Retailers in free delivery 'arms race' to snare online shoppers

When David Novack went to the Best Buy in Eagan recently to look at dishwashers, it represented a rare trip to one of the retailer's stores.

For a major appliance Novack will drop by a store. But he goes online for clothing, tech gadgets, music and other goods. Woe unto the retailer that charges for delivery.

"There's no way I'm going to be looking at something unless it does have free shipping or I can pick it up," said Novack, of Inver Grove Heights.

On Wednesday, Target issued the latest salvo in an arms race among retailers trying to boost sales with their delivery policies. The company is offering free shipping for all online orders through Dec. 20.

Retailers are responding to consumer demands to avoid the cost of shipping. Within the past year, about 60 percent of online orders from major retailers have ridden the delivery truck on the sender's tab, according to the e-commerce research firm comScore. Many brick-and-mortar retailers meet or beat free shipping deals offered by Internet retailers like Amazon.

At Best Buy, orders over $35 are shipped free of charge. Customers who spend more than $1,500 a year get an even better deal: free shipping on all products. According to comScore estimates, nearly 80 percent of the consumer electronics giant's recent online orders shipped free.

Some are sent out from Best Buy stores. The company was ahead of Target in starting to ship online orders not from a warehouse, but from a store close to a customer. Online purchases also can be picked up at stores.

"It's all about wherever, whenever and how a customer wants to shop," said Mary Lou Kelley, Best Buy's president of e-commerce.

By using its stores to fill online orders, Kelley said, Best Buy can put goods in the hands of shoppers faster and move new and returned merchandise that might otherwise be stuck in stores.

"The product is finding a home," she said. "It's not sitting in our store, waiting to be marked down and put on clearance. It's every product to any customer."

About a year ago, Best Buy was shipping orders from some 400 stores. Now, all 1,400 of its stores can provide delivery.

The packages don't have far to go. Seventy percent of Americans are within a 15-minute drive of a Best Buy.

Ship-from-store efforts helped drive a 22 percent spike in domestic online sales in the retailer's most recent quarter.

Online sales, including Internet orders picked up at stores, account for about 8 percent of Best Buy's domestic revenue. But with Internet and store sales becoming increasingly intertwined, it is becoming more difficult to simply categorize a sale as online or in-store.

Target also has been hustling to get goods to customers faster and cheaper.

This past June, the company began offering all customers free delivery on orders of $50 or more. Now, the $50 minimum is gone — at least for most of the holiday season. During an August conference call with analysts, Target executive vice president Kathee Tesija said delivery fees can be deal killers for online buyers.

"Research shows that the number one cause of abandoned carts is a surprise at checkout, including uncertain shipping charges," Tesija said.

Shoppers using Target-branded credit and debit cards already received free shipping on all orders.

Target offers in-store pickup, too. Customers pick up about 14 percent of Web orders in stores.

The retailer also has made a big push to use stores as shipping points, and the company says it will soon be able to ship goods from stores to 91 percent of the U.S. population within one or two days. That should mean lower shipping costs, as goods travel shorter distances. It also may help boost sales, since customers can still complete a purchase even when warehouses are out of stock.

Online sales account for about 2 percent of Target's total sales. That includes goods ordered online but picked up at stores. But Tesija said the company has to cater to the online shopper.

"The guests that shop Target online shop both online and in stores," she said. "This is absolutely our best guest and one we will not cede."

In some neighborhoods in Boston, Miami and Minneapolis, Target has experimented with same-day delivery, charging $10 for the convenience. The service may be expanded to other markets.

In San Francisco, Target has worked with a start-up company to offer curbside pickup at 10 stores.

To be sure, free shipping and other fulfillment services are not really free. But retailers have yet to pass on the full cost to customers, said Gerry Storch, CEO of Storch Advisors and a former Target vice chairman.

"Right now, the cost is being shared by the consumer and the retailer," he said. "In almost all cases, if you want free shipping you can find a way to get from almost any e-commerce retailer today."

Storch said the innovation of using stores as delivery points gives retailers an extensive distribution network that's close to customers. That has turned buildings long seen as a liability into an effective weapon in the battle against online-only retailers, he said.

"These stores are becoming a strategic advantage for the brick-and-mortar retailers," he said.