Fill ‘Er Up with E-Commerce, Please

Written by Evan Schuman
October 9th, 2005

Soaring gas prices have been pushed by natural disasters and an unfriendly global climate. But some e-commerce players are looking on the bright side: Maybe this will push people to drive less in the fourth quarter and instead log in and buy more online.

Gas prices could impact e-commerce activity in two opposite ways: by increasing the out-of-pocket costs of driving to stores, making e-commerce a better option; or by increasing the costs of shipping packages, making brick-and-mortar shopping the more cost-effective route.

For this holiday season, it looks like both factors are smiling on e-commerce. Shipping giant FedEx this week announced that it was hiking rates 5.5 percent because of rising fuel prices.

But?and this is crucial?those increases won’t kick in until Jan. 2, so holiday e-commerce activity will be spared.

The bigger question is what will happen after Jan. 2, especially given the probability that other shipping firms will follow FedEx’s lead and boost their rates a comparable amount.

Free shipping has quickly soared to the top of the consumer list of most-sought-after e-commerce attributes, and any hints that e-tailers will start pulling back from free shipping?most likely by increasing the dollar value of purchases that would qualify for free shipping?could have serious implications.

An NRF (National Retail Federation) survey released this week underscored the importance of free shipping.

Based on a late September survey of 1,891 consumers and 119 e-tailers, 79 percent of the consumers chose “free shipping offers” as most important when shopping online, which is just about as high as it was (80 percent) during last year’s survey.

That’s important, as it is one of the few e-commerce attributes that did not drop in importance when compared with last year’s survey, suggesting that its value to consumers might be as close to permanent as anything Web-related can be.

Other popular choices were “low everyday prices” (54 percent this year, down from 65 percent last year), “percent-off discounts” (47 percent this year, down from 59 percent last year), “unique products” (52 percent this year, down from 58 percent last year), “broad product selection” (52 percent this year, roughly the same as last year’s 53 percent), “brand-name products” (37 percent this year, down from 40 percent last year), “gift with purchase” (16 percent this year, down from 20 percent last year), “gift card with purchase” (15 percent both last year and this year) and “early morning specials” (5 percent this year, down from 6 percent last year).

That same survey made it clear that retailers have no intention of pulling back from their free shipping, at least not in time for the holiday shopping season.

Some 79 percent of e-merchants plan to offer holiday shoppers free shipping, with the standard conditions, a sharp increase from the 64 percent who offered it last year.

So this year’s stocking stuffers appear to be safe from the Grinch Who Stole Free Shipping, but what’s likely to happen to free shipping in January? According to most industry watchers, the most likely answer is “absolutely nothing.”

Why? Beyond the clear importance of free shipping, the rationale is that margins and revenue for the next six months are looking quite strong, alleviating the business pressure and allowing most retailers to simply absorb the higher shipping costs and to take some very public bows for doing so.

Scott Silverman, an NRF official who serves as the executive director of NRF’s network and who was in charge of the survey, said even long-term contracts won’t spare retailers from fuel-forced shipping increases.

“I just spoke with one very large retailer that I would assume would have substantial leverage. FedEx has the right to place surcharges based on fuel charges,” Silverman said. The retailers “are going to have to absorb it. You simply can’t pass that along.”

Silverman said a retailer theoretically could increase the threshold to qualify for free shipping, or increase product prices to cover the costs, but the large number of e-commerce sites selling identical products and price comparison sites with constantly updated databases make such a move unlikely.

“There is just too much price transparency on the Internet today,” Silverman said.

Strong business predictors would also make such a move unnecessary, he added.

“They’re expecting a strong holiday season. Across the board we’re looking at operating margins at 28 percent,” Silverman said. “These are very healthy businesses and they will continue to grow. I think they can afford to absorb this a little bit.”

As for the question of whether there will be an impact on e-commerce from rising gas prices making consumers more hesitant to drive to the mall, Silverman said he has mixed feelings.

“You could make the case that it could boost sales because people don’t want to spend money on gasoline,” Silverman said. “But for the same reason, it could depress all sales. Less money in your pocket, less money to spend.”

High-income consumers will likely not be swayed by either argument, Silverman said, but marketers should be cautious how they pitch this.

“I would certainly expect that message to be tested. You’re trying to get them to buy. I would be careful about reminding people how much they are spending on gas,” Silverman said.

“They may be less receptive to then spending on gifts and merchandise, thinking, ‘Maybe I shouldn’t be buying that shirt or perhaps I should buy wool instead of cashmere.’ But then again, there’s been so much media coverage on the high gas prices that it may not matter.”

Paula Rosenblum, the director of retail research for the Aberdeen Group, is not nearly as mixed in her opinion as Silverman and said she definitely sees gas prices as helping e-commerce, even for purchases that don’t quality for free shipping.

“It’s going to be cheaper to pay the delivery fee than to pay for your SUV to troll around the malls,” Rosenblum said.

Rosenblum added that the shop online, pick up in stores approach may also benefit from the gas hikes because it avoids any shipping costs or delays and allows for consumers to see the item, and also because going to one store for pickup has much less gas impact than driving around town searching for something.

Patti Freeman Evans, who tracks retail trends for Jupiter Research of Jupitermedia Corp., said she agrees that the rising gas prices will help e-commerce sales, but stressed that it will likely come from more a belief that the customer is probably saving money rather than an actual calculated savings.

“It’s unlikely that customers are going to make calculations and figure, ‘It’s going to cost me $1.50 to go to Costco and, if I go online, I won’t have to pay that,'” Evans said. “But the perception of not having to use gas and then if they don’t have to pay shipping, that could have an impact. Free shipping could have more value this year. Free shipping is always a big deal to consumers, though.”

But even though Jupiter has not finished crunching its retail revenue projections for this year, whatever the margins were going to be this year, they’ll now be less.

“Given that it’s looking more and more likely that gas prices are going to stay high, it’s a challenge for retailers online. Their expenses are going to increase and their margins are going to be eroded,” Evans said.

Bernard Baumohl, the executive director of global economic risk and forecasting firm The Economic Outlook Group, also agreed that rising gas prices will help e-commerce, but he was more bullish than most.

“This year will be the best ever for e-commerce,” Baumohl said, because those fuel increases are “still a small percentage of the total retail sales, but it will be the best because people don’t want to spend money on gasoline that they could spend on buying more presents. Already, people are cutting back on travel. If they’re staying at home, they’re more likely to go online and shop. Gas levels are already at $3 a gallon.”

Of all the segments he is tracking, Baumohl said, he sees e-commerce as benefiting the most.

“E-commerce will be the big beneficiary of high gas prices. With the price of gasoline up more than 50 percent over the past year and with consumers facing higher energy costs for heating, consumers will be financially stretched,” he said. “They’ll save money by not driving to various malls. They’ll go online.”


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