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DECEMBER 5, 2001 PERSPECTIVE By Heather Green E-Tailers Pay a High Price for Free Shipping Those that still offer it during the holiday season would be better off if they kicked this margin-sapping habit
But some online retailers have one habit they need to kick: free shipping. While cyberselling is still in its infancy and what works online may turn out to be wholly at odds with bricks-and-mortar retailing, my bet is that e-tailers that depend on free shipping to lure shoppers will be disappointed. After the past experiences with free shipping, you'd think e-tailers would steer clear of that particular promotional gimmick. Indeed, some online shops are doing exactly that this holiday season. Kmart's Bluelight.com and Lands' End are sticking to business basics: They're charging for shipping. At Lands' End, that means ponying up from $3.95 to $11.95, based on the amount of an order. Still, a slew of other companies, including Amazon.com, electronics e-tailer 800.com, and the reincarnation of eToys, whose assets were purchased by traditional retailer KB Toys, have offered free shipping this holiday season. GONE WILD. The promotion has had a checkered past, producing uncertain results. It came into vogue during the 1999 holiday season, when venture backing of consumer dot-coms reached its frenzy. Scores of well-funded startups in every retail category, ranging from holiday cards to beauty products, duked it out in a battle for survival. Dot-com retailers went wild, offering coupons, gift items, and free shipping that goosed the revenue line but pumped up costs even further. Worse, that behavior undercut claims that the real value of online shopping was convenience and selection, not merely price. While consumers cleaned up online, many dot-coms drove themselves into the ground. When the Internet bubble began to pop during the spring of 2000, the freebies of the previous year -- and especially 1999's holiday season -- became synonymous with a crazy period when traditional financial rules were thrown out the window. But was that the end of free shipping? Nope. The promotion emerged again during 2000's holiday season among some of the remaining dot-coms, including eToys and Amazon.com. The 2000 holiday environment was very different from 1999's. A slowdown in consumer spending was emerging as the economy stalled. For the first time, e-tailers had to deal with slowing growth. DESPERATE ATTEMPTS. Meantime, private and public financing for risky ventures had dried up, forcing hundreds of dot-coms to go under. eToys was the biggest, perhaps most unexpected, blowup. In mid-December of 2000, it announced that it would miss holiday projections, and it eventually filed for bankruptcy. Unlike in 1999, free-shipping offers from e-tailers in 2000 weren't a tactic designed to gain market share. They were a desperate attempt to meet Wall Street estimates for earnings growth and remain alive, a gamble that failed in eToys' case. Another holiday season, a different economic environment. This year, the U.S. is in a full-fledged recession, not just the beginning of a slowdown. And free shipping has emerged once again. Amazon and partner Toysrus.com offered the incentive through the beginning of December on orders over $99, while KBToys' eToys is offering free shipping for a limited time. This time around, analysts are interpreting the offers as a strategy for spreading out demand over the holiday season, enabling e-tailers to ship packages on time. E-tailers generally appear to be seeing positive results in 2001's holiday season. The number of people who visited shopping sites during Thanksgiving week increased by 43% compared to the same week last year, according to Jupiter Media Metrix. But beyond that initial conclusion, it's hard to say whether free shipping is in any way responsible for the surge, says Ken Cassar, an analyst at researcher Jupiter. It's also too soon to tell whether the initially encouraging holiday shopping traffic will continue -- and that goes double for the e-tailers that had offered free shipping for limited periods. The bottom line, though, is that e-tailers won't have to resort to such margin-sapping tactics if they just stick to the value proposition they touted so much in the beginning -- convenience and selection.  Green cover the Internet and e-business for BusinessWeek in New York Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | DECEMBER |
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