The high cost of free shipping

• Nov 15, 2018
• Peggy Dorf

I'm doing my holiday shopping early this year.

That may seem overly cautious, considering that everybody and his brother is suddenly offering free shipping. Order before December 22, and shipping is free. Some retailers have even guaranteed free, two-day shipping until that date, with no minimum purchase requirements.

Amazon, Target, Walmart, and other retailers are betting that their offers of free shipping will yield additional sales and boost market share. They expect to come out ahead for the holiday season, even though their transportation costs are sure to increase.

That extra convenience is an incentive to shoppers, including those who buy online at the last minute. And really, with those deals, why NOT procrastinate?

Well, the worst case is that your thoughtful gifts won't arrive in time for the holiday. After all, there's a finite number of trucks and drivers, but there's going to be a lot more holiday freight than in previous years. That combination makes it more likely that some deliveries will be delayed, and the merchandise itself may be more expensive.

E-commerce drives up costs for freight transportation

Freight transportation is a pure example of supply-versus-demand. When you get a lot of additional demand without an increase in supply, it drives prices up. That's why transportation costs are rising so fast this year. The economy is growing like gangbusters, and carriers can't hire enough qualified truck drivers to move all the 18-wheelers where they need to go.

At DAT, we track rising demand and pricing for truck freight transportation. The constraints on trucking capacity have the potential to throttle economic growth in the longer term. For now, however, this trend is adding to the cost of all tangible goods.

Free shipping with no minimum purchase means more individual packages, stuffed with those air pillows, taking up more room on the truck. It's more economical to consolidate multiple items in a single box, and load more boxes per truck. Now that the consumer has no incentive to order more things at once, the online retailers will need to hire even more trucks. And if the goods need to arrive within two days, those trucks won't even be allowed to wait until they're full of those single-item packages. That's not an efficient use of resources, but that's what will happen.

Who pays for all that free shipping?

On the demand side, consumers are ready to spend money. Unemployment is as low as it's ever been, so pretty much anyone who wants a job has a job, and wages are up 3% compared to last year. That means Santa and the elves will be working overtime, too. Retailers are expecting sales to increase by almost 5% year over year, and e-commerce is forecasting more than 16% growth.

In the end, someone is going to pay for all that free shipping. Either the prices of the items themselves will go up, or the stores will make lower profits. According to Motley Fool, that means the shipping bill will go directly to shareholders in those retail companies: "Managing gross margin is a big challenge for both Walmart and Target as they look to compete for online sales. Investors should expect margin pressure over the next few months, but it could pay off with strong sales growth."

Source:- DAT.

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