Peapod, Drugstore.com and Others Sweat Higher Fuel Prices
By George Anderson
The price at the pump has kept going up and e-tailers are caught between the proverbial rock and hard place.
If companies pass on costs to customers in the form of higher delivery fees or item prices, they face the prospect of lost sales. If they hold the line, they face reduced profits because of higher fuel costs.
The grocery delivery service Peapod is one of the company’s facing this dilemma. It has seen its fuel prices rise along with everyone else but has yet to pass the cost on to customers in the form of higher fees.
“For now, we’re riding it out,” said Elana Margolis, a spokesperson for Peapod.
Drugstore.com has also chosen to incur higher fuel costs rather than pass them on to its customers. The online drugstore’s filing with the SEC in March included the caution: “Shipping costs, which are included in cost of sales, continue to exceed the amount we charge customers for shipping. We expect to continue to subsidize a portion of our…shipping costs for the foreseeable future, through free shipping on non-prescription orders of $49 or more, as a strategy to attract and retain customers.”
Moderator’s Comment: Given the unenviable choice between charging shoppers more to offset fuel prices or taking the costs out of sales without a price
increase, which do you choose? Will most consumers understand and accept higher prices if a retailer explains the cause or will they simply go to another store/site that hasn’t
raised its prices? –
George Anderson – Moderator
The rise in fuel and energy costs will affect both e-retailers and brick-and-mortar kind. Every consumer is now experiencing the higher costs of personal transportation and package deliveries. Surcharges are becoming a standard. This translates into the acceptance of higher costs for our preferred way of shopping. It will just cost more to maintain our standard of shopping preference … but if state and local taxes should also become a standard cost of buying over the Internet and by catalog from another state, then the buying game will likely be modified.
This is as much an issue for bricks and mortar retailers as e-tailers. What about moving vans, pizza delivery, etc.? In the short term, I believe, consumers will go to those who don’t raise their prices. Since, at some point, all retailers will need to recoup these price increases, at some point everyone will raise their prices. Ultimately, retailers will have no choice but to pass on costs and consumers will have no choice but to pay for them.
Petroleum-driven cost increases won’t just be transportation-related. Plastic bag prices rise sharply when oil prices rise. Heating and cooling costs rise. The cost of most merchandise has an energy component. Retailer net margins are usually low, so it’s unlikely they can stop inflation on their own.
Per the comments of others, rising fuels costs will ripple through every line of a product P&L, and will expose weak spots in the business model of some retailers.
On the cost side, this impacts both e-tailer and traditional formats – the goods must get to the consumer one way or another. In a high-cost-of-fuel economy, it will come down to which distribution models are most efficient.
On the revenue side, this gets to the heart of price elasticity and what consumers care or don’t care about when they evaluate the prices of goods and services they buy. E-tailers must have an atomic level of understanding of the impact of increases and decreases in delivery charges on their overall demand.
As usual, the retailers that understand and serve their customers best and continuously drive an efficient and effective supply chain will win. It can’t be assumed that high fuel costs will cause greater pain for e-tailers over their brick and mortar competitors.
As a consumer, I would understand a reasonable expense increase due to rising fuel charges; however, I refuse to accept an oppressive increase. If fuel cost is the issue, then it should be easy to determine a fair charge. Do the back of the napkin math.
If a given delivery van is doing on average 25 stops per 250 mile daily run (or 10 miles average per delivery), and the cost of fuel has increased $1.00 per gallon, and the average fuel consumption is 10 miles to the gallon in a 25 gallon tank, then the actual increased cost is easy to determine… $1.00 per delivery in this pre-defined scenario. Assuming worst case scenario of 5 miles per gallon on fuel, then $2.00 at most is reasonable.
Passing on more than $2.00 per delivery will cause me to spend my gas and drive to the store. It’s all about the convenience factor for home delivery. This is something to consider.
Some of these companies may have been operating at or near the red, therefore, they may be looking at the issue of rising fuel costs to be the catalyst to create a potentially profitable channel. As a consumer, I would not accept any increases to fund higher wages, or more fuel efficient delivery vehicles.
If the retailers are going to name the delivery increases as “fuel related,” then only add that cost as a fuel charge, showing it on the documentation. AND, when the gas drops, give us a break…
A significant amount of our oil imports are used to produce plastic products – both domestic and imported – and those costs will rise, too. (Wouldn’t it be great if automobiles could burn plastic Chinese imports?) On the serious side, it’s important to remember that reducing gasoline usage by legislating higher gas mileage and producing hybrid vehicles will not produce the result envisioned by those passionately opposed to SUVs. A study published recently postulated that if every car in America were exchanged for a hybrid vehicle today, our gasoline usage would return to current levels in only eight years.
Let’s say some good things happen to impact oil usage and needs, like: 1.) Producing more oil in our own country; 2.) a single gasoline recipe nationwide – instead of approximately 40 – thus enabling refineries to be more efficient; 3.) a hydrogen fuel cell that doesn’t require more fossil fuel to produce it than it replaces and; 4.) calmer political situations in the Mideast and South America. Will oil prices drop and, if so, will retailers reduce their product and transportation charges to consumers in the same way they raised them originally?
A great idea for retailers to validate their concern to shoppers in passing on these rising costs. A needed means to engage the customer base.
Now, let’s communicate positive differences of the retailer vs. its competitors by engaging the shopper!!!!