By Caroline Jansen, Retail Dive / For big brick-and-mortar retailers, shipping discounts are an easier cost to rationalize, but digitally focused companies can have a tougher time matching promotions.
It seems impossible for consumers to shop online this holiday season without being inundated with free or discounted shipping offers. But in the middle of the enticing offers, it’s easy to forget exactly what it is: just another holiday promotion.
“Promotions are really the biggest influence on holiday shopping,” said Bobby Stephens, retail and consumer products leader for Deloitte Digital, in an interview with Retail Dive. Deloitte revealed in a 2018 holiday survey that 82% of shoppers think free shipping is one of the most enticing promotional offers, coming in second only to price discounts.
Additionally, 34% of respondents in a uShip survey cited expensive shipping costs as a leading stressor during the holidays. A promotion on free or discounted shipping would therefore be attractive to consumers.
Among the retailers offering the biggest shipping promotions are Amazon, which extended free shipping to non-Prime members; Target, which announced free two-day shipping for the season, dropping the standard qualifying $35 minimum; Best Buy, which offers “free shipping on everything all season long;” and Walmart, which is offering free two-day shipping on purchases of $35 or more.
However, Moody’s Lead Retail Analyst Charlie O’Shea points to one glaring difference between the mentioned retailers. “Target, Walmart and Best Buy have shipping points and pickup points — they’re called stores,” he told Retail Dive in an interview.
The cost of free shipping
For big retailers who rely heavily on their brick-and-mortar presence over online, like Target and Best Buy, offering shipping discounts is an easier pill to swallow. But when the majority of a retailer’s revenue comes from online, it becomes more difficult to beat, let alone match, the promotions.
“Target’s online sales are about $4 billion on a base of 70. You’re talking about a small percentage of sales that, in a perfect world, would be affected by free shipping,” O’Shea said. He added that if you take AWS out of the equation, “Amazon’s online sales are 98% of revenues, or something crazy like that.”
Comparatively, Target has an easier time offering free two-day shipping, whereas if Amazon offered that same discount to non-Prime members, it would be extremely expensive, according to O’Shea. “I don’t even know if Amazon shareholders would be able to stomach that.”
He expects Amazon “could get to $15 billion in shipping costs for 2018. Some of that will be offset with Prime membership fees, some of it will be offset with profit, but there’s still a $15 billion hole there.” Although promotions like this will ultimately cut into margins, he added, what matters is “how much and does the percentage get outweighed by extra sales volumes such that your dollars remain in pretty good shape.”
Although it appeared retailers offered shipping promotions in domino fashion (O’Shea last month even dubbed it a shipping “arms race”) these tactics have been planned for months and they’re built into the company’s marketing plan. According to data from public relations firm Walker Sands, over 80% of online shoppers last year said free shipping was a primary motivator in shopping online more frequently, which may have further influenced the companies’ decisions.
Retailers “think of it as an investment this time of year,” Stephens said. “The holidays are a great time to not only have great sales numbers, but also to acquire new customers, that then, over the course of a year or two … becomes profitable over time.”
So what’s the benefit for retailers, especially those who tout a large brick-and-mortar presence, to push a large online-driven marketing initiative? Free shipping offers helped drive more traffic online this year, which reached a record high of $7.9 billion spent on Cyber Monday compared to last year’s $6.6 billion, according to data from Adobe Analytics. And with Thanksgiving falling so early on the calendar this year, thereby extending the holiday season, Stephens says it’s no time for retailers to sleep on their online presence.
“Black Friday has started to become just as much of an online event as it is a store event,” Stephens said. “Part of it is wanting to extend that out into the week when it is harder to get people into the store for an entire week. You can do that better via the online presence.”
However, as with any promotion, it must eventually come to an end.
“Retailers roll out their best promotions during the holiday, and then after the holiday ends, they’re not there anymore,” O’Shea said. “I don’t expect to see products 50% off in February, end-of-season sales.”