September 30, 2008, 12:00 AM

Some slipping on shipping

As gas prices rise, some e-retailers are raising shipping fees, just as more consumers turn to the web to stay away from the pump.

By Katie Deatsch

Two things are clear: online retailers are paying more to ship goods to consumers, and many shoppers want to pay little or nothing for shipping.

So what’s an online retailer to do?

An Internet Retailer survey of 14 larger Internet merchants across several categories finds five have raised at least some of their shipping fees in the last year. The rest have kept fees steady, in some cases trying to trim expenses elsewhere to cover their higher delivery costs. (See chart on facing page.)

“Pricing shipping rates is definitely a balancing act between giving our customers low or free shipping and trying to cover our costs,” says Sue De Boer, supervisor of pricing at Amway Global/Quixtar, a direct marketer of health and beauty products owned by Alticor Inc. The retailer has raised its shipping fees on orders above $120 by between 80 cents and $2, about 5%.

Most of the retailers surveyed said they would offer some shipping promotions during the upcoming holiday season. But offering deals on expedited shipping will be especially tough, because carriers are imposing higher surcharges for air delivery than for ground shipping.

The dilemma

The pressure on retailers to offer good deals on shipping is greater than ever because many consumers are turning to e-commerce sites as a way to avoid paying higher gas prices, which have increased from an average of $2.78 a gallon a year ago to $3.85 last month, according to the American Automobile Association.

The high price of gasoline will prompt 36% of consumers to do more holiday buying online, according to a July survey by Harris Interactive for e-commerce technology provider iCongo Inc. 60% cited free shipping as a reason they are more likely to shop on the web. Another study from comparison shopping engine Pricegrabber.com found 20% of consumers who buy big-ticket household items on the Internet are motivated to buy online because of free shipping and delivery.

As much as they would like to satisfy that demand for free shipping, online retailers face the reality that such major carriers as UPS, FedEx and DHL are passing along their higher fuel costs in the form of surcharges.

Air freight soars

In the past six months fees for 1-, 2- and 3-day shipping services have increased by as much as 20%-mainly because of higher fuel surcharges, says Bob Boylan, president of Xpert Fulfillment Inc., a third-party order fulfillment provider.

Surcharges are especially high for air freight, says Brian Hodgson, vice president of marketing and business development for shipping software vendor Kewill Americas, a subsidiary of U.K.-based Kewill Systems Plc. He estimates fuel surcharges for packages shipped via air average about 30% of the standard fee, while ground surcharges are about 10%.

Those increases have forced outdoor gear and apparel retailer Backcountry.com to raise some delivery charges on orders that don’t qualify for free shipping, such as expedited orders and purchases of under $50. And it’s getting tougher to continue offering free standard shipping on all orders of $50 and up, says Jeff Carter, vice president of fulfillment at the online retailer.

“It’s putting more pressure on us to be more efficient in our warehouse operations,” he says. “Every penny you can shave off counts.”

With an average order value of $115, Backcountry.com ships many packages for free, Carter says. And so the retailer, which on its heaviest day ships about 40,000 orders from two distribution centers covering 240,000 square feet, has taken a hard look at its warehouse operations to trim costs so it can continue to provide the incentive.

Backcountry, which uses UPS to deliver most of its orders, has automated its distribution center’s packing system to save money. It also carefully tracks carriers’ fuel surcharges each month, adjusting its shipping plans accordingly. “We have an analyst who monitors our shipping fees and makes decisions and builds them into our financial forecast based on what he thinks they will be over the year,” Carter says.

Outdoor apparel retailer L.L. Bean is feeling the pain of higher shipping costs-and passing some of it on to its customers, increasing the shipping charge on most orders by $1. But the retailer offers free shipping and returns for shoppers that use its co-branded Visa credit card.

Grocery e-retailer Peapod has responded to higher gasoline costs by tacking on a fuel surcharge to its delivery prices. The fee, imposed any time gas prices reach $2.75 a gallon, starts at 28 cents and increases 10 cents each time gasoline prices jump a dime.

“Since the price of gas has risen dramatically over the past year, we have instituted a temporary fuel surcharge as we are no longer able to absorb these costs,” the e-retailer says on its web site. “We hope to be able to reduce or remove this surcharge in the very near future.” Peapod’s surcharge last month was $1.38.

Recreational Equipment Inc., a multi-channel outdoor apparel and gear retailer, raised its shipping fee $1 on most orders, and by more on certain expedited orders.

Cutting costs

But other big-name retailers are finding ways to cope, sometimes by using their large volume of shipments as leverage with carriers. Costco Wholesale, for example, says it has a lucrative contract with UPS. “We’ve negotiated a large volume contract that somewhat protects us from rising fuel prices,” says Randy Terashima, assistant vice president, technology. “We pass along all savings to our members to keep shipping as low as possible.”

Oriental Trading Company, which sells party supplies and novelties, also has kept shipping prices steady, recognizing customer sensitivity to those charges. “Historically, the free shipping type offer is the one that most of our customers have responded to,” says Brian Moen, vice president of e-commerce. “They are looking for that shipping savings and looking at that as an important factor.” He says the retailer plans to offer free shipping frequently throughout the holiday season.

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