Amazon (NASDAQ:AMZN) long ago set the rules of the e-commerce game by which almost all retailers now play. By training consumers to expect free shipping for their online purchases, the company essentially compelled rivals large and small to fall in line -- if they have any expectation of competing, they too, need to offer some form of free shipping.
Yet the cost to retailers of providing that perk is soaring. UPS and FedEx raised rates this year by 4.9% on average, and hiked the prices of the services used most by residential customers by 30% or more. Even the U.S. Postal Service has increased rates for package delivery. The result is that sellers are absorbing costs in the billions of dollars annually to meet consumers' demand to get something for nothing.
Maybe it's time more retailers considered charging for free delivery. After all, that's what Amazon does.
Check out the latest earnings call transcript for Amazon.
Amazon's secret weapon
Although the e-commerce giant got everyone else to follow its lead on free shipping, Amazon's service isn't actually free at all, as consumers pay $119 a year for it. Even though shipping to customers cost the online retailer $27.7 billion in 2018, up 27% from the year before, it partially offset that expense with the fees from its Prime membership loyalty program.
Amazon has over 100 million members worldwide, and almost 58 million in the U.S., so from one perspective, Prime fees offset its shipping costs by about $12 billion last year. Market research firm eMarketer estimates that by 2021, 57% of U.S. households, almost 72 million in all, will have Prime memberships.
Yet if Prime were nothing but a free-shipping deal, that would still leave $15.7 billion or so Amazon that was out of pocket -- a substantial expense. And as we all know, members get a lot of benefits and services beyond that. The company says it will lay out $5 billion this year on content for Prime Video alone, which takes a considerable bite out of that $12 billion in subscription revenue.
The key point, however, is that most other retailers don't have any built-in income stream designed to offset the costs of providing free shipping; the best they can hope for is to boost their sales incrementally by setting a dollar threshold for customers to qualify for the service.
Walmart requires customers to spend $35 on an order before it qualifies for free shipping; so does Target, but shoppers who use the store's REDCard credit card qualify with orders of just $25. Macy's has a similar policy, and a number of smaller retailers have tighter policies still.
Gap, for instance, requires you to spend $50 on an order to get free shipping, but it usually takes five to seven days to receive it. If you want expedited two-day shipping, it'll cost you $17. American Eagle Outfitters also requires you spend at least $50 to get free shipping.
Time for an upgrade
Retailers reap some obvious benefits from offering free shipping, regardless of the details, such as greater consumer loyalty and engagement. But can they get consumers to acknowledge the costs involved by implementing premium loyalty programs of their own?
Plenty of retailers do have such programs that come with a variety of exclusive perks, but free shipping is often not among them. For example, RH, the former Restoration Hardware, has a $100 per year premium loyalty program that offers discounts and services such as design consultations, but members still pay for shipping. While furniture is an admittedly expensive category to ship, even small items carry a fee.
Others are starting to come around. Where Barnes & Noble has long offered free express shipping for members of its $25-a-year loyalty program, lululemon athletica began testing one last year where for $128 a year, free expedited shipping is included.
Clarus Commerce says loyalty program fatigue is setting in: The average U.S. household belongs to 29 different programs, but is active in only 12. On the other hand, Clarus also found 62% of consumers and 75% of millennials would consider paying for a premium program. The key is offering a range of benefits customers find attractive -- free shipping is obviously one that should be considered.
In reality, of course, there's no such thing as "free" shipping. Customers pay for it through loyalty program membership fees, the costs being baked into the list prices of the items, or both.
Yet retailers are now being caught between consumers' desire for free stuff and the rising rates that UPS, FedEx, and the U.S. Postal Service are charging. If they are going to keep their omnichannel operations profitable, more of them may have to ask their customers pay up front to enjoy that "something for nothing" feeling later on.