It just got harder to shop on Amazon.com (NASDAQ:AMZN) without Prime.
Over the weekend with no announcement, Amazon raised its free shipping minimum on orders from $35 to $50.
The move seemed like a naked push to cut shipping costs and encourage shoppers to sign up for Amazon's Prime loyalty program, a service that costs $99 a year and provides a number of benefits including video streaming, cloud storage, and access to the Kindle Lending Library in addition to free two-day shipping on qualifying items.
Amazon has never provided exact figures on the number of Prime members it has, but the research firm Consumer Intelligence Research Partners has estimated the total to be 54 million in the U.S., or close to half of total households. CIRP has also said that shoppers double their spending on Amazon after joining Prime.
Why Amazon did it
It's unclear whether the move will drive increased membership to Prime as a number of commenters dismissed the company for making the move, saying it wouldn't convince them to join Prime or would cause them to search elsewhere.
But before Amazon made the decision, there were signs that its shipping was getting slower for non-Prime members. The research firm StellaService said that Amazon had fallen out of the top 10 for fulfillment for the first time last year due to longer shipping times for non-Prime members amid complaints about slower service. As more shoppers convert to Prime, Amazon has a lesser need to cater to the holdouts. Beyond Prime, however, the company must also control its shipping costs. Amazon's net shipping costs grew by 19% last year to more than $5 billion, making shipping a significant weight on profits.
If lifting the free shipping minimum to $50 doesn't sway people to join Prime, it will at least help the company save on shipping costs. It is also experimenting with its own delivery service in order to take more control over shipping and presumably save on costs.
Raising the shipping minimum could also create an opportunity for its rivals, however.
The shipping wars
Free shipping has become a major selling point in e-commerce. It's why Amazon Prime is popular, after all, and Amazon's rivals have taken notice.
Target Corporation (NYSE:TGT) made a bold statement last year by lowering its free shipping minimum from $50 to $25, making it the lowest of any major retailer. The move was prompted by the popularity of free shipping over the holidays, and helped lift Target's online sales by 34% in the fourth quarter. Wal-Mart (NYSE:WMT), on the other hand, has resisted calls to lower its free shipping threshold, keeping it at $50. Instead, Wal-Mart is introducing ShippingPass, a competitor to Prime that gives customer free three-day shipping for $50 a year. Over the holidays, it also focused on getting shoppers into its stores rather than promoting digital sales.
Wal-Mart and Target are far from Amazon's only competition, however. One notable challenge the e-commerce giant faces is from start-up Jet.com. Jet.com Founder Marc Lore already tested Amazon with Diapers.com parent Quidsi several years ago, a company that Amazon dealt with by eventually buying it out for $550 million. With Jet.com, he aims to build a business that can offer the lowest price online and still turn a profit, and Jet's been shown to beat Amazon on a number of household items. Jet offers free shipping on orders over $35, and free two-day shipping on everyday essentials above that minimum.
Based on Amazon's recent quarterly results, though, its rivals have not dented its rapid sales growth. As the company continues to invest in Prime with more original programming on Prime Instant Video and perks like same-day delivery with Prime Now, it is more closely resembling Costco Wholesale (NASDAQ:COST), the membership-based warehouse retailer that's been one of the best-performing stocks in the sector over the last decade. Costco has bucked the weakness in brick-and-mortar retail by retaining close to 90% of its members. Most of its profits also come from membership fees as it sells its goods at near cost.
It shouldn't be surprising, then, that Amazon would seek to replicate such a model. According to estimates, Prime's retention rate is in the 90% range as well, indicating the service is highly popular. It makes sense that Amazon would try to push more shoppers into Prime this way. As it spends to make Prime more appealing with more original programming on Prime Instant Video and services like Prime Now, it needs to grow membership to offset those costs.
In the end, the decision to make free shipping harder may not appeal to the bottom feeders on Amazon's website, but by cutting shipping costs and nudging shoppers over to Prime, it should help boost the company's bottom line. And that's what counts for investors.