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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. They also did away with minimum
spending thresholds to qualify for the perk.
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.
"For most companies, it is a very expensive proposition to try to
offer fast and free," Steve Osburn, director of supply chain for
consulting firm Kurt Salmon, said in an interview. "It's really
eating away at the margin dollars at some of these retailers."
Shipping remains a key battleground in the escalating war between
brick-and-mortar retailers and Amazon.com Inc, with both sides
spending big on logistics. Offering free shipping has long been
standard practice during the holidays, but in 2014, retailers leaned
on it heavily all year long.
The number of online purchases in the United States with free
delivery hit a high of 68 percent in the third quarter of 2014,
according to industry-data tracker comScore, up from 44 percent the
previous year. Amazon said this week that it saved customers $2
billion in shipping fees over the holidays.
Much of those savings came via Amazon's Prime program, which offers
free shipping on most items for a $99 annual fee.
The company declined to share the previous year's figure. Nor would
it share estimates on how much more Prime customers bought compared
with others, which would provide some insight into how much Prime
might boost Amazon's revenue. Forrester Research analyst Sucharita
Mulpuru estimates that Amazon loses $1 billion to $2 billion a year
on U.S. Prime shipments.
Other retailers, including Target Corp and Wal-Mart Stores Inc, are
removing minimum-spending thresholds on free shipping to entice
consumers, consultants said. Just over half of companies surveyed by
Kurt Salmon eliminated those thresholds for the 2014 holiday season,
up from 5 percent the previous year.
PERKS AT A PRICE
But those perks come at a high price, analysts said. Amazon's
shipping costs during the first nine months of 2014 rose 32 percent,
compared with 29 percent in the same period of 2013.
This growing subsidy for customers might give investors more reason
to dump Amazon shares. The company’s stock declined 22 percent in
2014 even as the U.S. stock market, as measured by the S&P 500
index, gained more than 11 percent.
Target said in November that growing online sales were pressuring
margins, due in large part to higher shipping expenses. Much like
Amazon, Target offers free shipping year-round for users of its
membership card. Online orders account for about 2.5 percent of
Target's overall revenue, or roughly $1.85 billion out of the $74
billion in annual sales analysts are forecasting for the current
fiscal year which ends on Jan. 31, 2015.
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In a recent note, Wolfe Research said a 1 percent move in sales to
Target’s online business cuts profit margins by 5 basis points. The
retailer said it did not see the cost of a free holiday-shipping
campaign as material to fourth-quarter results, and added it
expected to improve profitability from online operations over time.
Wal-Mart does not break out its e-commerce division's profitability
or shipping costs. In October it said 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. 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.
"Most brick and mortar retailers that move online are run at a loss
still because they haven’t mastered the shipping piece,” said
Jarrett Streebin, CEO of shipping startup EasyPost. "If (Wal-Mart)
can’t make it work or cost-friendly, I don’t know who can."
LITTLE CHOICE
Retailers have little choice but to adapt. The bulk of U.S. retail
sales takes place in person, but e-commerce is growing quickly.
Online sales rose 16 percent in the third quarter compared with 4
percent for retail sales overall.
To offset the high cost of shipping packages to online shippers,
retailers tried over 2014 to lean more heavily on their
brick-and-mortar operations in what they dub the omnichannel
approach. That includes shipping online orders from nearby stores
rather than faraway warehouses to cut down on freight costs, or
encouraging customers to pick up online orders in stores.
Wal-Mart, for example, offers free same-day in-store pickup on more
than 70,000 items.
For its part, Amazon has been rapidly building warehouses near major
cities to bring items to customers faster while also adding
extra-fast options such as Prime Now, a one-hour delivery service in
New York.
"The margins are worse for everybody but it doesn’t really matter
because you have to play the game," Cowen and Company analyst Oliver
Chen said. "That's the way the shopper is moving, whether you like
it or not."
(Editing by Sarah McBride, Eric Effron and Matthew Lewis)
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