Industry News

Free Shipping Just Got More Expensive

Retailers & Consumers Spend More to Counter Cost Hikes

Excerpt from Supply Chain 247.com  |  By:  Larry Lewis  |  October 31, 2014

Free shipping is top of the list for consumers when making purchase decisions and it’s been shown that they will modify their spending patterns to ensure they get it, feeling that spending more is worthwhile to save a few dollars in shipping charges.

As the holiday season grows near, retailers are poised to enter all-out battle for market share, with heavy promotional activity starting in earnest after Halloween and intensifying right up until December 24.

And consumers are again expected to carry out an unprecedented percentage of purchases online or via a smartphone or tablet, meaning delivery charges are going to be front of mind when deciding who to purchase that ‘must-have’ item for, along with stock availability and of course price.

Free shipping is top of the list for consumers when making purchase decisions and it’s been shown that they will modify their spending patterns to ensure they get it, feeling that spending more is worthwhile to save a few dollars in shipping charges. Indeed, free shipping promotions (including offering free premium options such as next day where free shipping is standard) are increasingly as popular with customers as discounts, and when the two combine it is shopping nirvana for many consumers.

However, we all know there is no such thing as a free lunch and somebody always picks up the tab. Retailers are upping the minimum spend for free shipping by stealth, with major names such as Amazon, Best Buy and Gap recently increasing their qualifying spend according to analysis by the Wall Street Journal. However this isn’t in an attempt to increase margins during the most critical trading period of the year – that would be a bold move indeed – it’s in reaction to major changes to billing structures being introduced by the major carriers who have announced charging based on dimensional weight (package volume rather than just weight).

kewill_free_shipping_just_got_more_expensive_wide_image

Dimensional weight – DIM weight – charging has always applied to air freight where space is at a real premium, and to large items, but has previously not been used for smaller parcels and packages and so has generally not affected online retailers much. The new pricing policies announced by the largest carriers over the summer give them the freedom to charge by DIM weight or actual weight, whichever is greater, and are creating a headache for retailers who will not only need to consider the impact of higher shipping costs, but handle the complexity of calculating DIM weight at point of order, making them even more reliant on technology and integration.

With an e-commerce fulfillment market worth more than 260 Billion dollars in the U.S. alone, it is no wonder the carriers are overhauling their distribution networks in order to improve their ability to service their retail customers. To keep up with retailer and consumer demands, they are investing in and using:

  • Advanced technology to enhance their trace and track capabilities; technology which includes advanced shipment notifications and alerts to prevent delays or missed deliveries
  • Dimensional scanners and inline scales to be leaner and more price competitive
  • New labels with enhanced bar code capabilities designed to improve the routing and sorting capabilities within the hub and spoke centers, to increase the efficiency within their delivery network

The carriers are doing all of this to gain a competitive advantage in a booming but competitive market where they are all vying for the same business. According to the Wall Street Journal, “The major growth in retail sales, over the past ten years, has come from retail sales by internet. In actual fact, retail sales by internet have been an extremely disruptive force. The movement from brick and mortar store fronts to online retail has forced not only the carriers but retailers, distributor, and LSPs to rethink the way they do business.

In fact, the movement has given way to a whole new way at looking at your Brand, Distribution and Fulfillment models, all the way down to which carriers and mode are optimal for the new consumer market it must serve. “E-commerce in the U.S. still generated more than $11 billion in revenue for UPS in 2013, Mr. Vernon estimates, or about 21% of the company’s overall revenue of $55.44 billion.”

Unfortunately this comes at a cost to the supply chain – to carriers in terms of investment in technology and to retailers who suddenly need to cope with less favorable pricing structures. Ultimately, retailers have to pay more to have the same goods moved through their existing delivery networks, prompting a renewed interest from many in wider carrier networks that incorporate regional carriers who can offer more competitive pricing locally. This is no bad thing, in much of Europe and Asia the use of local carrier networks rather than the enterprise-wide use of a huge carrier is widespread as geography and language differences mean that it is often necessary to use more than one transportation partner.

However, retailers need to make sure their supply chain software can handle a multi-carrier shipping policy. A key consideration where multiple carriers are used is the use of business rules to ensure proper routing in line with policy, ensuring that the best shipping option is chosen, time in transit is considered when making the selection and that cost and performance can be accurately measured and reported by carrier.