Free shipping ups ante for Amazon foes
The big e-tailer's decision to retain the program permanently has prompted counterattacks from competitors. The catch? Amazon can afford to do it. Others may not be able to.
First, it was Buy.com. In February, the company began free shipping on orders of $99 or more, as long as the order weighed less than 25 pounds. Since then, KBtoys.com and eToys, both operated by KB Holdings, have run free-shipping offers that closely mirrored Amazon's. And last month, the Internet unit of apparel chain Banana Republic ran a free-shipping promotion on orders of $100 or more.
When Amazon announced in January that it would permanently waive shipping costs on orders of $99 or more, analysts predicted that a price war would ensue. Few of the merchants would discuss why they began offering free shipping. But analysts say that Amazon's program has raised the stakes for everyone else.
"Everybody has to look at what Amazon is doing and ask themselves, 'Do we have to match their offer?'" Forrester Research analyst Kate Delhagen said. "The customers at some of these places are probably telling them, 'You've got to waive the shipping or I'm going to buy it from Amazon.'"
Delhagen said Amazon's free shipping drives more traffic to its site and entices customers to spend more per order. Diego Piacentini, senior vice president in charge of Amazon's global retail and marketing operations, said Amazon's free-shipping program is meeting expectations.
The free shipping "is increasing order size. It is increasing units per order, which is exactly our objective," Piacentini told analysts last month.
For Amazon, the largest online retailer, touching off price wars is nothing new.
Last June, the company offered free shipping when customers bought two or more books, CDs or videos. Barnes&Noble.com countered with its own free-shipping offer. Amazon ended the offer several weeks later, though Barnes&Noble.com has continued to offer free shipping ever since.
In the early days of e-commerce, online stores offered free shipping to attract new customers. They were willing to take losses and chalk it up to the cost of acquiring customers.
That stopped when Wall Street demanded that dot-com companies show profits. Web merchants began squeezing every penny, and the days of freebies appeared to be over. Recently, e-tailers have brought back free-shipping promotions at specific times, like the holiday season, as a way to entice customers.
But Amazon says it can afford to offer free shipping because of the cost-cutting measures it has taken, mostly in its distribution and fulfillment operations.
"It's going to hurt their margins in the short term, but they can afford to experiment to help the business in the long term," Morningstar analyst David Kathman said.
The same may not be true for Amazon's competitors. The costs may be too high for them to offer free shipping on a permanent basis. KBtoys and Banana Republic ended their free-shipping programs after a month.
"Free shipping continues to sway consumers to shop online," Forrester's Delhagen said. "It's also the type of price promotion that you can turn on and off very quickly. If it gets too expensive, then you can shut it down."