Free delivery is being grounded by Wal-Mart in Canada because of rising costs and, possibly, less competition. Photo: Wal-Mart via Flickr
Unless you spend $50 or more online, Wal-Mart (WMT -2.10%) says it's Canadian customers won't get free shipping anymore like their shopping brethren south of the border. Canada is just too big with its population centers too spread out to make it worthwhile. Instead they'll be charged $4.97 for delivery.
Although costs likely play a big role in Wal-Mart's decision, it can't be a complete coincidence the decision comes so soon after Target (TGT -0.58%) announced it was completely abandoning the Canadian market, closing all 133 stores it operates. Less competition means it doesn't have to be as giving.
Wide open spaces
Canada has about the same landmass as the U.S. -- 3.8 million square miles versus 3.5 million -- but the U.S. has over 320 million people in that area, or 88 people per sq. mi., compared to 35.6 million up north, or just over 8 people per sq. mi. In between there's a lot of sprawling wilderness making it much more expensive to service customers in Canada than in the U.S.
In addition to Target, electronics retailer Best Buy (BBY -0.09%) is reducing its footprint in Canada, closing 66 Future Shops and rebranding another 65 under the Best Buy banner. After the reorganization, it will have 192 stores up north comprised of 136 eponymous big box stores and 56 Best Buy Mobile shops.
Sales for Wal-Mart in Canada improved in the fourth quarter, growing 4.1% with a 1.8% increase in comparable store sales. Its online business jumped over 38% from the year-ago period. But that still couldn't stop operating income from falling year over year as it made investments in its e-commerce efforts and in pricing.
Excludingorders under $50 from free shipping (as well as oversized items), Wal-Mart can improve its performance without really impacting the sales growth it's witnessing. Deliveries through its ship-to-store program, along with its "Grab & Go" lockers and to post offices, will remain free.
Droning on about costs
Wal-Mart's growth up north may be forcing it to initiate fees for shipping low-value items, but it could find they won't stick as more intense competition from Amazon.com (AMZN 1.33%) forces its hand. The closure of Best Buy's Future Shops was just one manifestation of the impact the online retailer is having on the Canadian marketplace.
But it could also be said that it's Amazon's rivals that are giving it a run for the money. According to a Bloomberg Business analysis of data from the industry researchers at eMarketer, the gap between Amazon's growth rate in North America with that of e-commerce overall in the region is narrowing.
North American sales for Amazon rose 23% last year, but that was only seven percentage points greater than the 16% growth rate registered for e-commerce generally in the U.S. and Canada. It notes that back in 2011, there was a 17 percentage point difference between the two.
Amazon's Prime Air drones could be the delivery method of choice in the future, particularly to remote areas not easily accessible. Photo: Amazon.com
Tomayto, tomahto. What it means is competition for customers is only going to get more fierce as Amazon Prime offers Canadian customers free two-day shipping, just like in the U.S. As the e-tailer continues to add benefits to the service -- for example, this past January Canadians got free, unlimited photo storage after customers in the U.S. and the U.K. got it in November -- the pressure on Wal-Mart and other retailers to make their shipping policies competitive once again will grow.
Call of the wild
Amazon's standard shipping policies give Canadians free shipping once their total hits $25, though for remote locations it can cost as much $125. It defines a remote location as one of the following:
- Towns far from a shipper's hub
- Towns that are infrequently served by shippers
- Places where mail must be airlifted at certain times of the year
And for some of those spots, some items just can't be delivered there no matter what. That, of course, could change in the near future as Amazon has begun testing its drone delivery service in rural British Columbia, a service it hopes will one day allow it to deliver a package within 30 minutes of an order being placed.
All of which highlights the challenges retailers face in trying to service customers in Canada. Faced with a rival like Amazon.com that has shown a propensity for operating its business at a loss in an attempt to grab share, something that Wal-Mart is unable or loathe to do, it indicates that the Great White North may be a land that doesn't allow any one retailer to profit or succeed.
