A primary reason for the success of ecommerce is the convenience of home delivery. While doorstep delivery is comfortable for end users, the shipping costs deal a blow to businesses, negatively impacting their profit margins. We look at a few major companies with high shipping costs as part of their overhead expenses.
The Shipping Cost
Amazon's 2014 annual report puts the company's net shipping cost at $4.223 billion (4.7% of net sales), up from $3.538 billion a year earlier. But who actually bears the shipping costs? Common online marketplaces like Amazon.com, Inc. (AMZN) and eBay Inc. (EBAY) allow individuals and businesses to sell goods through their sites. The cost is borne by the seller, who may pass it on to the buyer under "shipping charges." Amazon additionally offers a warehousing facility. Sellers send their clearly marked inventory in bulk to Amazon warehouses. Upon receipt of an order, Amazon sends the goods to the buyer from its warehouse. The shipping cost is charged to the seller, who may pass it to the buyer. Other businesses, like Toys ‘R’ Us, serve their customers directly, and either bear the shipping costs on their own or pass it on to the customers.
Let’s look at a few major businesses which have dependency on the cost of shipping. Exact figures may not be available about shipping costs or business losses due such costs.
1. Amazon: The online ecommerce giant Amazon offers free shipping on select orders above $35. It also has other shopping options like Amazon Prime, which offers low cost delivery solution. As promotional time-based offers, Amazon occasionally provides “Free Shipping" coupons. Beyond those, all the shipping costs are usually passed on to the buyer. Amazon is also involved in warehouse and inventory management. The company’s estimated shipping costs constituted 4.7% of the annual revenues of $88.99 billion in 2014. (See more: How Buying On Amazon.com Works.)
2. eBay: eBay works on a pure marketplace model. It does not get into inventory management like Amazon. Instead, it facilitates the trade by being an interface between buyer and seller. It may help make the shipping process easier for its sellers through its eBay-appointed shipping partners. Once a sale is made, a shipping company is appointed by eBay to pickup the goods from the seller's location for delivery to the buyer. This facility is available to regular sellers only and not to the casual sellers. Discounted shipping is charged to the sellers, who may pass it on to the buyers. eBay may not get involved with shipping all items sold through its site, as its business model is for direct interaction between buyer and seller, but such dedicated shipping assistance programs help the company maintain its competitive edge.
3. Toys ‘R’ Us operates through brick-and-mortar stores and online. It offers free shipping for online orders above $19 under their “economy shipping” category which takes six to nine days. Anything required sooner, or below $19, gets charged. Toys ‘R’ Us also offers promotional offers like “Free Shipping” days. It also utilizes its brick-and-mortar stores to offer free pickup to online customers. With online sales on the rise, shipping costs continue to increase for Toys ‘R’ Us.
4. Wal-Mart Stores, Inc. (WMT), the largest retailer in the U.S., also has an online presence. It offers free shipping on online orders worth more than $50. Additionally, it also runs a ShippingPass Pilot program under which the customers can pay $50 per year and get unlimited free shipping for delivery of purchased goods within three days or less. Anything else gets charged to customers. Wal-Mart appears to be following a good strategy with different shipping options and passing the cost to the buyer directly, indirectly or through subsidized rates. (For more, see: How Wal-Mart Makes its Money.)
5. Best Buy Co., Inc. (BBY) is a leading multi-brand products store, offering products across various categories. It offers free shipping on select orders above $35. It also runs customized membership programs that include free shipping. "My Best Buy" membership allows unlimited free shipping for all orders above $35, elite membership allows free unlimited standard shipping with no minimum purchase amount, while elite plus offers free unlimited expedited shipping with no minimum purchase amount. (For more, see: Is Amazon Killing the Best Buy Business Model?)
6. Macy's, Inc. (M), is one of the largest department stores in the U.S. Crain's Chicago Business reported about Macy’s expansion plans to offer same-day delivery like that of Amazon. It is expected to increase shipping costs, but Macy’s hopes to attract more customers to its online sales channel. Macy’s' shipping charges are based on total order value. For same day shipping, it charges $5 for orders above $99, and $14.95 for orders below $99. Other regular shipping options include Standard, Premium and Express, which follow a tiered charge structure for delivery.
7. Nordstrom, Inc. (JWN): Nordstrom is a leading fashion specialty retailer. It operates 316 stores across 39 states in the U.S. It also has a major online sales channel through its website. It offers absolutely free shipping to the entire U.S., as well as free returns. With free delivery and free returns, shipping is a major cost factor for Nordstrom.
The Bottom Line
Amid increasing competition in the online and retail space, shipping cost is a major challenge for businesses that offer home delivery. Beyond the cost, the operational efficiency, timeliness of order delivery, handling of goods and return policies are also key to keeping customers. The businesses mentioned above either absorb shipping costs, include them in total costs or membership programs, or run promotions. Investors in any such listed companies should be aware of this cost and dependency, which often get overlooked in ecommerce business valuations. (For more, see: Is Free Shipping Worth It? )