According to a report from Reuters, and several other publications, retailers have finally come to the realization that free shipping isn’t free.
Amazon popularized the concept of free shipping as a unique selling proposition, leveraging their profitable Prime subscriptions and other revenue streams to absorb the high cost of shipping. This strategy created a competitive advantage for Amazon, causing other retailers to adopt the same approach, despite not having the same resources. However, with margins in retail contracting and shipping rates for major carriers like United Parcel Service Inc, FedEx Corp., and the U.S. Postal Service reaching unprecedented levels, the e-commerce industry, where almost 75 percent of companies offer free shipping, is starting to reconsider the financial impact of conditioning customers to expect free shipping.
Retailers, including Amazon, are no longer willing to operate at a loss for a service that customers have become habituated to expect. This has led to a push for reducing shipping costs by up to 25 percent, according to Mingshu Bates, chief analytics officer at AFS Logistics consulting firm. As a dominant force in the e-commerce industry, Amazon’s recent actions offer valuable insights into the direction of the industry, including a shift away from unconditional free and fast shipping.
In the United States, Amazon has rolled out “free” same-day shipping for Prime members in several major cities. However, this service is not entirely free, as it requires a minimum order value of $25, and incurs a $2.99 fee for orders below that amount. Additionally, Amazon recently increased the minimum spending threshold for free Prime shipping on its struggling online grocery business from $35 to $150, with added charges ranging from $3.95 to $9.95 for orders that fall below the new limit. These changes come on the heels of a $20 increase in the annual Prime subscription fee, which now stands at $139.
The pressure to provide free shipping is causing some retailers to make changes, which in most cases implies jacking up product prices to cover shipping costs. Some Prime customers, meanwhile, have expressed dissatisfaction with late deliveries and question the value of their subscriptions. Other retailers are also changing their policies, with some dropping free shipping altogether or raising product prices to offset the cost of offering it. However, industry experts note that shoppers have come to expect free shipping, making it difficult for retailers to change their policies without alienating customers.
You can read the original article here.
Addicted To Free Shipping
Retailers like Amazon implemented free shipping as a way to influence consumer behavior. Consumers were reluctant to purchase products online because they had to pay shipping costs. Many consumers asked themselves this question: Why pay to have a product shipped when I can easily buy what I want at a retail store and pay no shipping costs? Amazon had to influence consumers to think differently, and free shipping was the catalyst for doing so.
Amazon’s fulfillment and shipping costs have increased from $10B in 2011, to $162B in 2022. Amazon’s shipping and fulfillment costs represent nearly 35% of their revenue. Amazon’s logistics costs have increased faster than sales resulting in Amazon losing billions of dollars on a quarterly basis. Why is Amazon raising fees associated with shipping and fulfillment? They have to as they attempt to cover their logistics costs.
The challenge that Amazon and other retailers who offer free shipping are encountering is resistance from consumers. Like a drug, free shipping is addictive. However, customers only became addicted to free shipping because retailers willingly pushed their drug to their customers. It worked. Like all addicts, consumers are resisting going off of the drug of free shipping.
Amazon knows that they have a big problem on their hands. The company is investing heavily in automation to reduce their fulfillment and shipping labor needs and costs. Amazon has terminated over 27,000 employees; I believe additional cuts will take place later in 2023 and into 2024. Amazon doubled in size during the COVID pandemic – from 800,000 employees to 1.6 million. I believe Amazon made a catastrophic error by doubling the size of the company.
I also believe Amazon’s executive team woefully misunderstood what was happening during COVID in terms of their growth. What Amazon perceived as being “the new normal in growth,” I knew for a fact that e-commerce sales would fall once consumers were able to go back into stores. I was right.
In my opinion, Amazon has no choice but to reduce their workforce to between 800K to 1M. This means Amazon will have to lay off more corporate resources and reduce their warehouse, fulfillment, and shipping labor by several hundred thousand. An easy way for Amazon to do this is let the natural attrition that takes place in warehouses and not rehire for those positions.
What Are Amazon’s Options?
Retailers that own physical stores are incentivizing their customers to buy their products online but pick them up from a local store. Target fulfills online items from their stores and ships the items to Mixing Centers whereby packages are cross docked and delivered with additional packages using Shipt and other last mile delivery carriers.
Amazon is at a disadvantage because they have so few stores; only around 530.
What are Amazon’s options? At the moment, they don’t have many to choose from.
In 2013, I began researching the topic of free shipping. I anticipated that between 2022 – 2025, Amazon’s shipping costs would become so high that Amazon wouldn’t be able to continue subsidizing their retail business using the revenue generated from AWS. I designed several strategies that Amazon could utilize:
- Acquire Target, and use the stores for fulfillment, and open Whole Foods Markets inside Target’s stores.
- Acquire FedEx.
- Go Nuclear and acquire the U.S. Postal Service.
- Become a 3PL and sell their logistics services to other companies. The more freight Amazon moves for other companies, the cheaper it is to ship their own packages. Amazon launched 3PL services in 2022.
Although Amazon launched their 3PL service in 2022, I remain convinced that Amazon should have also acquired the U.S. Postal Service. You can read the articles I wrote on the topic here and here. Several senior executives from Amazon and the USPS reached out to me after each of my articles was published, to voice their support for the idea.
Note: I anticipate the creation of a service whereby UPS, FedEx, and retailers ship all of their packages to a consolidator who will make deliveries of all packages on the same vehicle. In other words, packages from Amazon, Target, Walmart, FedEx, UPS, etc., going to the same customers, neighborhoods, and businesses will be placed on the same truck for delivery. This will eliminate the issue of having multiple package deliveries in the same neighborhoods and to the same companies by Amazon, FedEx, UPS, and the U.S. Postal Service. There is no greater opportunity in logistics for reducing costs, traffic congestion, and environmental impact, than what I refer to as ‘Consolidated Package Delivery’ or CPD.
Amazon is in a tough spot. They addicted their customers to free shipping and now they want to convince them to pay more for the same drug. Many other retailers also addicted their customers to free shipping.
Consumers are about to learn that free shipping isn’t so free after all.
