Shipping discounts, which have become a mainstay of the holiday season, are being carefully analyzed by retailers as they weigh the benefits against the mounting costs. Transportation costs have skyrocketed in the last year, with diesel prices rising 50% year over year. In response, fuel surcharges applied by UPS and FedEx have more than doubled to 10.5% for ground packages and 34.5% for air packages.
Those increases will likely cause retailers to make over their promotional offers this holiday season. Last holiday season, 37% of online retailers surveyed by Shop.org, the National Retail Federation's digital division, offered free shipping without conditions. Free shipping with conditions was offered by 71% of online retailers. (Within the same season, retailers offer a number of promotions, some with conditions and some without.)
In the coming season, industry watchers expect more retailers to offer free shipping with strings attached in an effort to preserve margins. Retailers are likely to raise minimum-purchase requirements or set minimum-purchase requirements for the first time. Some likely will limit free shipping to only those shoppers who hold the retailer's credit card. And others will offer free shipping to customers if they pick up the items at a local store.
"I call it wardrobing a sale," said Marshal Cohen, chief industry analyst at NPD. "With free shipping, you're going to have to do something to get it."
Balancing discounts, shipping costs
Retailers could also tweak overall promotional offers to avoid stressing margins. Instead of giving consumers a 25% discount, Mr. Cohen said, retailers could offer 20% off plus free shipping.
Those alternatives are better than attempting to eliminate free shipping altogether, analysts said. Indeed, consumers preferred free shipping over coupons, buy-one-get-one-free promotions, free gifts, gift cards or early-bird specials, according to a Shop.org study. In the same study, 35% of consumers said they would spend more online because of free-shipping offers, while 13% said they would spend less because shipping charges were too expensive.
Still, Mr. Cohen said he expects some retailers to try to trim the programs this coming holiday season. He just doesn't expect them to be successful. "If you take free shipping out of the equation, you're going to lose an awful lot of traffic if you're going to try to compete with someone who is [offering] it," he said. "Let's put it this way: It's an expense that they're going to have to incur."
JCPenney, which has seen an uptick in the number of customers taking advantage of free-shipping offers, said it will continue to offer the incentives. "Rising fuel and transportation costs affect not only our customers but our business as well," said spokeswoman Kate Parkhouse. "However, we feel it is important -- particularly with the upcoming holiday season -- to continue to provide our customers compelling free-shipping offers."
A current promotion at jcp.com provides free shipping to customers if they spend at least $49 and have the item shipped to a local store.
Now that retailers have gotten shoppers in the habit of not paying for shipping costs, it will be nearly impossible to take that perk away. "The awareness level has become very high. It's an expectation," said Scott Silverman, executive director of Shop.org. "Retailers talk about it as an addiction."
And as shoppers hunt for bargains and look to curb their own fuel expenses, they are seeking out free-shipping offers more than ever. Online searches for free shipping have been at peak levels throughout the year and are already approaching levels typically not seen until closer to the holiday season, according to research from ComScore and Google.
"What we're seeing at Google is that the current economic climate continues to impact consumer search and spending behavior, with more and more consumers turning to the web to shop, for example, opting to save on the cost of high gas prices in favor of free-shipping offers," said John Burke, Google's director-industry development and marketing. "While offering free-shipping promotions means increased cost pressures for businesses, we believe that those businesses that listen to the consumer and are where their consumers are will be able to compete and win in the search for consumer dollars this holiday season."