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Hidden costs of online retail
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February 5, 1999: 4:47 p.m. ET
Shipping charges often outweigh the ease and convenience of Net shopping
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NEW YORK (CNNfn) - The Internet is changing the face of retail, but one thing remains the same: shipping and handling.
It may have rendered the store and the mail-order catalog nearly obsolete, but it hasn't eliminated the delivery boy.
With the Internet emerging as a ubiquitous and powerful sales tool, companies are rushing headlong into cyberspace to find new customers and boost sales.
And for good reason: online sales are exploding. In 1998, total purchases in the online retail market were $9 billion. That number is expected to jump to $17 billion by 2001. Online sales during the holiday season in 1998 totaled $2.3 billion, more than twice the $1.1 billion in online sales reported for the 1997 holiday season.
Many consumers are drawn to the Internet for the potential savings of buying direct. Net retailers tout the cyber-adage of cutting out the middle man and passing the savings on to the customer. Amazon.com and barnesandnoble.com, for example, offer a 20 to 40 percent discount on all of their books.
But these discounts often don't translate to actual savings. The reason? You guessed it: shipping and handling.
Online discounts unraveled
Consider: a friend recommends a book. You go online, punch up Amazon.com, find the book, and get ready to place your order.
The discount seems impressive. You would have paid $11.95 for this paperback in the store, but Amazon.com offers the book for $9.56 -- a saving of $2.39, or 20 percent! However, you'll also pay an additional $3.95 for shipping and handling -- $3 per order plus 95 cents per book.
You end up paying $13.51 for the order, a $1.56 premium, or 13 percent over the conventional bookstore price.
On the other hand, the more you buy, the more of a savings you actually get. If you add two more books to the order, one that retails for $9.95, and another that retails for $13.50. You'd have paid $35.40 for the three books in the store. Amazon.com will save you 20 percent, or $7.08, for a total of $28.32.
The shipping and handling charge for the order will be $5.85. Your actual saving is $1.23, or a whopping 4 percent.
So unless you're placing a large order, or buying hardcover best-sellers at a 40 percent discount, the savings are elusive. You can never fully realize the advertised savings because the shipping and handling charges will always take a bite out of the actual discount.
And if you have your order sent express, you can forget about savings altogether. Amazon.com charges $6 per order, plus $1.95 per item for 2-day shipping. Next day air costs even more -- $8 per order plus $2.95 per item.
According to Amazon.com spokesman Bill Curry, shipping and handling charges just aren't a major factor in the minds of customers. "The numbers speak for themselves," he says. "We added 1.7 million new customers in the fourth quarter of last year. Are these customers turned off by shipping charges? Obviously not."
The company has also added a new distribution center in Fernley, Nev., to expedite shipping to its exploding customer base.
A barnesandnoble.com spokesman said that the consumer is well aware of shipping and handling charges from the outset. "The consumer is a smart animal," said Ben Boyd.
"Our customers understand the convenience of going online and having books delivered to their door. Many of our them are experienced catalog shoppers - we're certainly not the first company to charge for shipping and handling," he added.
The Tax Factor
Despite the high cost of shipping and handling, Internet retail presents a clear advantage in a major area: taxes. The Internet Tax Freedom Act passed in 1998 prohibited new taxes on all forms of electronic commerce and computer network communications for at least three years.
In areas with high tax rates, such as New York City, ordering online can help customers avoid paying state and local sales tax. A customer from Manhattan who places a $50 order with Amazon.com saves $4.12 in taxes.
The tax issue is particularly relevant for consumers who use the Web for major purchases, such as electronics or computers. Purchasing a $3,000 computer online will save you $180 in sales tax at a 6 percent tax rate.
Even if the shipping and handling charges total $30, you're still saving $150, or 5 percent.
Caveat Emptor
In some cases, ordering online presents a clear advantage. For rare and out-of-print books, as well as for hard-to-find imported compact-disk titles, the benefits of shopping online far outweigh the costs of shipping and handling.
Quite often, an imported CD that may fetch $25 or more in the store can be had for as little as $9.95 from an online retailer such as Amazon.com or CD-NOW.
More often than not, however, buying CDs online often presents no more of a discount than buying books online. Once again, the shipping and handling charges can wipe out the advertised savings completely.
Consumers need to be informed before they place online orders. Many online retailers do not divulge shipping and handling prices until the very last stage of the order, after the customer has filled out all of the order information and entered all of his or her credit card information.
Also, consumers should be aware of state and local sales tax and should consider the savings offered by potentially tax-free online ordering. Keep in mind that the state in which an Internet business is located -- Washington and Nevada, in the case of Amazon.com -- are required by law to charge sales tax on orders placed by customers living within that state.
Before you place an order online, be aware of shipping and handling charges from the outset. Know exactly how much a company is charging for the convenience of having products delivered to your door. Consider how much you're willing to pay for this service -- formulate a personal cost/convenience ratio -- and plan your purchases accordingly.
If you're not careful, "handling" can translate to "handing", as in "handing over all of your money."
-- by staff writer Campbell Foster
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