It’s a move, analysts say, that Amazon hopes will edge out its brick-and-mortar competitors and maybe even lock in new Prime subscribers going into 2019. But with grand promises come high risks: Fall short on getting customers their presents in time, and those shoppers go elsewhere.
(Amazon.com founder and CEO Jeffrey P. Bezos owns The Washington Post.)
“This is going to boil down to: ‘How do I want to shop? Who’s the cheapest in price. And who do I trust the most?’” said Mark Cohen, director of retail studies at Columbia Business School.
To be sure, Target and Walmart are playing ball. Last month, Target announced that from Nov. 1 to Dec. 22, it will offer free two-day shipping with no minimum purchase or membership required. In March, Target said shoppers who spent at least $35 or used a company credit card could get free two-day shipping. In previous holiday seasons, Target offered free standard shipping.
Walmart will continue to offer free two-day shipping in the United States on purchases of $35 or more. It is also expanding its free two-day shipping to third-party marketplace sellers.
“Amazon took out a potential challenge to its supremacy," Cohen said. "'Free' is a very addictive drug.”
Cohen said Amazon has “a chokehold on competitors” largely because of the revenue generated through Prime memberships, which Bezos most recently put at more than 100 million worldwide in his annual shareholder letter. But dominating e-commerce is particularly crucial for the tech giant. According to market research from Mintel, almost half of holiday shoppers expect free shipping.
Charlie O’Shea, lead retail analyst for Moody’s, noted that Amazon isn’t selling the majority of its products in physical stores, as is the case with Walmart and Target. O’Shea estimated that brick-and-mortar stores with comparatively strong online presences, like Best Buy, don’t even incur 20 percent of revenue through e-commerce.
While free shipping is one of the easiest promotions a retailer can offer, O’Shea said it comes at a steep price. Amazon’s shipping costs for fiscal year 2017 totaled nearly $22 billion, O’Shea said, with about $7.4 billion in the fourth quarter. The retailer posted just more than $3 billion in profit in 2017.
Still, the promise of free shipping doesn’t guarantee shoppers will get their goods on time. Retailers of all sizes often grapple with a surge of holiday orders carried by FedEx, UPS, the Postal Service and other third-party shippers that must contend with a huge spike in demand.
Amazon is also adding seasonal, full-time drivers to supplement delivery during the holidays. Those drivers will add to the fleet of traditional carriers, smaller-scale delivery partners and independent contractors who earn $18 to $25 an hour delivering Amazon packages through the Amazon Flex program.
Paula Rosenblum, co-founder and managing partner of Retail Systems Research, said Amazon’s pledge will be tested through its third-party Prime operators that sell and ship their products through Amazon’s website. While those third-party shippers generate profit for Amazon, they “could be a thorn in [Amazon’s] side” if they leave customers hanging, Rosenblum said.
An Amazon spokesperson said the offer applies to all items eligible for free shipping, including items from millions of third-party sellers.
As Target and Walmart signal to Amazon that they "are not going to roll over,” Rosenblum said Amazon’s move is just the latest in the “race to the bottom.”
“As far as I can tell, price parity has been achieved,” Rosenblum said. “Once you can achieve shipping cost parity, then it becomes very interesting.”
O’Shea put it another way.
“I call it a limbo contest,” he said. “How low can you go?”