The uncomfortable truth about free shipping in a changing world
We can’t say for sure what the future holds for our cities and towns – how they’ll look and how they’ll function – but it’s fairly safe to assume investment priorities will move further away from public buildings and towards transportation, warehousing and digital connectivity.
The advance of technology is having dramatic knock-on effects on the political, social and economic landscapes. One example: the concept of traveling to acquire goods to bring home – a practice that essentially goes back to our hunter-gatherer days – is being flipped on its head.
Our desire for buildings that house consumer products is waning, and our reliance on data, delivery and internet connectivity is deepening. Amazon’s 45-foot-long ‘Snowmobile’ shipping truck, which carries up to 100 million gigabytes of data so that what would be a decades-long internet transfer can be done in weeks, is a novel example of this change manifesting itself.
Trucks full of data aren’t the only thing on Amazon’s mind. The company seems to be gearing up to take on the entire logistics industry in response to the shipping companies it uses raising their prices. It’s not unthinkable that Amazon could soon ‘Uberize’ the logistics industry.
It’s no secret that Amazon has already had a huge influence on how logistics has evolved in the digital age. The company has played the biggest role in replacing shops for warehouses, and its Amazon Prime service has now firmly normalized the concept of free shipping in the minds of consumers.
As a result of the free shipping precedent it set, Amazon only recovers about 55% of the amount it spends on shipping (equating to a $1.75bn loss in Q3, though it more than makes up for this with profits in other areas).
With drones, driverless cars and home deliveries set to become the norm, it looks as though logistics could become the centerpiece in future business plans, at least for retailers. One of the biggest questions on decision maker’s lips will be: “we’re not Amazon, so how can we compete and run sustainably when we’re making no returns on our shipping costs?”
Maybe that’s a question those businesses shouldn’t have to answer. If there was a cultural shift to citizens accepting paid shipping as an everyday cost, much like they accept the cost of the gas it takes to get them to a store, would the problem disappear?
The only alternatives appear to be discreetly folding shipping into the price of products or allowing Amazon to monopolize retail commerce while AWS forever soaks up the losses it makes on shipping.
Arguing this point, Fast Company’s Neal Ungerleider wrote an excellent piece titled Free Shipping is a Lie:
Like virtually everything else, “free” shipping is not actually free. The biggest impact is felt by e-commerce businesses, particularly smaller ones, which face what some have called an emerging crisis: The cost of free shipping, in many cases, is unsustainable.
Jerry Storch, CEO of Hudson’s Bay Company, had this to say on the matter. “Direct-to-home has a supply chain cost three times higher than a store-based model. So when we say the internet retailer can charge less, how can that be? Maybe this is why so many of us have so much trouble emulating Amazon’s model and making any money. It’s because it’s really expensive and it’s also why Amazon’s had trouble making money on merchandising sales.”
Going back to the Fast Company article, another passage reads:
“The Amazon Effect” [is] a massive growth in shipping caused by Amazon and its customers’ behavior. It highlight[s]…Amazon’s ability to let customers purchase small add-on items without additional shipping charges when ordering more expensive items. Even though the items may be small, they add up to a massive amount of shipping material, physical space occupied, and gasoline and worker hours spent bringing them from Point A to Point B.
This in mind, what does the future hold for shipping when people increasingly choose home deliveries over in-store shopping but don’t want to pay for the goods to be delivered? Whatever Amazon does, it’s up to retail businesses to prepare for this looming reality and put logistics front of mind. Like many things these days, digital technology, data and advanced machinery will likely provide the answers, but for most retailers this is beginning of a long road ahead.
Listen to Adrian Gonzalez, logistics thought leader, explain how businesses can put transportation of goods centre stage in their digital business plans.