Amazon, other retailers revamp 'free' shipping as costs soar
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[March 24, 2023] By
Lisa Baertlein
LOS ANGELES (Reuters) - There is no such thing as free shipping.
Even so, Amazon.com Inc and other online retailers who use so-called
free delivery to cultivate customer loyalty are scrambling to keep it
from draining profits as costs climb and e-commerce contracts.
They are adding fees for faster service, raising minimum purchase
requirements and making other changes that shift more costs to consumers
who are struggling with financial issues of their own.
"The days of free delivery are numbered," Ken Morris, managing partner
at Cambridge Retail Advisors, said of the fast-changing retail marketing
tool.
Retailers are beginning to look more like some airlines, which charge
for better seating, transporting luggage and also restrict use of
frequent flyer points, Morris said.
It is an open secret that most retailers raise product prices to
subsidize free shipping. Still, product inflation and soaring shipping
costs are making the service unsustainable as the prospect of recession
threatens to wallop already-flagging online spending.
Amazon marketed free shipping as a differentiator and used pricey Prime
subscriptions and fat profits from other businesses to underwrite its
package delivery costs - forcing other retailers to follow, even if they
lacked Amazon's advantages.
With retail margins shrinking and shipping rates for United Parcel
Service Inc, FedEx Corp and the U.S. Postal Service hitting record
levels, the industry where nearly three-quarters of e-commerce companies
offer some sort of free shipping is rethinking the financial cost of
habituating shoppers to free shipping.
Retailers' top priority is lowering shipping costs, with speed a close
second, said Lee Spratt, CEO of DHL eCommerce Solutions America, which
provides logistics services.
Retailers from Amazon to dog treat seller Einstein Pets and ubiquitous
apparel chains like Zara, Abercrombie & Fitch and Foot Locker are
drawing the line at losing money on a service consumers have come to
expect.
That is translating into shipping cost reduction goals of up to 25%,
said Mingshu Bates, chief analytics officer at consultancy AFS
Logistics.
After forcing both free and fast shipping on the e-commerce industry it
dominates, Amazon's latest moves are instructive.
The online retailer, which recently hiked the annual Prime subscription
price by $20 to $139, is now offering "free" same-day shipping for Prime
members in at least a dozen U.S. cities, including Los Angeles, Chicago
and Philadelphia. There are strings attached, however, as the service is
free only on orders of at least $25, and costs $2.99 when orders fall
below that.
At the start of March, Amazon also raised the minimum threshold for free
Prime shipping from its struggling online grocery business to $150 from
$35 and added charges of $3.95 to $9.95 for orders below the new limit.
Amazon CEO Andy Jassy in February said the company is streamlining costs
across the business and that shipping speed would not be a casualty of
its efficiency push. A spokesperson on Thursday added that Prime
delivery speeds got faster from 2021 to 2022 and are improving further
this year.
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Einstein Pets owner Kelly Ison poses for
a portrait near a group of fulfilled orders at her residence in
Canton, Georgia, U.S., February 08, 2023. REUTERS/Alyssa Pointer
'WHAT ARE WE PAYING FOR?'
Meanwhile, some consultants and customers are noticing service
changes.
"Getting things to people same-day or within a certain number of
hours doesn't seem to be first and foremost anymore" at Amazon,
e-commerce consultant Chris McCabe said.
Dozens of Prime subscribers, including upstate New York
middle-school teacher Bryan Fabiano, have taken to social media to
question the value of their Prime subscriptions due to late package
deliveries, particularly during the holidays.
"My wife and I are Prime customers because of the shipping
(benefits). If they're not going to deliver on that, then what are
we paying for?" Fabiano, 48, told Reuters.
Indeed, shoppers who do not subscribe to Prime get free standard
shipping on Amazon orders over $25. Walmart Inc and Target Corp,
which have delivery subscriptions of about $100 per year, offer free
shipping on orders above $35 for non-members.
Nearly three-quarters of the top 1,000 U.S. retailers offered free
shipping on at least some orders, with 45% requiring a minimum
purchase for that perk, according to August 2022 survey results from
industry research firm Digital Commerce 360.
While retailers like Amazon and fashion purveyor Asos Plc have
raised thresholds for fast shipping, others are dropping free
shipping altogether or taking product prices up again.
Einstein Pets in Atlanta was caught "between a rock and a hard
place" according to owner Kelly Ison. She moved to protect profit by
ending free shipping in mid-2022 on purchases of Einstein's
specialty dog treats, including flavors like PB’N Jelly Time and
Pumpkin Time.
"We can't compete with Amazon," she told Reuters.
Ison switched to flat-rate shipping of $8 to help defray fast-rising
delivery costs and avoid price increases that would hurt her
competitiveness. She lost some customers, but remains profitable.
Toronto-based United Filter Co raised prices on its furnace filters
so it could keep offering free shipping for sales through Amazon,
Walmart and Ebay and it has never offered across-the-board free
returns because they are too "cost-prohibitive," owner Darrin Landau
told Reuters.
The company split the difference, he said. "People are just addicted
to free shipping."
(Reporting by Lisa Baertlein in Los Angeles; Additional reporting by
James Davey in London and Corina Rodriguez in Madrid, Editing by Ben
Klayman and Matthew Lewis)
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