Daily Dose of iQ: Free Shipping Eats Away at Retailers' Holiday Profit

Jan 02, 2015 — Allan Pulga

As more and more retailers offer free holiday shipping of online orders, their ability to do it profitably decreases, according to a recent story from Reuters.

"During the just-ended holiday season, outlets from Target to Wal-Mart to Amazon expanded their free-delivery options, adding more items eligible for free shipping," wrote Reuters' Deepa Seetharaman and Nathan Layne. "They also did away with minimum spending thresholds to qualify for the perk."

Amazon has made free shipping seem standard, but few retailers have the scale or volume to offer it as efficiently as Amazon does.

"Yet as more U.S. shoppers view free shipping as their right, retailers struggle to make a profit online. That struggle will become evident in coming weeks when companies report financial results for the holiday quarter, analysts said."

In fact, Seetharaman and Layne add, more retailers have been offering free shopping all year long: In the third quarter, 68% of U.S. online purchases came with free delivery, up from 44% the previous year.

Below are a few other "free shipping" stats from the Reuters article:

  • Amazon said it saved customers $2 billion in shipping fees over the holidays, largely through Amazon Prime (which offers free shipping on most items for a $99 annual fee).
  • Over half of companies surveyed by consulting firm Kurt Salmon eliminated purchase thresholds for free shipping, up from 5% the previous year.
  • Amazon's shipping costs for the first nine months of 2014 rose 32%, compared with 29% in the same period of 2013.
  • Target said in November that growing online sales were pressuring margins, largely due to higher shipping costs. Similar to Amazon, it offers free shipping to membership cardholders.
  • Target's online orders account for 2.5% of its overall revenue, so $1.85 billion of its $74 billion in annual revenue, according to analysts' estimates.
  • Walmart said in October "it expected the next 18-24 months to bring heavy investments and operating losses in e-commerce as it builds fulfillment centers and makes other outlays to drive sales," Seetharaman and Layne wrote. "It expects online revenue to hit $12.5 billion in the year to January 2015 and grow at about 30 to 40 percent over the following three years."

Topics: Retail Operations, Wireless Trends, Mobile Industry, e-Commerce

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