think of it this way. Manufacturers can choose to get their products to the store via direct ship to the warehouse, third-party distributor to warehouse or store — depending — or by direct store delivery (DSD). Each adds some costs and subtracts others, including the retailer’s margin at the shelf which is typically lower for DSD than warehoused items. Now apply the same logic to Amazon. You have minimal long-tail inventory because your vendors hold it. You have almost no transaction friction costs because your vendors pay you to be on the site — more than covering your costs of money/admin/etc. You have no fixed distribution costs because you are strictly 3PL (for now anyway). And you have huge leverage with those 3PLs because of your volume. Your order entry costs are practically zero because it is all online and digitized on your back-end. Orders made by voice on Alexa are placed, picked by robots, packed, billed and… Read more »
Gene Detroyer
BrainTrust

Ben, your explanation nailed it. Of course shipping is not free, but it replaces the various in-store costs the retailer experiences. When a customer goes into a brick-and-mortar store they don’t see charges for rent and labor added to the price of the product. Shipping is a substitute for those store elements.

Ken Cassar
BrainTrust

I do not subscribe to the idea that shipping and handling costs necessarily undermine the economics of e-commerce businesses. Yes, shipping and handling costs are not incurred by brick-and-mortar stores. But brick-and-mortar stores incur costs that e-commerce businesses do not. Commercial rent is typically 2 percent to 8 percent of sales for a retailer. Staffing of stores is more expensive than staffing a warehouse. And inventory managed out of a warehouse is more efficient than inventory managed from a distributed group of stores. The problem that omnichannel retailers have to deal with is that they incur all of those costs. The real question may be this: Do the economics of omnichannel retail work, or do retailers need to choose to be highly competitive in one channel or the other?

Anna Tolmach
BrainTrust

The point that “free shipping isn’t free” and “omnichannel is expensive” has been covered, but a big point not mentioned is just how slow retailers are to react to changes in the ecosystem. One example is apps. When apps first became popular and novel with consumers, retailers delayed or took too long to create apps. When they did create them, they invested huge amounts of money in creating apps. However, by that point, consumers were over it. No one wanted to download yet another app, but they wanted a mobile optimized site. The traditional brands were too little too late. Similarly, perhaps holding inventory at a store doesn’t make sense anymore. Let your customer come in, try on a sample and order the product from you online. Have fewer stores, but keep them in prime experience driven locations. In general, a bigger problem isn’t just shipping, it’s the industry’s ability to react and adjust to new models of doing business.

Craig Sundstrom
Guest

Is it a challenge? Of course. But what a bizarre notion that we’re talking, even if only half-seriously (at least I hope not fully seriously) about the possibility of “the demise of brick/mortar” before we consider the more obvious possibility: when will shipping practices become rational and “free shipping” disappear?

gordon arnold
Guest

Watching David slay Goliath and The Thirteen Colonies oust The British Empire are two of a very few events far from the normal and should be seen only as a win against a total lack of synchronous preparedness. For instance, if a big box retailer was able to interleave its logistics with third party delivery companies and leverage their e-commerce and store deliveries, could they not create a formidable business arrangement? That being the case, what is causing the delay? Could it be Information Technology compatibility, operational incompatibility, or simply too many chiefs standing firmly in the way of progress? Whatever the case may be, it needs to be discovered and corrected and not by the big-box retailers alone. In fact, all of brick & mortar is losing to e-commerce simply by not engaging the market with all the tools they have or could have if the powers to be were of a single mindset to find and/or create a profitable way to compete. But that’s just what I think.

Lee Peterson
BrainTrust

There are two keys to this: 1) in partnership with your manufacturers, you’ve got to build shipping costs into the cost of the goods. As a former merchant, I can tell you, that’s been the case for just about everything you’ve bought since before the Revolutionary War, why would that change? Stop showing your customers extra costs. And 2) you have to have as much private label as possible to make that work — selling commodity goods is going to be Amazon’s game; get over it and drive your PL strategy fast, the Huns are at the gate.

Doug Garnett
BrainTrust

Brick and mortar offers too much consumer value to see the “free shipping” kill it. But it will change brick and mortar — partly because too many executives are working to strategies that are based entirely on beating Amazon and not on leveraging their strengths.

I reminded of over the weekend of Michael Porter’s observation that the essence of strategy is is choosing what not to do. Chasing Amazon isn’t a winning strategy.

That said, there’s a corollary question to this headline: Will free shipping doom eCommerce? There are already signs that investors have lost patience with Amazon because the only smallish profits they make are from a pittance of their income. And they lose money on the majority of their revenue.

Peter Charness
BrainTrust

Haven’t we seen this movie before? Some time ago, a retailer came into (smaller) towns with a big broad assortment of products at remarkably lower prices. They made up the lower margins with greater volumes and efficiency, lower SG&A etc. They drove out the nearby competition after which time prices did start to go up.

Anyone think this movie has a different ending? Amazon will drive out quite a large number of retailers who sell undifferentiated products and they seem to already be moving up a bit on the price scale.

Some retailers did figure out how to compete well against Walmart, and the smarter ones today will find a viable way of satisfying customers and growing their business, but it won’t be by standing still and ignoring changes needed to survive and thrive. They have to look at how the modern customer shops, what products they can uniquely supply, and use the available distribution networks of stores, DCs and vendor relations to play a better game than Amazon.

Guy Mucklow
Guest
Guy Mucklow
3 months 26 days ago

With the rise of not only e-commerce, but also m-commerce, sustaining an omnichannel business model is now more essential than ever for retailers. Today’s consumer demands speed and convenience when shopping. Having an online platform is now a necessity for brick and mortar stores to remain competitive, and shipping costs are a part of that necessity.

The ability to shop on any device, anywhere, and make a purchase in seconds is a convenience that is not going to be deterred by shipping fees. That said, retailers that decide to charge more for shipping must realize that the margin of error when it comes to deliveries will be slim to none. Failed deliveries or delivery delays can seriously jeopardize return business. Deliveries have to be right the first time — if they are, customers are less likely to care if they are paying more. The need for speed and convenience will trump all.

Ricardo Belmar
BrainTrust

Yes, it’s a challenge for retailers, but not an impossibility to overcome. Every product is shipped — either to a customer’s home, or to a store. What changes is how the cost is allocated and accounted for. Retailers need to adapt their models as they migrate to a unified commerce view of their customer, their merchandise, and their business as a whole. Claiming to be omnichannel while continuing to model costs in multiple silos will not lead to success in the long term.

Can free shipping be sustained? With current accounting models, no. Not long term. Even for Amazon. I suspect as cost structures are adapted to the new era, we will eventually stop talking about this as a challenge and will merely compare notes with how different retailers manage the process more efficiently than others.

wpDiscuz
Braintrust
"Brick-and-mortar retailers have many challenges and unsustainable shipping charges are merely one of the issues."
"Going omnichannel and promoting it vigorously means more customers will pick up in-store, which cuts shipping costs."
"Brick and mortar offers too much consumer value to see the “free shipping” kill it. But it will change brick and mortar..."

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