Free Shipping Policies Endanger Distributor/Reseller Relationships

Ingram Micro and Tech Data recently increased the minimum order sizes needed to qualify for free shipping; solution providers said they would have to pass that cost on to their customers. Meanwhile, companies such as Dell Computer and Buy.com regularly offer free ground shipping with no minimum purchases.

If free shipping becomes more common among e-tailers and others, broadline distributors may become less attractive as suppliers, said John Eckhoff, president of Venture Computer Systems, a Rochester, Minn.-based solution provider. E-tailers and others build the shipping costs into their margins, Eckhoff said. "Why can they afford to do it, but the No. 1 purchaser in the world [Ingram Micro] can't get the same leverage?"

Distribution executives say they are being squeezed.

"This is a major issue," said Dan Schwab, vice president of marketing at D&H Distributing, Harrisburg, Pa. "Not only are freight costs rising, but our unit growth is outpacing revenue growth." For example, he said, a printer last year might have cost $100 plus $5 for shipping. This year, that printer may cost $80 and another $5.50 for shipping. The shipping percentage of the overall cost is higher.

"We don't want to pass on costs to customers but recently, as extreme as the freight increase was, we have to look at that," Schwab said.

Shipping costs increase between 4 percent and 6 percent each year, usually with only a couple of weeks notice from the carriers, distribution executives said, adding they cannot match free shipping policies because their infrastructure is much different than other models. For example, distributors will not offer free shipping as a loss leader to gain customers.

Free shipping is a retail strategy used intermittently to drive traffic to a store or Web site, said Pat Collins, senior vice president of sales and marketing at Ingram Micro. In contrast, distribution "tends to be a more predictable cost structure from a solution provider's perspective," he said.

Stacy Nethercoat, vice president of inside sales at Tech Data, said, "We look at our cost structure and any incremental expenses we need to neutralize, if you will, to determine what minimum order size that we need [to offer free shipping]."

PC Connection gave free shipping to a test group of business customers in December, said Mark Gavin, CFO of the Merrimack, N.H.-based direct marketer. The company has not yet made a decision to offer it on a regular basis. "It did what we wanted it to do," Gavin said. "We wanted customers to use the Web site and they did. We still have more customers utilizing the Web site now than used it before we started free shipping."