Do retailers need to further commit to free delivery?

Discussion
Photo: Fedex
Feb 01, 2021

While often cited as a conversion necessity, the wide majority of retailers only offer free shipping occasionally for promotional campaigns, according to a study from parcelLab.

The logistics platform from July to October 2020 studied the order, shipping, delivery and returns processes of 52 of the National Retail Federation’s top 100 U.S. e-commerce retailers that regularly shipped products to customers.

Of the 52, only four — or eight percent — generally offered free shipping with no minimum purchase required. Sixty-two percent offered free shipping above an order value of $35. The remaining 30 percent did not offer free shipping at all, adding an average of $4.25 to each purchase for shipping costs.

Free returns were more common. Slightly more than a majority of retailers analyzed offered returns for free or had a “no need to return” policy. Of the 43 percent of retailers that charged for returns, 59 percent charged more than $10.

ParcelLab said requiring free shipping minimums or always charging for shipping or returns could “increase the chances of a customer opting not to shop with the retailer in the future due to these additional, inadvertent costs.” Not doing so also puts retailers at a competitive disadvantage to the free shipping promise of Amazon Prime.

Yet the reason many retailers set minimum thresholds for free shipping or charge is to offset escalating logistic costs. A Gartner study from December found retailers with more than 50 percent of revenue from the online channel have logistics costs as a percentage of sales that are almost double those of their store-focused counterparts.

Logistic costs have remained elevated during the crisis as carriers have steadily applied surcharges to offset the strain of unprecedented online shipping volume. In mid-January, FedEx Corp. announced plans to add a surcharge for its large customers (over 30,000 weekly average packages) “until further notice.” The move heightened concerns that shipping charges that traditionally arrive during peak selling periods may become a regular occurrence.

DISCUSSION QUESTIONS: Should retailers be looking at free shipping more as an online margin killer or as a shopping cart abandonment saver? Do retailers have viable options for absorbing the inherent costs of free shipping?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"To absorb ballooning shipping costs, retailers need to optimize the effectiveness of their e-commerce strategy. "
"“Free delivery” will become part of the price of the product. This will be like getting a basket of bread before a meal. It’s just what you do."
"Job One for retailers is to navigate away from siloed systems and toward the cloud, where costs can be better analyzed and more efficient practices adopted."

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35 Comments on "Do retailers need to further commit to free delivery?"


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Mark Ryski
BrainTrust

Free shipping is a margin killer, and part of the online race that Amazon and Walmart are driving as they battle for supremacy. Most other retailers are in a difficult spot with shipping and logistics costs. As noted, shipping costs are significantly impacting margins that are unsustainable for most retailers and while Amazon and Walmart can compete in the free shipping world, most other retailers can’t and shouldn’t.

Gene Detroyer
BrainTrust

Free shipping and free returns are not “margin killers.” They are simply costs of business like any other cost the retailer experiences.

Ryan Mathews
BrainTrust

Gene, at the risk of becoming a target myself, I agree. Now retailers don’t like the idea, of course, but once you offer any free service to a consumer they are going to: a.) expect that you will continue to provide it; and b.) assume it will be free forever. But it’s actually worse than that. I always tell my clients that their “competition” is anyone selling anything to anyone they might ever want to sell something to themselves. So if I can get a book or whatever overnight from Amazon, why do I have to wait three weeks for a car part? Talk about your margin killers! Overnight delivery and excess standing inventory. The phrase “margin killer” assumes retailers aren’t smart enough to change their supply chain, operational, and pricing models to defray the cost associated with “free” delivery. I don’t sell them that short.

Gene Detroyer
BrainTrust

“The phrase “margin killer” assumes retailers aren’t smart enough to change their supply chain, operational, and pricing models to defray the cost associated with “free” delivery. I don’t sell them that “short.” Exactly. They aren’t shooting themselves in the foot.

Craig Sundstrom
Guest

And yet, every day one finds well functioning businesses that offer neither.

Neil Saunders
BrainTrust

The answer to this depends on the category and the underlying economics and strategy of the business. There is no one-size-fits-all solution. However it is generally true that retailers already subsidize the costs of delivery for consumers. So extending free delivery might be a great way to build sales and market share, but it is unhelpful for margins and profitability. I think one of the best ways forward is to have a range of delivery options, including store collection, with a range of price points based on the economics of each service. That way the consumer has choice, while the retailer is able to manage margins.

Suresh Chaganti
BrainTrust

Every business will have a loss leader strategy. For online businesses free shipping is the one. Unfortunately for the online businesses, the loss leader components expanded to BOPAC, BOPIS and other elements of convenience that customers will not pay for, or competitive forces will not allow. That means the margins will be under sustained pressure. Free shipping will be a necessary evil for these businesses. It requires constant calibration and experimentation and customer understanding to make sure that free shipping is offered to the correct customers, on products and orders where it will make a difference.

Gary Sankary
BrainTrust

Free shipping has become an expectation from the consumer’s point of view. Retailers not named Walmart or Amazon will need to consider how to offer this service and maintain margins if they want to be competitive in the digital market. They’ll need to look into creative ways to capture margin elsewhere in their value chain.

Lisa Goller
BrainTrust

Retailers should look at free shipping as a consumer expectation. Yes free shipping erodes online margins, which is a real pickle unless you have a handy cash cow. Yet consumers are one click away from choosing a rival.

To absorb ballooning shipping costs, retailers need to optimize the effectiveness of their e-commerce strategy. Data insights can help them source in-demand assortments, price competitively and find incremental ways to refine the online experience.

Gene Detroyer
BrainTrust

The online retailer should eliminate anything that gets in the way of the customer pushing the buy button. That includes free delivery fees and free return fees.

Amazon provides free delivery and free returns. But I assure you it is not a “margin killer.” I am paying for it overtly with my Prime membership or covertly in the price. But assuredly I, the customer, am paying for it.

I am sure someone will say that Amazon can operate on smaller margins. This is true. However if I accept a 10 percent lesser margin and increase my sales 10 percent, I make a boatload more money.

Ryan Mathews
BrainTrust

Gene, I totally agree. See my comment on your earlier comment.

Jeff Sward
BrainTrust

How about we call this what it really is? It’s “no charge shipping.” It’s not free. In fact it’s damned expensive under certain transaction thresholds. Sure it’s a customer desire and expectation, but if the retailer isn’t really careful about how it’s applied, they will create a perpetual money losing model — all in the name of protecting market share. No charge shipping isn’t going anywhere any time soon, so it’s a function of how the retailer employs that tactic among all other competitive weapons.

Richard J. George, Ph.D.
BrainTrust

Both free shipping and returns are real costs. The issue is who absorbs them: the company and/or customer. The economics can be developed where both parties win (share) by requiring minimum purchase levels, which would enhance basket size. Here is a terrific opportunity to employ analytics to determine feasibility and profitability.

Gene Detroyer
BrainTrust

The cost of labor is a real cost. The cost of rent is a real cost. The cost of infrastructure is a real cost. And, like free delivery and free returns, the customer is paying for it all … or alternatively, the retailer goes out of business.

Cathy Hotka
BrainTrust

At last week’s VP IT Council meeting, participants talked about the difficulties of absorbing the $5 cost of shipping a $3 item. Job One for retailers is to navigate away from siloed systems and toward the cloud, where costs can be better analyzed and more efficient practices adopted.

Craig Sundstrom
Guest

I can’t disagree, but when the numbers are really as stark as you illustrate — and I suspect many times they are — no amount of “analysis” is going to save you.

Jeff Weidauer
BrainTrust

Like it or not, free shipping is a customer expectation. It’s up to the retailer to find a way to offer it and remain profitable. There are options to make up the margin, but they require new thinking – what’s worked in the past won’t work now.

Brandon Rael
BrainTrust

Removing friction from the shopping, including a more seamless shipping and product returns process, is all part of providing an outstanding customer experience. Once perceived as a margin killer, for better or for worse, free shipping has become the normal customer expectation.

The answer to the question is that it depends. It depends on the product, the forecasted margin, and the competitive landscape. Very few companies are in Walmart, Amazon, and Target’s universe, where they have vertically integrated much of their supply chain and have the ability to offer free shipping via annual memberships and other partnerships.

There are costs of doing business that have to be considered when offering free shipping. Larger companies could absorb these costs as economies of scale kick in. They could also leverage their physical retail locations as fulfillment centers via BOPIS, curbside, and same-day delivery.

Dave Bruno
BrainTrust

Yet another argument for ensuring the store is a vital and highly promoted part of the fulfillment mix for store-based retailers. BOPIS is of course the ideal outcome, but not always possible or practical for the shopper. Endless aisle and ship from store can help offset the logistics costs as well, but do have labor cost implications to the stores. NO easy answers here, I’m afraid, but encouraging options that minimize costs and, in the case of BOPIS anyway, encourage add-on sales, are for sure a strong way to help offset the pain of “free” shipping.

Liz Crawford
BrainTrust

“Free delivery” will become part of the price of the product. This will be like getting a basket of bread before a meal. It’s just what you do.

David Adelman
Guest

Free shipping and free returns are not sustainable; just like the race to the bottom, all retailers have experienced competing on the lowest price.

Many small retailers will perish trying to keep up with the Amazon and Walmart of the world. It’s been proven that consumers will pay up to 20% more for a product when they receive great service.

This means aligning yourself with your customer through all channels from the start until long after the sale.

The last factor to consider with the free shipping/return model is the cost to our environment. Sustainability and being responsible is paramount today for any business.

Trevor Sumner
BrainTrust

It also depends whether you believe shipping costs will lower with automation, micro-fulfillment, and new delivery methods like drones. Skate to where the puck is going. However near-term data is that costs are increasing, not decreasing as we covered in This Week In Retail.

Shep Hyken
BrainTrust

Free shipping is not really free shipping. It’s just that the retailer is not adding a shipping fee. It’s baked into the retail price of the product. Does it impact margin? Of course. It’s a cost. Does free shipping favor higher volume retailers? Yes. Higher volume and slimmer margins can be more profitable than lower volume and higher margins. It’s all numbers. Does shipping impact cart abandonment numbers. Absolutely. If there are two retailers that charge the same for their merchandise, and one has free shipping and the other charges, we know who the consumer will choose — unless there is a value proposition that is so obvious it makes the cost of the shipping irrelevant. And, that is where retailers need to focus. Create value outside of low prices and free shipping.