This holiday season, retailers’ battle for your shopping dollars has a new front line: Your doorstep.
With a projected $105 billion worth of online purchases up for grabs, retailers, including Wal-Mart, Target, Macy’s and Best Buy, are making a high-stakes gamble that delivering packages faster and more cheaply will make them more competitive against e-commerce giant Amazon.com which has encouraged shoppers’ expectations of instant gratification.
Gambits such as same-day delivery or free shipping, along with unglamorous but crucial logistics innovations, are likely to cost retailers millions this holiday season, a particular challenge in an industry built on narrow profit margins. But big-box retailers are determined to hold their ground this season against their online rivals and meet customers’ high expectations.
“For many [retailers], it’s the difference between making money and losing money on a transaction,” said Jeff Simpson, a director in Deloitte Consulting’s retail practice.
Wal-Mart depends on the holiday shopping season for a third of its yearly profit, but the company has struggled to fight off competition from online retailers. With foot traffic through its stores falling for two years, the giant retailer is investing more heavily in its e-commerce operation.
This holiday season, Wal-Mart will be relying on a new proprietary technology to make sure it can keep its shipping promises. The algorithm will allow the world’s largest retailer to monitor whether packages are at risk of not arriving on time and then, if necessary, to prioritize them to move faster through its network. With this and other shipping efforts, Wal-Mart says, it has reduced the time it takes to deliver packages by 15 percent.
Target is still recovering from a massive data breach during last year’s holiday season. To win back shoppers this year, it is offering free shipping on all online purchases made before Dec. 20, eliminating its typical $50 purchase minimum. While the strategy might lure more shoppers, it also promises to put even greater pressure on the company’s bottom line.
“We did a lot of analysis on what the costs and the impacts would be,” said Eddie Baeb, a Target spokesman. “At the end of the day, we hope it will be worth the investment.”
Target is aiming to reduce “shopping-cart abandonment” among online customers who get cold feet before checkout. In many cases, Target has found unexpected shipping charges can be the deal-breaker that dissuades people from completing a transaction.
But without shipping charges, customers may unbundle their orders, nabbing a book for dad one day and candle for grandma several days later instead of scooping them up at once. That behavior could end up costing Target big money.
Retailers have been engaged in something of a shipping arms race for years, but technological innovations and heightened competitive pressures are pushing the rivalry to new heights. Target, for example, is capable of reaching more than 90 percent of its customers with two-day shipping, something it couldn’t do even a year ago.
Some have found an advantage in having brick-and-mortar stores.
Increasingly, retailers are fulfilling online orders by taking an item off a nearby store shelf rather than from a far-off warehouse. This logistical sleight of hand is largely invisible to consumers but is shaking up the retail industry by allowing it to react more quickly to customer demands.
Steve Osburn, a director at consultancy Kurt Salmon who studies retail supply chains, expects 40 to 50 percent of major retailers to ship from stores this holiday season, up from 15 percent last year.
Best Buy credits ship-from-store capabilities for more than half of its online sales growth in the second quarter. The practice better utilizes the big-box electronics retailer’s inventory because it can sell items online that otherwise might collect dust in a store stockroom, company officials say.
Perhaps retailers’ riskiest investment is in same-day delivery.
Macy’s customers in eight cities can place an online order before 1 p.m. and then pay up to $15 to have their packages delivered later that day during a two-hour window that they select.
“We’re not sure what to expect. That’s why we have it in pilot [mode],” said Jim Sluzewski, Macy’s senior vice president of corporate communications. “We’re very early in the game.”
But it’s not clear from this and other nascent same-day efforts just how much demand there is for this kind of service. Some research suggests that customers may prefer cheap delivery options to those that are speedy but pricey.
“There is no question that the consumer is the winner in all of this,” said Alison Paul, leader of Deloitte’s U.S. retail and distribution practice. “But it’s a really pitched battle between these retailers.”
The stakes are high, too, for FedEx and UPS, which are looking to bounce back from a rough 2013 holiday season in which many packages didn’t make it to their destination in time for Christmas. UPS had 1.3 million packages on Christmas Eve that failed to make it to their recipients, while FedEx had 618,000, according to estimates from Shipmatrix.
To avoid another debacle, FedEx and UPS are hiring more seasonal workers this year and are pushing retailers to provide more-accurate forecasts of just how many packages they’ll be shipping during the holiday rush. Both shipping companies have said that if retailers send FedEx and UPS more packages than they forecast, they will not guarantee on-time arrival.
The lessons learned during the coming weeks will help shape retailers’ delivery practices the rest of the year.
“They know they have to do it. They just don’t know: Is it a deal-breaker? Can I do it for [only] a certain customer?” Simpson said. “I think that’s what this holiday is going to help us figure out.”