Thursday, November 11, 2010

How Does Walmart Offer Free Shipping?

Today, Walmart announced that purchases on its website will ship for free.   Walmart is not alone in offering free shipping as, JC Penney, LL Bean and Target all offer free shipping, although Amazon, JC Penney, and Target currently have minimum purchase amounts for their free shipping offers.

How do these companies justify free shipping?  

  •  The New York Times article cites the Distribution Management Group which has reported air shipping prices for big retailers are about 70 percent less than for a small company.   For large shippers to get discounts this large, they have to negotiate sharp discounts in surcharges for home delivery and rural delivery.   While discounts of 70% may be unusual, it is clear that those shippers spending more than $1 million annually on parcel shipping pay significantly lower rates than smaller shippers.   The reason that they pay less is that they take the time to negotiate carefully and carriers are willing to make the effort to compete on price as well as service.
  • Larger retailers have more warehouses which allow them to ship more of their items in zones 2 and 3 which has lower air and ground shipping rates.  This is a variation on zone skipping that shippers have tried to do for decades.  The difference now is that retail items manufactured abroad are now shipped to regional warehouses directly so the "zone skipping" involves both domestic and international transportation.
  • Larger shippers pack shipments to minimize costs.  Larger shippers have found that it can save money by choosing the right sized box and finding the lowest cost way to ship a multiple item shipment, whether by combining shipments to one delivery address to finding the cheapest way to ship the item based on whether it means packing the items in one box or multiple boxes.
  • Larger shippers have made significant information technology investments.   Significant improvements in software have allowed carriers to do real time price comparison among carriers and among offerings of carriers.   The software also improves inventory management and allows direct shipment of inventory to the warehouse closest to where demand for a product is or to stock different sizes or colors based on the popularity of the particular sizes or colors.  Software has also allowed shippers to check addresses and telephone numbers customers enter on line before the order is completed to ensure that both the address and telephone number is correct which eliminate charges for bad addresses and upcharges for home delivery when no telephone number is provided by the shipper.
  • Retailers are learning to compare the "cost of sale" from a brick and mortar location and on line sale.   Delivery costs to the store as well as the cost of employees, and facility costs that are born in the price of item sold in a retail store can be compared to shipping and other distribution costs of an on-line sale.   Free shipping makes sense when the shipping and distribution costs are comparable to the costs of selling through a retail outlet.
  • Retailers are starting to see opportunities for low cost delivery of larger and high value items using services of FedEx and the Postal Service that involve delivery to a retail location.   These services allow Walmart and other retailers the opportunity to ship these items reasonably and know that the customer will be able to pick it up when needed.

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