'Free' Shipping Crowds Out Small Retailers

By Laura Stevens Ginger Greer, a Medford, Ore., attorney who does nearly all her shopping from work without leaving her desk, has drawn a line in the sand: “I absolutely refuse to pay for shipping,” she says.“You can find anything, anywhere at this point” that ships free, she adds. That includes a step stool for her 5-year-old daughter and a barn-door slider Ms. Greer recently bought for her closet from Amazon.com Inc. Of course, shipping isn’t really free. But building it into a product’s price tag, or offering unlimited deliveries for a flat fee, can make consumers blind to it. Ms. Greer pays $99 annually for “no cost” two-day shipping through Amazon Prime but, she says, “in my mind, that’s free.” The number of consumers who agree with her is rising quickly. More than half the past year’s orders from 30 of the biggest e-commerce merchants were shipped free of charge, compared with 33% two years ago, according to mystery shopper StellaService.For online retailers who can afford it, free shipping is becoming a loss leader—the e-tailing equivalent of selling milk below cost to increase grocery-store traffic. Amazon Prime’s free shipping is turning the retailer into the first stop for many consumers. In a survey commissioned by BloomReach Inc. last year, 34% of 2,000 consumers polled said they started their online shopping on a search engine like Google. But 44% began at Amazon. That’s up from 30% in 2012, according to Forrester.In the free-shipping game, big shippers, who get more favorable rates from package carriers like FedEx Corp. and United Parcel Service Inc. because of guaranteed and predictable volume, have a big competitive advantage. That helps to make the Internet a tougher marketplace for startups and small businesses. The Web’s biggest retailers—including Target Corp., Wal-Mart Stores Inc. and Amazon—often get volume-driven discounts of 70% or more on certain shipments, while boutiques like Saratoga Olive Oil Co., in Saratoga Springs, N.Y., get breaks closer to 5%.“The barriers to entry are tough,” says Trevor Outman, principal partner at consulting firm Shipware LLC. He estimates that, after discounts, a megaretailer might pay about $14 to express-ship a 3-pound, 10-inch-square box from New York to a suburban Atlanta home. That same delivery could cost a small retailer about $74.Saratoga Olive Oil, which sells gourmet oils and vinegars, knows that all too well. “We’re not having Saratoga Oil Prime anytime soon,” says Peter Koch, its operations analyst. “We’ll never be large enough.”Saratoga shipped about 5,000 packages last year, at an average cost of $12 to $19 per order, including packaging. It offers free shipping on orders over $100, but that eats into its margins. “It’s a cost of our business and getting our name out there,” says Mr. Koch.More-established retailers have struggled to adjust. About seven years ago, Amazon moved aggressively into home and garden products, squeezing specialty e-tailer Comfort House, which launched its website in 1994. “When we started, there was no such thing as free shipping. And actually, today there’s no such thing as free shipping,” says Jeff Gornstein, president of the Newark, N.J., company, which he estimates generally spends about $15 to $20 per shipment, or about 12% of revenues.“We are absorbing more and more of it because we can’t pass along the costs to consumers, because of Amazon,” he says.Indeed, shipping costs are a new front in price wars. Last week, Amazon and Target.com both offered a 1.7-ounce jar of Neutrogena Hydro Boost Gel Cream for $17.99. Amazon offers free shipping to Prime members, as does Target to its REDcard members, who sign up for a Target debit or credit card. For nonmembers, the slowest shipping option cost $5.48 or $4, respectively. Both retailers can fatten their margins by saving even a few pennies off what it would cost to ship such a small item. Without discounts, prices are about $13 by ground and $24 for two-day air from New York to Atlanta. Amazon’s scale typically gives it an edge. A Shipware survey of about 560 shippers showed some who spent in the range of $100 million annually on shipping could qualify for discounts of more than 80% on overnight shipments, and up to 60% on residential delivery by ground.Amazon shipped more than a billion North American packages in 2015, roughly seven times as many as its closest rival, Wal-Mart, according to estimates by software developer ShipMatrix Inc. Amazon says it spent $11.54 billion globally on shipping costs last year.Barclays analysts estimate Amazon spends $4 to $5 on average per package, compared with the average $7 to $8 for ground delivery paid by an average business.Amazon didn’t respond to requests for comment. Though financial terms of its deal aren’t public, Amazon is among the handful of top customers who pay the Postal Service an average of $1.87 a package to make the last leg of a residential delivery. Other retailers must pay for a package’s full journey. Though it can be costly for other merchants to sell through Amazon, many do so in part to take advantage of shipping discounts. Through UPS, outside vendors spending over $1,000 weekly to ship from Amazon receive a 37% next-day air discount. Selling through Amazon eats into margins at Quady Winery in Madera, Calif., but gives the wine maker access to millions more customers. Quady recovers at least 40% of the retail price of its wine on orders placed through Amazon. “Shipping wine is expensive. It’s heavy, and you usually need to do it in two or three days,” says Herb Quady, one of the family owners. “Certainly we pay a lot more for shipping than Amazon does.” Write to Laura Stevens at Laura.Stevens@wsj.com

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