LONDON, United Kingdom — You’d be forgiven for thinking that online shopping is a little bit like modern magic. All it takes is the click of a button and — hey presto! — a few hours later, your new dress has been delivered to your door.
Led by Amazon’s generous free standard shipping policies and Prime membership (which offers unlimited two-day shipping for $99 a year), shipping has become an important point of competitive difference in e-commerce, with many retailers offering multiple delivery options — from next-day, to same-day, to appointed hour or even one-hour delivery — while slashing the costs of these services. According to America's National Retail Federation, nearly 60 percent of online transactions in the US include free shipping. In 2015, just over 50 percent of UK retailers offered free standard shipping with a minimum order value. For consumers, this arms race of delivery services means that online shopping has never been cheaper or more convenient.
But having attracted consumers with faster delivery at lower prices, retailers are now being squeezed by the heavy cost of these services — and it seems some are squeezing their workers in response.
In recent weeks, ASOS, Amazon and JD Sports have all made headlines for the treatment of workers at their fulfilment and storage facilities. An investigation by the Sunday Times revealed that workers at an Amazon sorting depot in Dunfermline, Scotland, face disciplinary measures and dismissal for taking four separate days off sick, even if they have a doctor’s note. Some Amazon workers even camp in a nearby woodland area to avoid the cost of transport to and from the depot, so they are left with more than minimum wage.
“Amazon provides a safe and positive workplace. The safety and wellbeing of our permanent and temporary associates is our number one priority,” the company said in a statement to BoF.
The workers are paying the price — they are working 24/7 to get all of these orders out.
A few days later, a Channel 4 investigation into a JD Sports distribution centre near Manchester was described by workers as “worse than a prison.” The sports retailer has since launched an internal investigation into the centre.
ASOS came under fire at the beginning of the month for allegations of pay restrictions for new temporary workers, which the company has denied. This followed months of criticism over working conditions at the fashion retailer’s central warehouse in Yorkshire.
“It’s a business model that JD Sports and Sports Direct and Amazon and ASOS have bought into … The vagaries of online retail and fashion are such that it will have peaks and troughs in demand and the way they’re going to deal with that is to have a very, very flexible work force and pay them the lowest rate they can,” says Neil Derrick, Yorkshire regional secretary at GMB (Britain’s General Union), which is supporting some of ASOS’s warehouse workers.
In a statement to BoF, a spokesperson from XPO Logistics, which runs the warehouse on ASOS’s behalf, said: “We engage our employees on an annualised contract to help support the seasonal fluctuations in demand, which is common across the industry.”
According to Derrick, at ASOS’s Barnsley site, which is “the size of two or three football pitches and three stories high in terms of racking [of products],” workers have to meet such high “picking” targets that some have forgone toilet breaks for fear of falling behind and being penalised. “The workers are paying the price … They are working 24/7 to get all of these orders out,” he says.
Certainly, retailers are facing a dilemma. Delivering individual orders to people’s homes is much more expensive than restocking a store. According to LCP, a global supply chain consultancy, home delivery constitutes about 20 percent of the total value of the item, while delivering to a store counts for only five to seven percent.
Consumers have been conditioned by marketing to believe that delivery should be free.
“Consumers have been conditioned by marketing to believe that delivery should be free, when the simple fact is that delivery of single items costs considerably more than traditional distribution of goods to stores,” says Neil Ashworth, chief executive of CollectPlus, the UK’s largest store-based parcel service. “However, retailers do need to offer these services because their customers have come to expect them.”
According to Deloitte’s 2015 Holiday survey, nine out of 10 shoppers considered same-day, next-day or two-day delivery to be “fast,” but only 63 percent thought three to four-day delivery was “fast.” The surveyed shoppers were willing to pay an average of just $5.10 for same-day delivery, with a quarter saying they would not expect to pay at all.
“Amazon has spoiled the consumer and now that the consumer is spoiled, there is no taking it away … Retailers who insist on charging for [shipping] are going to find themselves losing business to those that don’t,” agrees Satish Jindel, president of SJ Consulting Group, a parcel industry research firm.
Even with a small fee, delivery is often a loss-making operation. “Let’s be honest, we don’t make money out of delivery. We try not to lose too much — that’s the point — but we try to be as fair as we can to the customer in terms of having the right price so it’s not a psychological issue to have to pay those fees,” says Ulric Jerome, chief executive of Matchesfashion.com, which last week introduced a 90-minute delivery option in London for £15.
Of course, absorbing this cost is more manageable for luxury retailers, which operate at higher margins and typically process orders of greater value. “This is an area where luxury retailers have a huge advantage due to the high order value,” says Andrew Robb, chief operating officer of Farfetch, which introduced same-day delivery for a fee last year. “To deliver a luxury delivery experience, you need to pay more than for a mass market one, but the selling prices are much higher than the increased costs of delivery.”
Indeed, paying $5 to have a $500 cashmere sweater delivered to you on your day of choice seems much more reasonable than paying the same fee for a $10 t-shirt from a fast fashion retailer. (Matchesfashion.com, Farfetch and Net-a-Porter all charge a fee for standard delivery. )
For low-end retailers that already run on slim margins, absorbing these costs can be much more challenging — particularly if they lack the mass scale that allows giants like Amazon to negotiate vastly discounted rates from partner delivery firms.
Let’s be honest, we don’t make money out of delivery. We try not to lose too much — that’s the point.
Despite the pressure from consumers to keep costs low, “it is almost inevitable that delivery charges will increase over time as retailers recognise the true costs of their operations,” predicts CollectPlus’ Ashworth. Indeed, at the beginning of this year, Amazon raised its free shipping minimum from $35 to $49 for non-Prime members, while in the UK, John Lewis has reintroduced a £2 charge for “Click and Collect” orders under £30.
But as consumers place increasing value on convenience, they will also be more willing to pay for delivery. Already, among high-end shoppers, “the biggest perceived luxury is time,” says Alison Loehnis, president of Net-a-Porter and Mr Porter. “Having that dress and those shoes delivered to your door for you try on at home just hours after you’ve ordered them takes the stress out of the day-to-day,” she says.
As this sentiment trickles down to the mass market, delivery memberships like Amazon Prime are likely to become more common, as retailers seek creative ways to pass the cost on to the consumer, believes Jindel: “The consumer pays it once a year and then they forget that they paid that — then it appears to free to them.” Retailers might even offer a variety of memberships to suit consumers’ individual needs, such as a $99 a year deal for unlimited two-day delivery or $299 for same-day delivery.
Technology will also play a role. Already Amazon is investing heavily in robotics that can cut down fulfilment costs. Indeed, the company’s work with drones looks set to change the way parcels are delivered altogether. “There will always be people, but the ratio of people to machines and automation will be changing as we progress,” says Jindel.
In the meantime, however, consumers should educate themselves about what the true cost of their next-day delivery may be, says the GMB’s Derrick. “The consumer [needs to] scrape the surface and question how on earth they can push a button one evening and get the jumper they’ve ordered the following day.”