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Target Finally Starts Delivering on Free Shipping

Source: Target.

With all the exclusions that applied to Target's (NYSE: TGT  ) online free shipping policy, it's no wonder customers felt frustrated by the experience, and, according to company data, have often simply abandoned their online shopping cart rather than proceed to the checkout just for that reason. Finally, the retailer has realized the error of its ways, and has largely eliminated all such caveats and fine-print exclusions, meaning nearly all online orders of $50 or more on, with the exception of oversize or heavy items, will qualify for free shipping.

New shipping policies for retailers took off in earnest two years ago as free shipping became the new mantra to get customers to shop. A lackluster economy, tight purses, and sharper competition were keeping customers from spending, and retailers on- and offline began adopting shipping policies that made it easier and cheaper -- even free -- for customers to make have their purchase delivered.

Wal-Mart (NYSE: WMT  ) was one of the early adopters of the free-shipping policy that allowed consumers to pick up items in-store at no cost when they purchased from its website, while Sears Holding (NASDAQ: SHLD  ) , while not among the first to offer it, highlighted its free-shipping policy at Kmart with its humorous, award-winning "Ship My Pants" commercial. However, it felt like Target had to be drawn kicking and screaming to the table. It only offered a standard free shipping option if you used your Target credit card for a purchase, and even then there were so many items that didn't count toward the $50 minimum purchase that its customers threw their hands up in disgust.

The retailer's own internal data showed that more than half of shoppers who abandoned their shopping carts did so because of shipping costs. In a blog post this past Monday, Target's website and mobile senior VP wrote that, with increasingly becoming the company's "front door," making the experience easier and more relevant to its customers had become paramount.

Considering the phenomenal growth has enjoyed and how its $99 Prime membership service has taken off by offering free shipping on tens of thousands of products, it shouldn't have required a breakdown in the express checkout lane for Target to figure this out. With an estimated 2 million customers willing to essentially prepay for shipping (as well as get free movies and TV shows, books, and, soon, music), a retailer offering true free shipping to customers should be a winner.

No doubt it was a case of trying to have its profits cake and eat it too. Shipping costs money, and both gross and operating margins have been slipping. Particularly after its massive data breach late last year, the decline has had a worrisome impact on performance.

Source: Target SEC filings.

Revenues for the retailer were relatively unchanged at $16.6 billion, even though it added more stores to its portfolio. That's because it suffered a decline in same-store sales of 0.3% from the year-ago period. Comparable sales are an important retail metric, because they highlight the growth a company has achieved organically rather than through expansion.

Source: Target SEC filings.

We can see that revenues and comps have also been on a slow -- but steady -- slide for some time, for which millions of customer accounts being compromised did no favors. So at a time when the company is fighting for every sale that it can make, losing a customer just as they're about to turn over their money because you have infuriating, exclusionary policies in place makes no sense.

Target is working hard to restore consumer confidence. It's putting new policies in place, along with new executives. New, easier-to-follow shipping policies are only a small piece of the puzzle, so while they won't cause Target to leapfrog ahead of the competition, they also won't let it fall further behind. And that means the retailer may just deliver on its promises to its customer.

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Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


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8/27/2015 4:04 PM
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