E-commerce grew 20% for Costco in fiscal 2015—20 times faster than store sales.
Zero is the shipping fee online shoppers want to see—and increasingly will get.
How to offer that perk profitably is the challenge for e-retailers.
At Stonewall Kitchen, a multichannel retailer of foodstuffs, kitchenware and other home goods based in Maine, getting orders to customers throughout the U.S. in the fastest and more efficient way is forever on the mind of Aimee Roy, Stonewall's distribution manager. Having started as a retailer 20 years ago, Stonewall has worked hard to operate as a tight ship with its supply chain, fulfillment and shipping operations for store, catalog and web sales.
The retailer has seen consumers respond when it offers free shipping on online and catalog orders—and more competitors offering free shipping. "As a retailer facing pressure from our peers, we have to offer free shipping or be left behind—and have our market share go to someone else who offers what customers want," Roy says.
But their experience with the power of free shipping offers did not prepare Roy and her colleagues for L.L. Bean Inc.'s announcement in March that it would permanently offer free shipping on all orders except for its largest products like kayaks and mountain bikes. Roy says her e-mail inbox was flooded with comments from colleagues about how this raised the bar for all retailers. "It shocked us all when we heard that L.L. Bean began offering free shipping," Roy says.
'Yikes! Free shipping!'
The buzz carried over to a shipping industry conference Roy attended soon afterward. "It opened up everyone's eyes," she recalls. "It was 'Yikes! Here's this well-known retailer and look at what they're offering.'" And even though L.L. Bean is not a direct competitor to Stonewall, Roy says she and her colleagues realized the apparel and outdoor recreational gear retailer's move was likely to raise expectations among online consumers, making it that much more important to woo shoppers with generous shipping offers.
Nor was L.L. Bean the only e-retailer moving more aggressively into free shipping. Roy soon learned that kitchenware and foodstuffs retailer Williams-Sonoma Inc.—a direct competitor to Stonewall with $1.2 billion in 2010 web sales according to the Internet Retailer Top 500 Guide—had also launched an aggressive free-shipping policy. For an annual fee of $30, Williams-Sonoma was now offering for no additional charge free shipping of most items with no minimum purchase, and with delivery within five business days of an online order.
The list goes on of retailers offering more generous free-shipping offers of one kind or another, often including expedited shipping. Besides responding to competitive pressure, these web retailers are hoping to eliminate the biggest single reason that keeps consumers from completing online purchases. In a survey of 3,000 online consumers last year, Forrester Research Inc. asked shoppers to give the primary reason why they had abandoned an online shopping cart: The largest percentage of respondents, 44%, said that shipping and handling costs were too high.
Web retailers are getting the message and increasingly offering free shipping, especially during the crucial holiday season. 49% of U.S. e-commerce transactions in the fourth quarter of 2010 included free shipping, up from 44% a year earlier, according to comScore Inc., which tracks consumers' web activity. And the percentage did not drop dramatically after the holidays, with 47% of online orders shipping for free in the first quarter of 2011, up from 37% just two years earlier.
With no sign that this trend will reverse, online retailers have no choice but to figure out how, when and to whom to offer free shipping—and how, in the process, to increase their revenue and trim their costs, so that they can offer shipping perks profitably. There's no one size or flavor that suits all, and plenty of experimentation is underway as retailers react to the rising pressure to offer free or discounted shipping.
Here's just a sampling of some of the recent developments:
- United Online Inc.'s FTD.com, the online floral retailer, is offering a free-shipping program like Williams-Sonoma's to customers who pay an annual fee of $29.99 to participate in the FTD Gold Membership loyalty program.
- By the start of this year's holiday shopping season in November, ShopRunner Inc. says it will have more than doubled the number of retailers—to 90 from 44 in June—participating in its free-shipping program, which competes head-on against Amazon Prime, the free-shipping program from Amazon.com Inc. Like Amazon's program, ShopRunner enables participating merchants to offer their customers two-day shipping for no extra charges beyond an annual fee of $79, ShopRunner president Mike Golden says. Amazon Prime, launched in 2005, has attracted about 6 million subscribers, with a big majority of them in the U.S., estimates analyst Colin Sebastian, who follows e-commerce companies for brokerage and private equity firm Robert W. Baird & Co.
- FreeShipping.org, a coupon site for free-shipping offers, featured more than 4,000 retailers as of last month, up more than fourfold since January, says web manager Simon Jobman.
- The world's largest e-marketplace with 25 million sellers worldwide, eBay Inc.'s eBay.com, has revised its fee schedule to encourage sellers to offer more free or discounted shipping deals to their customers. Instead of charging sellers a 12% commission on sold apparel items, for example, eBay will now charge 10% of the combined price for the item and the shipping fee. Under the old rules, on a $40 sale an apparel seller would pay eBay $4.80, or 12%. Under the new rules, the seller would pay eBay $4, or 10%, on the same order if the seller doesn't charge for shipping. If the seller does charge, say, $10 for shipping on top of the $40 for the apparel, it would pay eBay a fee of $5, or 10% of the total order value of $50.
EBay says that about 30% of the items sold on eBay shipped for free under its old rules, but it hasn't said how the new fee schedule has affected sellers' shipping policies.