U.S. retailers drop shipping fees to counter weak holiday sales

Stung by a spending slowdown, more retailers are offering free online shipping, giving consumers a holiday gift but also cutting into profits.

This year, 90 percent of all retailers are providing free delivery, up from 78 percent in 2014, according to HRC Advisory. The strategies vary by company: Target Corp. and Best Buy Co. are providing free delivery on every purchase, for example, while Gap Inc. and Wal-Mart Stores Inc. require a $50 minimum.

Retailers are adding the incentive as they battle declining foot traffic in malls, record-shattering warm temperatures and a move toward more spending on services, travel and entertainment. They also face formidable competition from Internet behemoth Amazon, which is grabbing an increasing share of holiday spending.

“There’s a need now for retailers to cannibalize themselves so others don’t do it for them,” said Simeon Siegel, an analyst at Nomura Securities. “Consumers can get whatever they want at this point.”

Even in a growing U.S. economy, companies are “increasingly desperate” as shoppers turn away from traditional gifts, said Farla Efros, president of HRC.

“All the indicators are showing that we’re doing a bit better, but it’s not translating into retail – it’s translating into other things,” she said. That makes it incumbent upon merchants to make shopping as seamless as possible, she said.

While retailers are taking on a new expense in exchange for a fee that was once a small source of revenue, some of those costs may be offset by increased sales. The average order is 15 percent to 30 percent higher when merchants offer free shipping, with or without a minimum, according to Andrew Lipsman, vice president for marketing and insight for the research firm ComScore.

One of the drivers of the move toward complimentary shipping is Amazon, which commands a huge lead in online sales and offers the service through its $99-a-year Prime membership. By adding free delivery to compete, traditional brick-and-mortar chains are “being squeezed somewhere,” saidDeb Henretta,a senior adviser at consultant SSA & Co. and a former Procter & Gamble Co. executive whose roles included heading e-commerce.

Best Buy, the world’s biggest electronics chain, offered free shipping on orders of $35 or more this year before waiving the minimum from Oct. 25 to Jan. 2. Target, the discount chain, introduced free shipping for all holiday orders last year.

“We know that surprise shipping charges can be a barrier to online purchases,” Target spokesman Eddie Baeb said in an e- mail. The offer boosted conversion, or the percentage of online shopping that results in a purchase, by 40 percent, Baeb said.

Retailers can also use free delivery as a way to goose sales. The No. 1 reason consumers abort an online purchase is when a shipping charge gets added to the total during checkout, according to a study by ComScore and United Parcel Service Inc.

By adding thresholds to qualify, “that’s $10 you wouldn’t have spent had there not been that minimum,” Henretta said. And it isn’t necessarily a profit drain. Companies can adjust prices to compensate for some of those costs, according to Lipsman.

This story was originally published December 23, 2015 at 4:34 PM with the headline "U.S. retailers drop shipping fees to counter weak holiday sales."