Ship Free or Lose Out

Ship Free or Lose Out
More Retailers Absorb Cost of Sending Packages to Vie With Web-Only Rivals

Traditional retailers are taking the expensive step of offering more free-shipping deals this holiday season, as they seek to lure the growing number of Internet shoppers to their websites and away from online-only rivals, particularly

Amazon offers free shipping on most orders over $25, as well as cheap, low-hassle delivery options such as its Prime membership program, which other retailers have found hard to match. The online retail giant also offers low prices, since it doesn’t have to pay for sparkly stores or cheery salespeople and— as rivals like to point out—because it doesn’t collect sales taxes for the most part.

For consumers, free shipping can make a big difference in the ultimate price they pay.

“Free shipping used to be a way to entice customers to your store over another site, but now it’s just the price of entry,” said Kevin Mansell, chief executive of Kohl’s discount department store.

For giant retailers such as Wal-Mart and Target free shipping hasn’t yet started to affect their bottom lines, said Colin McGranahan, retail analyst at Sanford C. Bernstein. Internet sales make up less than 2% of Wal-Mart’s $419 billion of annual sales and Target’s $67 billion.

Several department stores, too, are now offering year-round free shipping—and the cost has begun crimping gross margins.

Nordstrom which in August, began offering free shipping and returns on all online orders, estimates that the free shipping cut its gross margin—of 36.6% in the third quarter—by about 0.15 percentage point.

Even so, the company says that the boost to sales from free shipping outweighs the costs; online inventory offers higher returns because of fewer overhead and labor costs, said Nordstrom’s chief financial officer, Mike Koppel.

Internet sales are projected to rise 15% this holiday, while in-store sales are expected to grow by less than 3%. But some of that Internet growth will occur at traditional retailers’ websites rather than at online-only retailers

Retailers are trying to find a way to offer a program similar to Amazon Prime, in which customers pay $79 a year for unlimited two-day-delivery service on purchases, as well as other perks, like movie streaming. Some analysts estimate that Amazon Prime will have 10 million customers by the end of the year and that the service accounts for about $7.5 billion of the company’s revenue, although the program still loses money for the company.



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