Santa delivers free of charge: How couriers are dealing with offers of free delivery

Shopping per mouse click reached fever pitch in the run-up to Christmas. According to some sources, US consumers spent in excess of US$1 billion a day on on-line purchases on four days between December 10 and December 14, and UPS estimated a volume of 135 million packages worldwide in its system in the final week before Christmas. FedEx, which saw an estimated 10% increase in holiday volumes, attributes this chiefly to a rise in e-commerce spending.

Retailers stoked the on-line shopping frenzy with offers of free delivery. The entry of heavy hitters such as Wal-Mart and Roots into this arena signalled that the offering is viewed increasingly as a tool to boost on-line sales in the festive season.

In most cases, the free delivery scenario was limited to just one day. Free Shipping Day, which was launched in the US in 2008, ran for the second year in Canada on December 12. According to the organisers, 264 merchants participated in the event, including Canon, Sears, The Bay, Indigo, Sony and Toys R Us. South of the border the one-day initiative was supported by over 2,500 merchants.

Gary Breininger, president of BGR Coaching & Strategic Solutions, notes that free delivery is on the rise, but incrementally. “It is not a tidal wave,” he says.

Albert Saphir, president of ABS Consulting points out that free delivery has been around for years. “Amazon started that as a year-round model,” he says. “A lot of retailers now offer free delivery on certain days, for weeks or certain promotions. It has become a tool to attract customers to their portals.”

The proliferation of free shipping offers may undermine the appeal of premium delivery services to some extent, but in some cases e-tailers offer free premium delivery to premium customers,” remarks Dirk Steiger, principal of airfreight research and consulting firm Aviainform.

“The Amazon model appeals to a certain segment of the market,” comments Breininger. For many consumers on-line shopping in the run-up to Christmas is marked by anxiety over the merchandise not arriving in time, so they are prepared to pay a premium for faster delivery, he says.

Amazon’s free delivery scheme offers no flexibility in shipping terms. While it has strong appeal for consumers who rank price above all other aspects, there are many shoppers who want to buy on their own terms, Breininger thinks. “I see growing demand for customization,” he adds.

This is in line with the broader portfolio of delivery options that most courier companies have developed. “Purolator and others have an array of products with different transit times,” Breininger says. For the price-conscious shipper, the deferred service offered by Canada Post is hard to beat, he adds.

“Couriers are largely ceding this part of the market to Canada Post,” he says. “Residential deliveries are low density. Courier companies want this business, but not at any cost. They want to make money with it. It would be surprising if they changed their business model for it. Companies like Purolator are not going to change their operational flow in their hub in December for this.”

Naturally on-line vendors are eager to push some of the cost of free delivery service on to their transportation providers, but in the main it is they themselves who absorb this cost, Saphir says.

“With the margins in retail, the seller can usually easily swallow the transportation costs, especially if the producer sells direct, which eliminates costs related to local sales. And if they are pure on-line merchants, they do not have costs for showroom and sales staff,” comments Steiger.

Breininger notes that retailers are putting pricing pressure on transportation providers, but most of the logistics firms appear to be holding the line.

The battle for on-line sales via free shipping options extends well beyond the Christmas break into the new year, as a growing number of retailers have included returns in their free transportation offer. While it was dealing with the Christmas delivery rush, UPS was already bracing for January 3, dubbed “National Returns Day”. The express firm was expecting to ship in excess of 520,000 packages back to retailers on that day.

Meanwhile, merchants are poring over the results of a different shipping tactic deployed this past Christmas season. Wal-Mart, Google and eBay were among the companies that joined Amazon with experiments with same-day deliveries, using private couriers to bring goods directly to consumers’ doorsteps.

By most estimates, these undertakings have cost retailers money. “Same-day delivery is a very expensive proposition. It is also pretty restrictive to a certain zip code range. It can only work in dense urban centres,” Saphir commented.