Wal-Mart (NYSE:WMT) made a bold move last month when it dropped its annual membership that cost customers $49 a year for unlimited, free two-day shipping, instead offering that perk to anyone ordering $35 in eligible items.
The retailer's previous program, ShippingPass, was a blatant attempt to undercut the price of Amazon (NASDAQ:AMZN) Prime, the online retailer's incredibly successful membership program. Prime began as a service that offered free, two-day shipping on millions of items in exchange for an annual fee. Now a $99-a-year (or $10.99 a month) Prime membership comes with all sorts of perks beyond two-day shipping, including Sunday delivery in many markets, the company's streaming video and music services, early access to some deals, and unlimited photo storage.
Powered by the free shipping offer, Prime grew to 65 million members in the United States entering Q4, 2016, according to an analysis by Consumer Intelligence Research Partners (CIRP). Those members make up a little over half of Amazon's audience in the U.S., and they are incredibly important to the retailer because, according to CIRP, they spend an average of about $1,200 per year, compared to about $600 per year for non-member customers.
Wal-Mart dropping its membership program is both an admission that it can't catch up to Prime and a bold attempt to win over customers. In theory, the physical retailer's offer should be very attractive to anyone who is not a Prime member, and the lack of a membership fee could get some people to consider dropping Amazon's service.
Comparing Amazon and Wal-Mart
Even though Wal-Mart has one-upped Amazon by going fee-free, the two shipping programs are not identical. Prime may cost $99 a year while Wal-Mart doesn't charge, but it's not quite that simple an equation. There are arguments in favor of both companies even with the physical retailer's new pricing advantage.
The major difference -- and for some people it may be enough to make Prime worth it -- is that Amazon Prime covers "over 50 million eligible items," according to its web page. Wal-Mart's free two-day shipping offer only covers "more than two million items," the company said in a press release.
The Wal-Mart program, which also lets consumers have their order shipped to stores, focuses "on the items customers shop the most, including household essentials such as baby necessities, pet products, food, like cereal and peanut butter, cleaning supplies and beauty favorites, as well as top electronics and toys," the company said. Amazon Prime offers all of those staples as well as pretty much anything else you can think of because the free two-day shipping deal applies not just to items the company sells directly to consumers but also orders it ships directly from its warehouses sold by various vendors.
In addition, Amazon offers free, though slower (5-8 day business days) shipping on any order of books over $25 and any overall order of $35 in eligible items. That's very slow delivery, but it might appeal to consumers who want to buy something they can't find in stores.
Which company has the better shipping deal?
For consumers who don't buy online very often. Wal-Mart has a very compelling offer. The retailer's free shipping offer takes away the risk of paying $99 for Prime and then finding you don't use it very often. In addition, while it offers only a couple of million items, the company clearly knows what consumers buy and has built its program around those items.
Still, while Wal-Mart may win business from non-Prime members and from people who let their membership lapse due to lack of use, it's hard to see the average Amazon devotee who spends $1,200 a year opting to make a change. That's because Amazon's program covers so much more that using Prime becomes a reflex for many members. The difference between over 2 million items and over 50 million is massive, and likely enough for Amazon to protect its turf, especially when you consider the other benefits Prime offers.
For less-devoted online shoppers however Wal-Mart has a better deal. On a very basic level free is simply better than $99 a year, even if Amazon has more items.
This is an early battle in what is likely going to be a prolonged war. Wal-Mart's offer should win it some customers and it may slow down Prime's growth. There are likely to be more shipping moves made by both companies, but Wal-Mart has shown that it's serious about becoming an online player. If it grows the eligible items in its free shipping program it could eventually erode the value of Prime, at least for people who join mostly for free shipping.