eCommerce

Retailing Expert Advice: What If…Free Shipping Was No Longer?

Although Marcel Brindöpke rejects a parcel tax as a means of redistribution at the expense of the mail order business, he still wonders whether e-commerce is doing itself a favor by offering free shipping to and from the destination. In this guest article, the etailing expert explains how free shipping was able to establish itself as the standard and examines its effects on competition, ecology and working conditions in the parcel industry.

In 2021, almost two billion packages were ordered in Germany via online shops. More than 300 million of them end up being returned to the sender, as Florian Kolf im Handelsblatt recently stated.

This amount of goods that, conversely, are no longer bought in brick-and-mortar stores awakens the imagination of those who lose out here. The German Association of Towns and Municipalities recently called for one package tax, so that “large online platforms participate in the financing of the infrastructure”.

© IMAGO / Sven Simon

In addition to purchasing on account, free outward and return shipments have been a key factor in the breakthrough of online trading in Germany.

The logic of horse-drawn carriages

If a certain clientele demands a tax on the performance of another clientele, it quickly becomes clear that there is no real sense behind it, but that a redistribution should take place at the expense of one group and in favor of the other. With the same logic, a car tax in favor of the horse-drawn carriage industry would have been appropriate, after all, the cars also used the infrastructure of the horse-drawn carriages, which must be maintained.

If one disregards the transparent attempt to raise money for one’s own purposes, one phenomenon is nevertheless remarkable. The increased attractiveness of online trading is based, among other things, on the fact that both outward and return shipments are now de facto free for customers.

While one can still argue with consumer protection in the case of free returns, there is a complete lack of a sensible argument for the outward delivery. How did it even come about?

About the loss to the USP

For the purpose of differentiation from the competition, shipping costs have been successively reduced since the end of the noughties. Especially the newcomers in the block like Amazon with Amazon Prime (costs money, but with the large number of orders it is a de facto free service, especially since several services are purchased with it today) or Zalando created a USP at the time and were able to beat the top dogs like Otto contest market shares.

This venture was also financed by external investors, who were able to compensate for the initial losses from these strategies.

Due to the high transparency in e-commerce with otherwise very comparable business models, this meant that from then on one was at a disadvantage if one could not offer this free service. Accordingly, free shipping quickly established itself as the standard.

Parcels over parcels: Returns are among the largest for many online retailers today "Profitfressern".

© IMAGO / Ralph Peters

Returnenabwicklung

In this way, returns do not turn into a loss-making business

Coupled with simple purchases on account and very accommodating returns regulations, this was the final breakthrough for online retail, at the expense of brick-and-mortar retail. If one now assumes that approx. 75% of all shipments are now free of charge and that a parcel shipment would be priced at EUR 4.50, the industry waived approx. EUR 6.75 billion, which represents approx. 9% of the total e-commerce transaction volume.

The suffering of the small traders

Now you could dismiss this as customer acquisition or customer care costs, but the effects go far beyond that. Small online shops often cannot afford this pricing and thus have a clear competitive disadvantage compared to online shops with a wide range, which can easily afford it.

If the smaller shops still take the step of free shipping, the margin drops enormously, with adverse effects on reserves, investment funds or salaries for employees.

Large online shops and marketplaces such as Amazon pay very low shipping costs for large volumes - and thus have a competitive advantage over smaller retailers.

© IMAGO / MiS

Large online shops and marketplaces such as Amazon pay very low shipping costs for large volumes – and thus have a competitive advantage over smaller retailers.

In addition, large online shops and marketplaces have the deserved advantage that they pay very low shipping costs for large volumes (scale effects) – DHL & Co. then recover the amounts lost there from the other market participants and have been increasing consistently for a few years Annual level the prices (see market power among CEP service providers).

And yet: 6.75 billion euros missing in the system certainly do not ensure the best wages and working conditions in the parcel industry.

This price development should not have an ecologically positive effect either, after all you can easily and quickly order very cheap products just like that. Amazon Prime customers place more than 60 orders a year, so the needs for weekly purchases should not be aggregated accordingly (the author is expressly part of this madness).

And wouldn’t the return rate also be reduced if some of the mailings were not offered free of charge per se? Spontaneous purchases without a real need often decline once the buying spree has been sweated out.

In summary and slightly abbreviated, it can be said that free shipping neither promotes fair competition, nor ecology, nor fair salary and working conditions in the parcel industry – the state should therefore see reason to intervene here. Especially since taxes are currently being paid on the 6.75 billion euros.

What if free shipping really didn’t exist anymore?

Above all, there would be a steering mechanism that would probably change the ordering behavior of customers in favor of ecology and lower shipment volumes and thus in favor of working conditions in the transport industry. On the other hand, more money would flow into the entire transport system, which could also improve salary conditions if strong unions take the ball.

Competition should also benefit, with international brands also finding it easier to afford to sell in Germany as international shipping is a strong price driver.

For the customer, however, it will initially be more expensive due to the shipping costs – the positive effects are only latently tangible for the customer. And: Many companies would compensate for the costs with vouchers or discount campaigns and thus largely circumvent the regulation.

Conclusion

As nice as it would be if Germany could take appropriate measures to reduce the number of returns to the level of other countries (in France, the return rate for fashion is more like 25% and not 65% as in Germany), it is so unrealistic that such a rule is coming. It’s too easy to circumvent, too difficult to enforce.

And who likes to increase the cost of delivery at a time when most people rely on delivery rather than store visits? Nevertheless, the mind games show how important it is with new business models to think about possible developments at an early stage before you stop catching the beast.

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Reference-etailment.de

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