Free delivery creates holiday boon for US consumers at high cost

For top U.S. retailers, free delivery is now the norm. That is good news for shoppers, but not so much for investors. During the just-ended holiday season, outlets from Target to Wal-Mart to Amazon expanded their free-delivery options, adding more items eligible for free shipping. They also did away with minimum spending thresholds to qualify for the perk.

Yet as more U.S. shoppers view free shipping as their right, retailers struggle to make a profit online. That struggle will become evident in coming weeks when companies report financial results for the holiday quarter, analysts said. "For most companies, it is a very expensive proposition to try to offer fast and free," Steve Osburn, director of supply chain for consulting firm Kurt Salmon, said in an interview. "It's really eating away at the mar- gin dollars at some of these retailers."

Shipping remains a key battleground in the escalating war between brick-and-mortar retailers and Amazon.com Inc, with both sides spending big on logistics. Offering free shipping has long been standard practice during the holidays, but in 2014, retailers leaned on it heavily all year long.

The number of online purchases in the United States with free delivery hit a high of 68 percent in the third quarter of 2014, according to industrydata tracker comScore, up from 44 percent the previous year. Amazon said this week that it saved customers $2 billion in shipping fees over the holidays.

Much of those savings came via Amazon's Prime program, which offers free shipping on most items for a $99 annual fee.

The company declined to share the previous year's figure. Nor would it share estimates on how much more Prime customers bought compared with others, which would provide some insight into how much Prime might boost Amazon's revenue. Forrester Research analyst Sucharita Mulpuru estimates that Amazon loses $1 billion to $2 billion a year on U.S. Prime shipments.

Other retailers, including Target Corp and WalMart Stores Inc, are removing minimum-spending thresholds on free shipping to entice consumers, consultants said. Just over half of companies surveyed by Kurt Salmon eliminated those thresholds for the 2014 holiday season, up from 5 percent the previous year.

But those perks come at a high price, analysts said. Amazon's shipping costs during the first nine months of 2014 rose 32 percent, compared with 29 percent in the same period of 2013.

This growing subsidy for customers might give investors more reason to dump Amazon shares. The company's stock declined 22 percent in 2014 even as the U.S. stock market, as measured by the S&P 500 index, gained more than 11 percent. Target said in November that growing online sales were pressuring margins, due in large part to higher shipping expenses. Much like Amazon, Target offers free shipping year-round for users of its membership card. Online orders account for about 2.5 percent of Target's overall revenue, or roughly $1.85 billion out of the $74 billion in annual sales analysts are forecasting for the current fiscal year which ends on Jan. 31, 2015.

In a recent note, Wolfe Research said a 1 percent move in sales to Target's online business cuts profit margins by 5 basis points. The retailer said it did not see the cost of a free holiday-shipping campaign as material to fourth-quarter results, and added it expected to improve profitability from online operations over time.