THE FREE SHIPPING REPORT: How this pervasive perk is eating away at margins, and the strategies retailers can adopt to compete with Amazon

BI Intelligence

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Amazon Prime’s free two-day shipping has led to an industry paradigm shift. Online retailers — small and large — are increasingly offering the perk to keep from losing customers to the behemoth marketplace. But free shipping comes at a steep cost: Rising shipping expenditures are eating away at retailers' margins. 

Larger retailers that can better afford to eat the cost of free shipping are battling to gain an advantage over Amazon. But most retailers, particularly small ones, lack the resources necessary to compete with the massive online retailer. This has set off a race in the logistics industry: Large logistics providers are creating new services for small retailers, while logistics startups aiming to address the same market are growing in numbers. 

In a new report, BI Intelligence weighs the costs and benefits of free shipping for retailers and analyzes the effects of the perk on the industry. It assesses the technologies that could become commonplace as retailers and logistics providers fight rising shipping costs. However, implementing a cost-effective free shipping strategy can be difficult, so the report also discusses various techniques that both small and large retailers can use to make free shipping work for them.

Here are some key takeaways from the report:

• Small and large retailers alike are turning to free shipping to better compete in an Amazon-dominated market. But rising shipping expenditures are eating away at retailers' margins — even Amazon reported in 2016 that its shipping costs jumped 40%.
• Small retailers face even more challenges than their larger counterparts, as they often lack the resources to invest in supply chain improvements and can’t benefit from the generous shipping discounts large retailers receive. Typically, retailers can get discounts of up to 70%, while boutique shops may only see discounts of about 5%.
• Both retailers and logistics companies will likely invest in technologies that help to lower shipping costs. These include augmented reality (AR), artificial intelligence (AI), and radio frequency identification (RFID) tracking. Additionally, as logistics providers continue to raise shipping rates, large retailers may move some logistics operations in-house.

In full, the report: 

• Provides an overview of how consumers' demand for free shipping is shaping the retail and logistics industries.
• Examines the technologies that may be implemented as a result of  companies seeking to lower shipping costs.
• Discusses various strategies to implement with free shipping for small and large retailers.

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