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Free Shipping Poses A Costly Challenge to Retailers

As the holiday shopping season heats up retailers are pulling out all the stops to woo potential consumers, but perks like free shipping come at a cost.

A new report by Fung Global Retail Tech highlights what a headache shipping can be for retailers. As consumers now increasingly expect free shipping, retailers are usually the ones absorbing the high logistics costs associated with shipping, even for low-cost items and small basket purchases.

This can be a double-edged sword for retailers. If they offer free shipping, they have to absorb the cost, but if they don’t, then shoppers are increasingly likely to hit the road for cheaper pastures at rival websites. In a 2016 Walker Sands survey, nine out of 10 consumers polled said that they would shop online more if shipping were free, versus eight out of 10 in the previous year’s poll.

Even for the biggest of e-commerce giants, free shipping is a ballooning problem. At Amazon, which arguably kick-started the free shipping craze with its Prime membership program, shipping costs in the last decade have exploded.

In 2006, Amazon’s shipping costs totaled $317 million, or 3 percent of the company’s total revenue. Between Jan. and Oct. 2016, Amazon’s shipping costs totaled $4.6 billion, or 5 percent of total revenue.

In 2015, retailers spent 29 percent of their capital expenditures on fulfillment issues, including transportation, logistics, delivery options, order management, inventory viability and returns management.

As retailers struggle to keep pace with Amazon, free shipping becomes a vicious cycle that many companies can’t avoid, and this is true even among some of the biggest names in retail. According to the report, only 19 percent of the top 200 retailers fulfill omni-channel demand profitably.

Related Story, recently acquired by Walmart to better compete with Amazon, initially offered a membership program that was similar to Amazon Prime, charging $50 a year for free two-day shipping. But the program did not last long, and the company settled with free shipping on all orders over $35.

But there are ways for online retailers to reduce the high costs associated with shipping. This includes the ‘click-and-collect’ method, where customers pick up their packages at a central location, such as Amazon’s Locker service.

Amazon has also made moves to begin to gain control of its own supply chain, leasing 40 of its own air freighters (an additional nine planes are in the works) and opening distribution centers near its customers.

“Shipping costs can be absorbed by retailers for a short period of time, depending on their liquidity, but the free-shipping model is unsustainable long term for profitable retailers that have a responsibility to shareholders,” said researchers at Fung Global in the report.