Supply chain management scholar offers thoughts on holiday free shipping and outcomes of an expected record increase in holiday spending
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Supply chain management scholar Dr. Rafay Ishfaq of Auburn University addresses a recent report of U.S. holiday sales predicted to surpass $1 trillion for the first time this year and how that will impact brick-and-mortar stores and online retailers. He also comments on how stores are able to offer free shipping.
Q. How will online stores’ free shipping offers affect the economy? Will consumers begin to expect free shipping all the time?
A. It has now been two years since free shipping has become the norm during the holiday season. But, once the Christmas trees come down and the excitement of New Year's fireworks is over, we have seen free shipping offers quietly replaced by free shipping offers only if you buy more than certain order value ($35 for Target, $50 for Walmart, Amazon Prime members pay $119 annually for free shipping). I don’t see much change in the current practice in the near future. To respond to customers' concerns regarding shipping charges, retailers are expanding their BOPIS (buy online pickup in store) service rather than offering free shipping year round. That is why we are seeing more and more stores offer curb-side pickup and a greater selection of online merchandise available for store pickup. Free shipping is not at all free for the retailers.
Q. How do retailers cover the costs of free shipping? Will they raise prices to counter free shipping?
A. Raising prices to offset shipping costs would be a logical option ... if shoppers won't notice. But, we are not in Kansas anymore. Shoppers know when they are being charged and are unwilling to pay for it. So, free shipping as of now is more to attract shoppers and improve market share. This approach attempts to recover shipping costs from sales-lift due to the minimum order value requirement to qualify for free shipping. The minimum order value makes shipping costs a smaller fraction of sales revenue, thereby improving profitability.
Q. Will increased holiday consumer spending breathe new life into brick-and-mortar stores?
A. We can expect the rising tide of consumer spending to lift all boats (no pun intended for sporting goods retailers). Brick-and-mortar retailers that have retooled their business model to compete in both local and online markets will reap the most benefit. We expect the share of online sales to grow again this year, though brick-and-mortar stores seem better prepared this year to give online retailers, like Amazon, a tough time competing to win over holiday shoppers. Retailers such as Target have already announced free shipping for all online orders, even before Amazon could offer the same service. Store retailers are also keen to leverage their brick-and-mortar store presence in local markets to facilitate returns for online orders that online retailers still can't match.
About Dr. Rafay Ishfaq:
Dr. Rafay Ishfaq is Auburn’s Allen Reed Associate Professor of Supply Chain Management. His research focuses on exploring the interplay between operational and service issues in retail supply chains. One of his key areas is order fulfillment and delivery services in omni-channel retail supply chains. The findings of his research studies have been published in numerous scholarly journals. More information about Dr. Ishfaq is available at http://harbert.auburn.edu/directory/rafay-ishfaq/.
Auburn University is a nationally ranked land grant institution recognized for its commitment to world-class scholarship, interdisciplinary research with an elite, top-tier Carnegie R1 classification, life-changing outreach with Carnegie’s Community Engagement designation and an undergraduate education experience second to none. Auburn is home to more than 30,000 students, and its faculty and research partners collaborate to develop and deliver meaningful scholarship, science and technology-based advancements that meet pressing regional, national and global needs. Auburn’s commitment to active student engagement, professional success and public/private partnership drives a growing reputation for outreach and extension that delivers broad economic, health and societal impact.
