Friday, October 24, 2014

RETAILERS AND THE NEW SUPPLY CHAIN

Many retailers do not understand the new supply chain--as this article shows.


Free Shipping Is Going to Cost You More

Many Retailers Raise the Minimum Purchase Needed to Qualify


If you think free shipping is actually free, think again. WSJ's Laura Stevens explains the inner workings of how free shipping really works. Photo: Getty
Free shipping is getting more expensive.
Retailers including Amazon.com Inc., Best Buy Co. and Gap Inc. are boosting the amount online shoppers must spend to qualify for free shipping, hoping to cover the growing cost of providing the perk.
On average, a customer now has to spend $82 on merchandise to qualify for free shipping, based on July data from 113 major retailers—up from $76 the same month a year earlier, according to StellaService Inc., which collects data about online shopping.
Amazon raised its free-shipping minimum to $35 from $25 late last year. And in March, the e-commerce giant increased the fee for its Prime membership, which allows for unlimited free two-day shipping, to $99 from its original price of $79.
ENLARGE
In May, Best Buy said it successfully increased its shipping minimum to $35 from $25 after realizing the free-shipping offer enticed customers to buy more to qualify.
“Free shipping is not free. Somebody is paying for it,” says Bala Ganesh, retail segment marketing director at United Parcel Service Inc.
Chains have been seeking to dial back the cost of a perk they had used aggressively to encourage shoppers to use their websites. It is a sign that e-commerce has matured from a budding growth area into a core business that has to stand on its own. Wal-Mart Stores Inc., for instance, disclosed for the first time last week that its online business posts an operating loss that it hopes to reverse later this decade.
Free shipping is not free. Somebody is paying for it
—Bala Ganesh, UPS
Last year Amazon spent about $6.64 billion on shipping, but brought in only about $3.1 billion in payments for shipping. An Amazon spokeswoman said the company ships more than twice as many items with Prime versus its free-shipping option.
Only a small group of retailers still offer no-minimum free shipping, with Amazon’s Zappos, Nordstrom Co. and L.L. Bean among them.
The changes also reflect greater efforts by carriers like UPS and FedEx Corp. to cover their own costs, including adjustments to start pricing packages by size as well as weight.
Free shipping was supposed to be a temporary enticement in the early days of e-commerce, but customers came to expect it, and even demand it. In a recent survey of 5,800 U.S. online shoppers, fully half said they have abandoned an order if they didn’t qualify for free shipping, according to comScore Inc., a data tracking firm that conducted the study for UPS.
Nearly 90% of retailers offer some sort of free shipping option, compared with about 65% two years ago, according to William Blair analyst Mark Miller.
One difference now, though, is that retailers are using the perk as leverage. Free shipping is so important that 93% of online shoppers said they have taken extra actions to qualify, like adding extra items to their shopping cart or opting for a slower method of delivery, according to the comScore survey.
 
Free shipping remains a go-to promotional gimmick. On Tuesday Target Corp. announced a holiday special, dropping shipping fees for all online orders from Oct. 22 through Dec. 20. Normally about two-thirds of all Target.com orders ship free, either because shoppers meet a $50 free-shipping threshold or pay using their Target-branded debit or credit cards.
Free shipping without a minimum purchase can quickly get expensive for a business, as it encourages customers to buy cheap convenience items online one at a time, retailers and shipping industry officials say. A pack of toilet paper, for instance, could cost more to ship than to purchase.
While most retailers dare not eliminate free shipping, many are having some success getting shoppers to at least pack more into each order. Shoppers spent an average $124 in September when they got the benefit, 35% more than those that paid separate shipping fees, according to according to Slice Intelligence, a subsidiary of e-commerce company Rakuten.
“I almost always add something to my basket if it means getting free shipping,” says Jim Hassee, 60 years old, of Greenwood, Ind. To qualify for free shipping, he recently bought more than $45 of coffee from Keurig.com even though he needed only a single box.