Walmart & Free Shipping: Who Will Suffer?

Once again, Walmart is making headlines with a business practice that will be good for its customers, and bad for its competitors. Here’s the story, by Stephanie Clifford for the NYT: Wal-Mart Says ‘Try This On’: Free Shipping

For years, Wal-Mart has used its clout as the nation’s largest retailer to squeeze competitors with rock-bottom prices in its stores. Now it is trying to throw a holiday knockout punch online.

Starting Thursday, Wal-Mart Stores plans to offer free shipping on its Web site, with no minimum purchase, on almost 60,000 gift items, including many toys and electronics. The offer will run through Dec. 20, when Wal-Mart said it might consider other free-shipping deals….

Not surprisingly, Walmart’s competitors are alarmed. Smaller on-line businesses don’t get the kinds of sweet shipping rates that Walmart gets from UPS and FedEx, and they don’t have the regional distribution centres that allow Walmart to keep its shipping costs low. It’s pretty clear that this move by Walmart is going to put serious pressure — maybe even fatal pressure — on some of its competitors.

Just 2 quick points to make:

1) It’s worth noting (for the benefit of those who don’t know) that Walmart’s profit margins are already razor-thin. Yes, the make big profits overall, but that’s due to their mind-bogglingly huge volume of sales. On a per-sale basis, their profit is very small. So the money for shipping a given product (for free) isn’t coming out of the profits on sales of that product — the profits just aren’t there. Something has to give. One possibility is that it really is a short-term gimmick, perhaps intended precisely to drive competitors out of business. That would potentially count as an instance of predatory pricing, which would be at least arguably unethical and potentially illegal — in spite of the short-term benefits to consumers.

2) Normally when we think about Walmart’s effect on competitors, we think about its effect on its very small competitors, the ‘mom & pop’ operations. But I wonder whether that’s the case here. I’m no expert on the structure of the industry, but it seems that the companies most likely to be hurt are Walmart’s large and mid-sized competitors, i.e., companies that occupy roughly the same strategy space as Walmart. It seems to me (and it’s just a hypothesis) that most small retailers will have significantly different business strategies than Walmart, and hence won’t be competing directly with Walmart in ways that would let them fall victim to this latest maneuver. If I’m right, then if Walmart really can sustain this free shipping policy (and they haven’t claimed they’ll even try to) it would be very bad for its medium-sized and large competitors. If that’s the case, will people have the same kinds objections as they tend to have when Walmart’s consumer-friendly strategies are instead bad for small businesses?

7 comments so far

  1. southwerk on

    Professor MacDonald, Don’t you think this has the potential to mimic the regulatory wars over the “rebate” with the railroad system at the turn of the 20th century?
    The difference between Wal-Mart getting favorable rates and specific companies getting rebates in the 1880’s sounds very similar to me.
    James Pilant

  2. Nino on

    First off, I’m so glad you’re a business ethics professor/expert/doctor at least… I just randomly found this because of a weird set of circumstances, which is neither here not there.

    With the internet, I really think you’re going to see big changes in your field. When has there ever been another time when a single person could mount an effective protest against a giant like walmart if they so chose to? With almost no help, rally cry or even warning? This, for now anyway, will keep everyone with certain ethical norms.

    If this were an attempt by walmart to employ it’s Terran strategy in the ether-world, I can guarantee you it will blow up, likely both literally and figuratively, in their faces.

    I think the most likely scenario here is that you will see the Amazon.coms (which is really like the world’s most humongous co-op), costco.com (especially) and other large competitors switch from a minimum order size to qualify for free shipping to throwing it out there for everyone as well. Really, who buys a candy bar and a pack of smokes in an online ‘shopping trip’? For the few that do, the PR around free shipping will more than make up for it. For the rest, they were spending enough to qualify already. Unless I was in a rush for something, I can’t remember the last time I paid for shipping, with the exception of items costing less than $1 (HDMI cables, used books and other items for which it was well worth it based on price and the ability to use a smaller vendor).

  3. Chris MacDonald on

    James:

    You’ve found a gap in my historical knowledge. Can you explain the example, or point me to an explanation?

    Thanks,
    Chris.

  4. James Pilant on

    During the 1880’s up until the turn of the century railroads gave more favorable rates to some kinds of products and often made very favorable deals with shippers called rebates. The charges would appear the same but the railroad would pay the shipper a rebate per amount shipped. These kinds of activities eventually resulted in, first, state, then federal regulation of railroad rates.
    Do you a similar developing situation here?
    While we have no rebates we have enormous competitive advantages based on size. One of the reasons, the U.S. Mail began handling packages in 1913 was that four private companies dominated the market, Adams Express, Wells Fargo, American Express and United States Express. Of course, it took more than thirty years for the government to act in either case but I have a perception that change is on the way. jp

    • Chris MacDonald on

      James:

      Interesting question. Competitive advantage based on size is hard to get around. Buying in bulk is pretty much always cheaper, and it just makes sense from the supplier’s point of view. It’s hard for me (at this point, any way) to see a public-interest argument in favour of regulation here.

      Chris.

  5. Julian Friedland on

    Fascinating. I’d almost post this elsewhere but I don’t want to give Wal-Mart the advertising!

  6. Chris MacDonald on

    Don’t worry, Julian. Walmart has never relied on advertising, and they do very little of it (for a company their size). lol


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