Free-Shipping is Becoming Less Free
A worrisome 41% of merchants indicated shipping costs were their biggest challenge in 2022. According to Shippo, an e-commerce shipping services provider, surveyed retailers were spending north of 10% per order’s value on shipping alone. Couple this with elevated fuel and distribution center costs many retailers are making some sobering changes to their delivery options.
In 2019 the average minimum-order threshold to qualify for free shipping was a purchase of $52. As of today, the figure is $64. The free shipping heydays of the mid-2010s brought about a copycat syndrome with one retailer after the next slashing delivery costs out of fear of being left out of tremendous e-commerce demand. US e-commerce growth boomed from $55.3 billion in the first quarter of 2012 to $272.6 billion over the first quarter of 2023. While the sales increase is notable, free deliveries eventually cut into profits and everyone from Amazon to Macy’s to Abercrombie & Fitch are now tightening their belts.
In 2005 Amazon launched its Prime membership. A key perk in the membership package was unlimited two-day shipping for a reasonable annual fee. Walmart soon stepped up with a similar offer and according to the same Shippo survey, roughly 62% of shoppers indicated they wouldn’t patronize a retailer without a free-shipping option. This figure has shot up 22% since 2020. According to Deutsche Bank Research, the costs associated with the delivery of goods to a store (via truck alone) represent 2% to 3% of a typical sale. Home delivery is popular but the cost is rocketing upward – the previously mentioned 10% of the item’s value.
Consolidating the logistics expense into the final sale price has become more and more challenging in a high inflationary environment. Yet, simply raising prices could turn customers away. Fed Ex and UPS both raised their average prices in 2022 by close to 6%. The previous threshold had been 4.9% in a given year, and a new record was hit this year – a 6.9% hike.
Shipping charges across all major retailers have shifted. Saks Fifth Avenue had no minimum order requirement for free shipping – they have now implemented a $100 minimum. Neiman Marcus had maintained a similar structure, and recently put in place a $50 minimum. Abercrombie & Fitch requires customers to spend $99 (up from $75) to qualify for free shipping, while others are routing clients into paid rewards programs with the inducement of free shipping.