Online shoppers increasingly want not just free but also fast shipping, e-retailers say.
Thad Rueter , Senior Editor
Vitacost.com Inc. owns one distribution center in North Carolina and leases another one in Las Vegas. The web-only health products retailer, whose web sales increased 27% in 2012 to $331 million, is working to make sure it doesn't need to invest in another warehouse anytime soon.
Productivity improvements in those two centers decreased the e-retailer's per-order fulfillment costs by 7% year over year in the nine months ended Sept. 30, 2013, says Greg Dahlstrom, director of global logistics for the e-retailer, which is No. 87 in the Internet Retailer 2013 Top 500 Guide. He says he expects more productivity improvements will allow Vitacost.com to decrease its costs further in 2014.
Vitacost has also started using regional carriers for some deliveries, which the e-retailer says has helped reduce shipping costs while making sure items reach customers as quickly as possible. After all, consumers' expectations are high when it comes to delivery, thanks in part to Amazon.com Inc.'s Prime program and smaller competitors such as ShopRunner that are training consumers to expect deliveries within two days at the most. Moving forward, newer—and even speedier—programs from eBay Inc., Google Inc. and Amazon seek to take same-day deliveries mainstream.
"Customers want free shipping and they want it fast," Dahlstrom says. Vitacost offers free shipping on orders of at least $49 and encourages early-bird shopping by promising delivery within one to four days for orders placed by 1 p.m. on weekdays. "This is obviously a challenge for many e-commerce companies. The biggest challenge for us is controlling shipping costs while avoiding the need to add fulfillment centers in order to speed up the order cycle."
Vitacost's experiences stand as an example of what other e-retailers are going through as they try to keep up with consumer expectations for shipments while also keeping fulfillment costs in check, according to results of Internet Retailer's inaugural survey of e-commerce fulfillment and delivery practices. The survey, conducted online in early January, attracted 245 responses. The results underscore the challenges e-retailers face in getting their products to customers and suggest how web merchants will invest to improve their fulfillment and delivery capabilities in the near future.
Here are some highlights from the survey:
Most of the survey responses—51.7%—came from web-only merchants, with 13.9% coming from retail chains. The remainder came from consumer-brand manufacturers (14.7%), business-to-business e-commerce operators (14.3%) and catalogers (5.5%). Responses were anonymous, although some respondents left comments that reinforced the findings.
In 2014, e-retailers and delivery carriers will have to address the cracks in their systems that emerged during the 2013 holiday sales season. A surge in online orders in the final days leading up to Christmas overwhelmed the ability of some retailers and delivery services to get items to consumers by Dec. 25. Nearly a third, 32%, of the top 25 North American e-retailers by sales didn't get all orders under the tree by Christmas Eve, even though consumers placed the orders before the merchants' stated cutoff dates, according to a study by StellaService Inc., which monitors e-retailers' service levels.
Analysts say a combination of e-retailers offering later order cutoff dates and bad weather overburdened delivery services, which weren't prepared for the late-season surge in package volume. 43.4% of respondents to the Internet Retailer survey had Christmas-season delivery cutoff deadlines between Dec. 17 and Dec. 20. UPS says the volume of air packages in its system in the final days before Christmas exceeded its capacity and some shipments were delayed. It declined further comment.
Those problems could lead to changes in 2014.
"There will almost inevitably be surge pricing [from the shipping carriers] for the days leading up to the holidays," says Sucharita Mulpuru, an e-commerce analyst for Forrester Research Inc. She estimates that up to 90% of holiday orders arrived on time. "[Shipping carriers] can't reasonably invest in too much more for just those few days. They need to incentivize retailers to change behavior. The shippers should have charged higher rates a long time ago." That could mean e-retailers will have to absorb at least some of those shipping costs to not alienate consumers who want free and quick shipping, she adds.
Free shipping, though, still entices consumers more than quick delivery, according to Internet Retailer's survey. 67.7% of respondents said their customers are more interested in free shipping than fast deliveries. Even so, only 6.3% of respondents reported offering free shipping on all orders.
But many offer free shipping on many orders. Among respondents to the survey, 16.9% said 76-99% of orders ship free; 14.8% said 51-75%; 17.3% said 26-50%; 16.5% said 11-25%; and 17.7% under 10%. Only 10.5% said they charge for shipping all orders. Many e-retailers require a minimum purchase amount for free shipping, including 62.3% in the survey. A quarter of respondents that set such thresholds—25.3%—said the minimum order required is at least $100. Nearly 35%, though, reported a minimum amount of less than $50.
At least one fulfillment and delivery expert says it's likely more e-retailers do, in fact, impose minimum purchases amounts for free shipping than is reflected in the survey. "Pretty much all web sites have minimum purchase amounts except for a week or two in December," says Fiona Dias, chief strategy officer at ShopRunner, which offers two-day shipping for orders from "hundreds" of retailers for a $79 yearly membership fee. That's the same price Amazon charges for its Prime service that promises free two-day shipping on all orders.
But that too could change, and in favor of consumers. "Minimum order amount is the next thing that's going to fall," she says. "Consumers hate thinking about having to put another item in the basket."
Retailers also are eyeing the progress of the same-day delivery programs by much larger e-commerce operators—that is, Amazon, eBay and Google. "We have yet to see a negative business impact from the same-day delivery options that a few large retailers are launching, which I think goes back to our value-driven customer base," says ShoeMetro's Stuempfig. "No question there is a market for same-day delivery but the price has to be right."
Of course, bolstering fulfillment and delivery comes at cost. The survey found 55.1% of respondents said they expect to pay more for fulfillment, compared with 12.0% who expect no change and 32.9% who anticipate paying less.
Some of those decreases likely stemmed from improvements that respondents have already made. The survey found 44.1% of respondents had upgraded their fulfillment, inventory or order management software during the preceding 18 months. That compares with 34.2% who had beefed up fulfillment staffing, 31.8% who began using suppliers to drop-ship orders to customers, 20.4% who had increased their reliance on third-party fulfillment providers, and 13.1% who had contracted with local and regional carriers for deliveries.
That latter option is not without headaches, though. "Regional carriers have helped to mitigate shipping cost growth to an extent, but not without significant resources to negotiate, implement and manage these programs," Stuempfig says. "We go into every year expecting freight increases but constantly evaluate carriers and renegotiate based on our growing package volume."
Those investments also could help e-retailers get products to consumers more quickly without absorbing too much extra cost. The survey found that the average order-to-ship time is less than 12 hours for 10.6% of respondents. 48.9% said it takes them less than one day to ship an order; 25.5% said less than two days; 6.0% less than three days; 1.7% less than four days; and 7.2% more than four days.
The leading challenge for e-retailers on the fulfillment and delivery front in 2014 seems pretty clear, experts and merchants say. "Even though customers prefer free shipping, they are expecting delivery times to be faster every year," says Dahlstrom, of Vitacost. "The challenge is to optimize delivery networks in a way so that we can continue to provide free shipping but get it to the customers more quickly."