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Fung Global: Free Shipping Isn’t Free and it Isn’t Sustainable

Consumers now think free shipping comes with the e-commerce territory, but the offering is unsustainable for brands with any hopes of long-term profitability.

Ever since Amazon started offering shipping on the house, consumers don’t even want to fork over dollars for small online orders, a new report out by Fung Global Retail Technology said.

Free shipping offers have evolved in recent years as retailers battle to accommodate consumers without entirely sacrificing the bottom line—and all in the face of increasing competition.

“While free shipping is highly desirable from a consumer standpoint, retailers are usually the ones absorbing high logistics costs, while struggling to maintain competitively low product costs,” the Fung Global report noted.

A study out this year by communications firm Walker Sands found that free shipping is a major factor for consumers when shopping online and nine of 10 said they would up their spend if shipping didn’t cost a thing.

The problem there, however, is that for the overwhelming majority of retailers, offering that favored free shipping isn’t sustainable.

Only 19 percent of the top 250 retailers can profitably fulfill omnichannel demands, according to the same Walker Sands study. Last year, retailers spent 29 percent of their capital expenditures on fulfillment, including transportation, logistics, delivery options, inventory visibility and managing returns.

To survive, retailers are looking at more clever ways to get consumers to foot the bill for at least some of these shipping costs. That’s why Amazon introduced its $99 a year Prime service, which gets shoppers free two-day shipping on all products eligible for Prime.

“However, the company’s shipping costs as a percentage of revenues have continued to grow as the business has expanded, posing a costly challenge for Amazon,” Fung Global explained.

In 2006, Amazon reported shipping costs totaled $317 million, or 3 percent of total revenue. In the first 10 months of 2016, that number jumped to $4.6 billion, 5 percent of total revenue.

For other e-commerce companies, like Jet.com—which Walmart acquired this year—subscription-based free shipping services similar to Prime, didn’t last. Instead the company only offered free shipping on orders over $35 and tried to lower costs by matching shoppers with products and inventory housed closest to them.

“The cost of shipping was likely weighing heavily on the e-commerce pure play,” Fung Global said. “The acquisition by Walmart provided Jet with the distribution centers and logistics tools and infrastructure it needed, along with the capital to offset the high costs of shipping, for now.”

But even though Amazon and Jet are doing their best to accommodate the cost of free shipping, smaller e-tailers are less able to absorb the price of getting those goods to consumers for nothing.

“Smaller retailers must therefore decide whether it is better to be up front with customers about the cost of shipping or to increase ticket prices on items in order to cover the cost of ‘free’ shipping,” the report noted.

Some companies will have to opt into alternative ways to combat the costs of shipping, like buy-online, pick up in-store or purchasing and collecting items at lockers or central locations.

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

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