No Such Thing as Free Shipping

"$97 for FedEx 2 Day delivery?!" I repeated back to the shipping manager assisting me. It was 6PM PT on a Wednesday night and I was under the gun. Earlier in the day, I had been told the specific parcel I held in my possession needed to leapfrog the country - from Los Angeles to New York City and arrive by Friday. I expected the shipping cost to be high but not $97.

I took a deep breath, still recovering from the initial shock, I reluctantly pulled out a credit card and slide it across to the cashier. I may or may not have winced as the shipping manager charged the card.

As I left FedEx that night, I tried to make sense of it all. How is it that I could order nearly anything on Amazon Prime and get it next day for FREE (may I add) but standard shipping and delivery companies like FedEx and UPS still charged a premium?

Then it hit me, shipping costs have not fundamentally altered in the last decade but who is footing the bill has.

Let me explain - once upon a time ago (before Amazon had over 90 million Amazon Prime subscribers), if a consumer wished to purchase a product they had limited options - they could order it through a catalog, drive to a brick and mortar location to purchase it in store, or send it from Point A to Point B. In most cases, the end user had to pay the shipping cost of the item which varied in price.

Then, in the early 2000s, an alternative appeared - ecommerce. Ecommerce, or electronic transactions over the internet, allowed consumers to buy things while at home and for quite a while not pay sales tax (FYI - this changed in 2018 when the Supreme Court ruled that online merchants had to charge it). In 2005, Amazon Prime was born where consumers paid $79 per year for free two-day shipping.

The birth of Amazon Prime, I would argue, represents the shift of responsibilities for shipping and handling. That is - when businesses began picking up the tab for those services. Today, if you shop online (particularly at Amazon's rivals - Wal-Mart and Target), free shipping is a common perk given to consumers. (According to Retail Dive, in 2015, nearly 90% of all retails offered some type of free shipping or return option).

It's also something consumers (myself included) have come to expect. In a recent UPS survey, 43% of consumers consider delivery costs before purchasing online. Another study by NRF found that 68% of online shoppers expect free shipping when making a purchase of <$50. Another 47% indicated they would abort a purchase if free shipping was not thrown in.

Honestly, I'm surprised the numbers are not higher. From a personal perspective, I always look at projected shipping costs before purchasing. This surfaced recently when I was ordering new checks (long story) - priority shipping was $30 or higher to deliver in under a week. Instead of paying that outrageous shipping cost, I choose the cheapest shipping option and went to the bank to get a cashier check instead.

"Free shipping is not free. Somebody is paying for it" - Bala Ganesh

It's unclear if retailers knew what they were getting themselves into when they started offered free shipping. According to The Wall Street Journal in 2017, U.S. businesses spent $1.7 trillion on logistics (i.e. shipping and handling). That represented a 6.2% YoY increase. Amazon saw its shipping costs rise fifteen-fold over a nine year period - in 2018 alone, it paid over $27 billion in shipping costs.

So, what are retailers doing to combat the rise of shipping costs without significantly degrading the customer experience? Well, the answer depends on what side of the shipping equation you fall under.

For shipping companies like FedEx, it's been a work in progress strategy - to be flexible but find ways to keep costs down.

The company became more flexible in pick-up time frames. Previously, it had hard cut-off times for package pick-up. I can recall many a times when I arrived at a FedEx only to learn that my parcel had missed the shipping window and would not be picked up until the next evening which I hated.

In 2018, they rolled out "FedEx Extra Hours" which expanded the window when shippers could fulfill orders. This meant that an order could be placed in the evening hours (which is when a majority of ecommerce shopping occurs), be fulfilled and out the door by midnight. And my parcel could still be shipped - even at 6PM.

There have been downsides too. Examples include - package size and weight and relationship with ecommerce giants.

In regards to package size - with ecommerce, packages shipped dramatically changed. Instead of sending large and heavy boxes, smaller and lighter packages have become the norm. This is particularly the case as consumers shift to monthly service plans (a topic for another blog) or buy one off items (i.e. a roll of stamps).

Companies like FedEx responded by changing their pricing structure. In 2014, the company announced it would charge based upon the size instead of weight. This meant that bulky items like paper towels or diapers could cost the same to send as a heavier item. Again, this cost impacted ecommerce shippers more than consumers (which they responded to).

However, even this model proved to be unsustainable for a company like FedEx - who announced earlier this year it was ending its partnership with Amazon. To be clear, this does not mean that FedEx is abandoning the ecommerce space - it's just refusing to do business with one of the larger retailers. They still have agreements with Target, Dollar General and Wal-Mart and service other ecommerce companies.

On the other side of the fence are ecommerce businesses who have to combat changing shipping rules (like the size regulations mentioned above) and consumer expectations. One solution has been the creation of a minimum spend amount - basically, how much a customer must spend to qualify for free shipping. This tactic is a way for retailers to offset shipping costs.

We have all been there - you have everything in your cart and are ready to checkout when a banner or pop-up alerts you that you can get free shipping by spending $X more. I have certainly fallen for that ploy before - like I said above, I love free shipping.

Another measure taken to offset shipping costs has been delivering goods to concentrated distribution centers instead of directly to the consumer address. In other words, sending your stuff to the Whole Foods a mile away instead of to your doorstep. Retailers are trying to take advantage of their physical presence and save money on last mile logistics. Their rationale is - they have stores in close proximity to most urban dwellers so why spend the money to deliver to personalized addresses driving up cost (gas, delivery man, trucks, etc.) when it can go to their own location which is close enough to the consumer.

Unsurprisingly, Amazon has been the most aggressive in this space. They have experimented with drone delivery (still a pipe dream - in my humble opinion), delivery to their brick and mortar locations (i.e. that Whole Foods example above) and building out their own supply chain. Here's some facts to chew on:

• In 2013, Amazon relied upon FedEx and UPS and USPS for 90% of its deliveries. In 2018, that mix had shifted to ~68% (with FedEx composing only 3% of deliveries).

• In 2021, Amazon is projected to lease and operate 70 cargo planes. In 2015, it had 20 cargo planes.

• In 2018, Amazon paid an estimated $8-9 per box in shipping costs with FedEx and UPS. By creating their own supply chain, that cost will drop to ~$6 per box.

It's clear that big retailers and big shippers are headed for confrontation in the arena of shipping. Amazon has not been shy about making bold statements - like it's promise to deliver one day shipping. It will be interesting to see how other retailers and shippers continue to react. It's my hope that from this battle that consumers will once again be the beneficiates.

But it may take a while for these changes to trickle down to us. Which means I better be prepared for another large shipping cost the next time I visit FedEx.