Free Delivery At The Store
The introduction of Amazon Prime and its free two-day shipping perk in 2005 drew many consumers to online shopping. It forced many competitors of Amazon also to offer free shipping to keep pace with the e-commerce behemoth. However, expect free shipping offers to get a new look as retailers invest in omnichannel strategies and address higher supply chain costs.
Retailers’ omnichannel investments provide a connected ability for retailers to offer various last-mile delivery options, including buy online, pick up in-store (BOPIS), curbside pickup services, delivery to customers’ homes or other third-party locations.
The goal of these last-mile options is to give customers more control of their experience with the retailer and, for the retailer, an opportunity to drive traffic to stores and to mitigate last-mile costs.
Deliveries to customers’ homes and third-party locations have been on the rise thanks to the growth in e-commerce. Year-to-date through November, not seasonally adjusted, non-store retailers’ sales are up 14.4% year-over-year, according to the US Census Bureau.
Much of the rising number of deliveries to customers’ homes is likely due to free shipping.
According to a 2019 National Retail Federation (NRF) survey, 75% of consumers surveyed expect delivery to be free even on orders under $50, up from 68% a year ago.
Retailers have either subsidized all their free shipping, set spending minimums, or offered flat-rate shipping rates for customers. However, a good bit of these deliveries involve free shipping, which is not free, as we all know, and the costs associated with free shipping continue to climb.
For 2022, an annual average rate increase of 5.9% has been announced by several last-mile parcel carriers. The 2022 annual average rate increases follow eight consecutive years of annual average rate increases of 4.9% from most major last-mile parcel carriers.
In addition, included in these average rate increases are surcharges. Carriers such as FedEx and UPS have implemented residential surcharges, delivery area surcharges, additional handling, and more to mitigate their costs to deliver to customers’ homes.
With rising upstream supply chain costs that retailers are paying to import and store inventories to replenish stores and websites, retailers will need to rethink free shipping offers.
Free delivery shifts to the store
“Delivery expense was 4.3% of net sales, 170 basis points higher than the second quarter of 2019. We made good progress with our initiatives to improve delivery expense management, but we continue to have work to do,” Macy’s CFO Adrian V. Mitchell told analysts during the company’s Q2 earnings call on August 19.
Indeed, Macy’s has heavily promoted its BOPIS and curbside capabilities via promotional materials to reduce its delivery expense. For example, on Thanksgiving Day, while its stores were closed, curbside pickups were not.
“Consumers want free delivery, and they’re willing to meet retailers halfway to get it,” NRF Vice President for Research Development and Industry Analysis Mark Mathews said. “If we can get their purchase to the store, they’ll come pick it up if that’s what it takes to avoid a delivery charge.”
Meanwhile, speed can also motivate customers to pick up purchased items at stores. According to Nordstrom’s CEO, Erik Nordstrom, one-third of next-day Nordstrom.com orders were picked up at Nordstrom’s Rack stores. “Our average shipping time had a one-day reduction,” Nordstrom told analysts during the company’s Q3 earnings call on November 24.
But, perhaps a potential trend to monitor is one that was highlighted in a previous Substack article, Retailers take control of parts of their supply chain, in which retailer American Eagle Outfitters (AEO) acquiring last-mile startup AirTerra and e-fulfillment provider Quiet Logistics was mentioned. This acquisition links AEO’s middle mile with the last mile to reduce costs and speed up fulfillment, which speeds up the last mile.
“Our total delivery leverage, digital delivery leveraged as a percent of sales, delivery dollars are down, and our packages are getting to customers 10% to 15% faster,” AEO COO Michael Rempell told analysts during the company’s Q3 earnings call on November 23. “We’re acquiring the Quiet, and we acquired AirTerra because we believe that this combination of scale, speed, and cost advantages is needed in the market,” Rempell said.
While AEO is able to reduce its delivery costs thanks to its recent acquisitions, the company still holds a tight rein on its free standard shipping service, which is offered on orders that are $75 or more. Less than $75, there is a $7.00 flat rate. But, there is the option for free curbside pickup or $10 for same-day delivery or free same-day delivery for Shoprunner members (fyi, FedEx owns Shoprunner).
Last-mile delivery options will come at a price to customers. If customers want free delivery, they’ll likely have to visit a physical location to pick items up unless, perhaps, they pay a subscription fee for specific online platforms that offer free delivery as a perk. Otherwise, customers will eventually have to pay for home deliveries. We’re already seeing same-day delivery fees charged by retailers and expect those fees to eventually include standard home deliveries.
- Cathy
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I wear a number of hats these days. Besides running a logistics market research firm, catch my weekly articles on air cargo, freight forwarding, and the express markets, as well as a monthly podcast on Air Cargo World , I’m also trying to figure out how to measure returns for the Reverse Logistics Association, I assist companies with content and other needs and I’m trying to figure out how to update my website (which is down at the moment).