Free delivery does not happen

When you buy something online, you will rather quickly face deception.

Spend $ 15- $ 20, and your shipping will be free. Take advantage of competing holiday offers that promise to deliver any item for free, without any minimum purchase amount. Sign up for Amazon Prime, which costs $ 99 a year in the US, and get free shipping for millions of items.
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The truth, however, is that free shipping, like everything else, is not really free.

The consequences of this lie we, users who are accustomed to expect free delivery, do not often feel on ourselves. The hardest hit is on e-commerce, for small companies that are faced with the fact that the cost of "free" delivery for them turns out to be very heavy.

In other online stores, shipping costs are included in the prices of items or are covered by investors. Jerry Storch, CEO of the Hudson's Bay Company, which has real stores, including the Canadian The Bay, Lord & Taylor, and Saks Fifth Avenue, says that shipping to the door costs them much more than trading in regular stores. For sellers, shipping becomes the main expense item.

“The economy is understandable,” Storch explained at the Shoptalk e-commerce conference in Las Vegas this spring. - The cost of the supply chain for home delivery is three times the in-store sales model. And how then can online stores put a lower price? Maybe because of this, many of us find it so hard to emulate the Amazon model and make money from it. Because it is very expensive, and because Amazon is struggling to make sales. This is a very expensive model, and it is not cheaper than the model of work of ordinary stores. ”

The cost of “free” delivery is particularly burdensome for small shops, but it also affects Amazon or Target, the two giants responsible for popularizing the trend. Usually, Amazon returns about 55% of the delivery costs, and this figure has been scrutinized after its revenue in the third quarter sharply diverged from expectations . Due to the expansion of Prime service and other offers, in the third quarter the delivery costs - the difference between the delivery of courier services and the money received from users to pay for deliveries and membership in Prime - amounted to $ 1.75 billion, which is historically the largest figure apart from holiday quarters.

In the face of rising shipping costs, Amazon creates its own delivery service and unobtrusively pushes Prime users to buy in services like Prime Pantry , with payment of delivery. In February, she raised the minimum order amount for free delivery in the US from $ 35 to $ 49, and repeated this jump in Canada last month. Earlier, Target notified users with credit cards that for some positions they would have to pay additional order processing .

The average consumer is not interested in the supply chain when they buy a shower curtain or Bluetooth speakers. Even if shipping costs are included in product prices or memberships, users prefer to shop at no extra cost. According to a survey of 2016 conducted by Walker Sands, free shipping is the main argument in favor of frequent purchases . 88% of users said that free shipping attracts them more than the ease of return or delivery on the day of order.

Therefore, many online stores offer “ free delivery day ” promotions on December 16 to raise holiday sales, and therefore Best Buy and Target announced that they would offer free shipping for many online purchases before Christmas.

But someone still has to pay the shipping cost. If investors or users do not, companies will lose money on each delivery. If you expect a new round of investment, it can be experienced. But otherwise, this situation will throw the company out of the market, especially the small one.

Free deliveries are guilty in the most striking cases of bankruptcy of companies during the dotcom boom in the 90s. Pets.com, whose advertising is still recorded on the under the cortex of some readers of a certain age, offered free delivery of dog food to buyers, which had a rather high real cost of transportation. In the book " Thinking Inside The Box ", author Kirk Cheyfits [Kirk Cheyfitz] explained how a small margin caused by free shipping sank Pets.com.



In the era of Amazon Dash buttons, purchases from smartphones and new niches, such as custom-made mattresses or subscription boxes, subscription boxes are the delivery of goods packed in a beautiful box designed to increase the value of goods in the buyer's eyes - approx. trans.], small and medium-sized online companies carefully think about how their business works - or does not work - free shipping.

Logistics, Logistics, Logistics

Kristian von Rickenbach is the co-founder of Helix Sleep , an online store selling custom-made mattresses and last year’s investment of $ 7.35 million. Helix works in a very competitive industry dominated by Casper and many small startups they fight for the incomes of all clients, from college students with a limited budget to those who are obsessed with the convenience of suburban families.

Helix offers customers free shipping and free returns. The company, like any competitor trying to sell mattresses online, has no choice. Casper offers free shipping, just like its competitors Tuft and Needle and Leesa .

“The online purchase of mattresses is different from the usual pattern of behavior,” Rickenbach told me. - They need to get the product as quickly as possible and be able to return. Free shipping is more convenient for people buying online. ”

The company repeats after many others - negotiates the "wholesale" cost of delivery with companies such as UPS. Vaughn Rickenbach said that the cost for his company is determined by the number of deliveries, package size and geography of addresses. The company is also trying to efficiently pack goods. “We spent quite a lot of time developing the optimal packaging so that it would withstand delivery and at the same time satisfy the size limits to minimize the cost of delivery,” he says.

But Rickenbach believes that customers do not need to bear the cost of delivery in a separate line. “The free delivery model, even if the actual consumer does not pay for the delivery, is usually better suited to the consumer, because the company can work more efficiently and directly with the rules of delivery.” In the competitive mattress market, his goal was not to scare off buyers with additional spending. Free shipping - “more transparent pricing for mattress buyers who are upset about hidden fees in mattress retail stores.”

Importance of niche

Other online stores by all means avoid free delivery. As Laura Stevens recently wrote in an article in the Wall Street Journal, small sellers do not benefit from economies of scale like big companies like Amazon or Walmart.

Jerry Hum, CEO of Touch of Modern , an online men's fashion store, says he doesn't have free delivery, but he has something to surprise the customer with: a sense of community. The store is positioned as a "site with membership", and uses the practice of sending frequent emails to attract to the home page.

Ham honestly told me on the phone: for companies such as his own (raising $ 14 million investment in the second round in 2014), it is most effective to compete with big sellers through specialization - in his case, this is a niche for men's fashion. Touch of Modern is one of many medium-sized stores. They have a large customer base and a fairly large number of orders. If you extrapolate its revenue for February 2016 for the whole year, you will receive an annual revenue of $ 100 million. But compared with the Walmarts and Amazons, they are small.

Like other vendors, Touch of Modern works closely with shipping managers to negotiate wholesale discounts. The prices they receive open up one of the most annoying features of e-commerce and economies of scale delivery: the more customers are attracted by the seller (often through “free delivery”), the lower these prices become.

For Touch of Modern, shipping and logistics (and how much customers pay for shipping) are tied to margin and profitability.

“We treat the cost of delivery as the cost of goods,” explains Ham. “What we do is cutting the margin.” But from the client’s point of view, whether they pay for delivery separately, or if we include it in the price of the goods, this makes little difference. Clients do not do mathematics, but simply look at the price of the goods. ”

Change shipping costs by increasing the number of purchases

Another seller, JackThreads , took up the expensive business: free shipping and the TryOuts return program.

JackThreads sends products to customers for free, and if they do not return the goods, then in seven days their cost will be deducted from them. Even prepaid return packages are involved in the process, so that customers do not have to run around in search of a cardboard box for mail.

The company is new to free shipping, which they began offering simultaneously with TryOuts. According to Mark Walker, general director, the company is thus trying to improve the delivery experience, which included seven-day guaranteed delivery, which appeared earlier this year. Walker says that changes were necessary for the growth of the company.

“The decisions in terms of delivery and launch of TryOuts were affected by the fact that if you deal with discounts or negotiate with stores, customers expect a 50% or 75% discount,” Walker says. - And everyone is waiting for free shipping for purchases from $ 100. If you shop frequently, you are entitled to free shipping. In my opinion, customers get annoyed when they try to order something and see that they are paying for delivery. ”

In the case of JackThreads, the company's internal research has shown that the economic blow made by free shipping and returns will be justified by additional business involvement. “You absorb the cost of delivery through repeated purchases, but this conversation doesn’t fit well on an Excel plate,” adds Walker. “It’s not easy to turn the number of repetitions and drives of other clients into numbers.”

From a conversation with Walker, I understood one key point in the “free shipping” riddle: if companies set up free shipping so that many things are sent or returned in the same package, this brings economic benefits to the seller.

“The benefit is that large suppliers determine your position in the price structure based on your income,” says Walker. - The more you send parcels, the cheaper it is for you to send one parcel. We work with UPS and ship much more packages, which have also become heavier. Therefore, we spend more money, but we get a better cost of shipping due to the fact that they have become heavier. ”

JackThreads is helped by what is needed by any company offering free shipping: amounts of capital. The company split a $ 54 million round of financing with Thrillist , before they split into two companies. She is also partnered with T-Mobile and launched a shoe line this year.

Will free shipping survive?

Not everyone welcomes or refuses free shipping. Bob Schwartz, an e-commerce veteran, best known as the former president of Magento and founder of Nordstrom.com in the early days of online shopping. Schwartz is more pessimistic: the trend of free delivery cannot support himself, and he survives only at the expense of feeding giant companies like Amazon, which do not report profits to investors.

Schwartz said he considered free shipping part of the historical story in e-commerce. At the beginning of online stores, from the late 90s to the early 2000s, venture capitalists financed free shipping. "We spent the investors' money trying to lure customers to the market, which was not ready for this, and we taught the customers that the delivery should be free."

This continued until the beginning of the explosive growth of online stores over the past decade, the leader of which with a margin became Amazon. “Amazon is dragging everyone into their track to play free shipping,” Schwartz explained in a telephone conversation. - For me, Amazon is the anchor, forcing the industry to free delivery, because it does not expect profits. And it delays the other sellers in the same rut, despite the fact that they are required to profitability - even if they can not be measured by the same standard. ”

For Schwartz, our perception of free shipping and the future of e-commerce is closely related to giants like Amazon.

“I think the following is happening: instead of financing free delivery as an investment strategy, Wall Street believes that Amazon is a technology company that does not have to be profitable. They finance the ability of Amazon to create a retail crisis in which they eliminate all other merchants. Other sellers are responsible for every quarter, but not Amazon. ”

For Amazon, investing in shipping and logistics — including shipping costs for Prime members and for the rest — means massive spending. Only in October, Amazon opened five new order processing centers, as told by CFO Brian Olavsky [Brian Olavsky] at the third-quarter meeting . According to him, by the end of 2016, Amazon will open 26 new processing centers, mainly in North America. For comparison, in 2015, she opened 14. According to Piper Jeffrey's analysis, approximately 44% of the US population lives 20 miles from the nearest Amazon center, while in 2014 this figure was only 25%. Shipping investments are worth a lot of money, even for Amazon.

Last year, the packaging company, Shorr, published a report called " Amazon Effect ", a significant increase in the number of deliveries associated with Amazon and its customers. For example, Amazon allows customers to order small additional goods at no extra shipping cost in addition to more expensive ones. And although these items can be small, they greatly increase the volume of deliveries, occupy a physical place, and gasoline and man-hours are spent on their delivery from point A to point B.

But Amazon pays a huge amount of money to maintain this effect. Last year, the company spent $ 11.5 billion on deliveries, and earned $ 6.5 billion, according to its report . According to the latest data, this cost continues to grow.

And although Amazon announces an incredible 45% increase in revenue from delivery, such numbers would be a problem for any other company. But the huge size of the company means economies of scale, which most of its competitors do not have, excluding Walmart and Target. Amazon makes profit from Amazon Web Services, as well as a large part of global transactions. And the possession of a huge amount of data about the preferences of customers means that the company knows better than others how to approach such hackers as free shipping.

Large companies have another advantage in delivery: close relationships with USPS and other suppliers. Where the average seller will pay $ 7-8 for delivery, Amazon will pay $ 4-5, according to Barclays estimates.

And with the rise in shipping costs, Amazon is in search of new advantages, begins to build its delivery infrastructure, with a fleet of cargo planes, trucks, and someday, drones .

But perhaps you shouldn't blame Amazon, Walmart, or Target for involving sellers in the free delivery race. Thousands of vendors offer some form of this service. As a result, customers are accustomed to free shipping, regardless of how it is included in the cost, and this affects those e-commerce companies that can achieve success in the future. Free shipping is partly based on the expectations of the companies themselves, such as low fuel prices and a growing desire to shop online. But if there is a sharp increase in the cost of fuel or another recession, these companies may find themselves in a very uncomfortable position.

Future free shipping

Schwartz, like Storch, believes that alternative models will appear in business, for example, self-pickup, or the use of potomats. Schwartz says he likes the idea of ​​paying for a return shipping.

In September, Touch of Modern conducted A / B testing of free shipping, offering it to customers who have spent a certain amount of money. “We wanted to find out what happens if we offer free delivery from a certain amount of the order and find the point where our margin will be the same,” says Ham. “However, we quickly discovered that free shipping was not working. If we offer free shipping, it’s not possible to make the margin the same. More honestly to offer a real price and honestly report the cost of delivery. ”

Honestly, or not, the offer exceeds demand, and customers are looking for cheaper shipping. Big sellers can write off the cost of free shipping as one of the costs. Small companies get into debt to compete with large ones. Others may simply raise prices and then offer “free shipping”.

As the experience of Touch of Modern shows, online merchants in 2016 may well not take money for shipping. But companies that choose not to provide free shipping face the challenge of convincing customers that the shipping charge will be cheaper for them.