There is, as the saying goes, no such thing as a free lunch—or a free delivery. Consumers might enjoy, and even demand, shipping policies that do not charge them, but at some point, someone in the supply chain must pay the costs required to pack, label, and ship merchandise. According to some observers, that supply chain member is going to be brick-and-mortar retailers, and the result is not going to be pretty.
As this prediction goes, Amazon has established the expectation of free shipping, and it provides this service relatively well. Although Amazon still loses millions on its shipping each year, it is more efficient than many of its competitors. Moreover, even with these losses, it continues to grow and show stock gains.
To compete, conventional retailers have had to offer free shipping too. But they are not as good at it as Amazon, such that they are losing more due to their efforts. Thus a cycle begins, in which brick-and-mortar retailers turn increasingly to their e-commerce channels, in an attempt to cut costs. This shift in focus expands the delivery demands even further, and so their losses grow instead of diminishing.
Also affected by the situation are delivery services such as UPS and FedEx, which have shown some negative earnings due to their inability or unwillingness to charge sellers what it costs to ship. Perhaps worried that increasing their rates would lose them the business of big clients like Amazon, shipping prices do not reflect the true costs either.
Someday though, the situation will have to change. The costs will come due. If customers have to pay them, they are likely to express resentment and take their business elsewhere. If logistics providers have to pay them, their ability to earn profits might disappear. And if retailers have to pay them, as seems most likely, it could mean the end of many of them that are not named Amazon.
Discussion Questions:
- How do Amazon’s and other retailers’ free shipping policies affect their bottom lines—and the bottom lines of other retailers?
- Is free shipping a sustainable strategy, even for Amazon?
Source: Dan Gilmore, Retail Wire, February 27, 2017