Free shipping draws online shoppers

Online merchants are willing to make sacrifices this holiday season and are betting that waiving shipping costs will win over shoppers.

NEW YORK -- Online retailers are wielding a weapon they hope will tip the odds in their favor when they slug it out with their brick-and-mortar peers this holiday season.

CDNow Inc. (Nasdaq:CDNW), Barnesandnoble.com Inc. (Nasdaq:BNBN), Amazon.com Inc. (Nasdaq:AMZN), Buy.com Inc. and Cyberian Outpost Inc. (Nasdaq:COOL) are among the slew of online merchants betting that waiving or whittling down shipping costs will win over shoppers.

CDNow's recent promotions include free shipping with the purchase of any three compact disks. A different offer lets shoppers load up their virtual shopping carts and ship those CDs for $5. Buy.com (www.buy.com), which sells computer products, books, music and videos, will offer free shipping on specific products, a spokeswoman said. Outpost.com recently e-mailed customized promotions to customers promising free shipping in the United States.

"A lot of times customers aren't getting the savings when they shop online," said Samantha Liss, director of brand marketing at online compact disk seller CDNow. "If we take shipping costs out of the equation, it reduces that competitive issue."

Internet's golden era
But much more is at stake than the hefty gains in sales. This is the "golden era of Internet adoption," a chance to establish a loyal base of customers, said Christopher Vroom, an analyst at Thomas Weisel Partners. The greater the incentive to buy on a site, the better the first impression, he said.

"This is obviously important because it's such a peak buying period and an opportunity to bring a lot more people into the behavior of shopping online, which has positive ramifications going forward," said David Ricci, an analyst at William Blair & Co.

More than 10 million newcomers will jump online this year, and many will make their first buys during the holidays, according to online research firm Jupiter Communications. Consumer spending will double from the $3 billion spent online in November and December of 1998, Jupiter says. The firm sees about $5 billion in retail transactions and $1 billion spent on travel services.

"The holiday season last year was more for the adventuresome, this time it's for the mass market," said Melissa Shore, an analyst at Jupiter. "If people have a good experience, they will be buying more."

That means merchants are willing to make sacrifices. Shipping revenue amounts to between 10 percent and 20 percent of total sales at most catalogers and e-tailers. But the expense of these promotions could be well worth lower shipping revenue because success or failure will influence stock valuations and public offerings, analysts say.

"If they don't capture this market, I think their ability to raise capital after the holidays will be severely diminished," Vroom said.

Free upgrades
The holidays are prime time to publicize discounts, but some companies offer shipping promotions throughout the year, following examples set by catalog companies. In addition to free offers, some online retailers "upgrade" orders, sending wares overnight at two- to three-day prices.

A.G. Edwards & Sons Inc. transportation analyst Donald Broughton noted the upgrades to overnight service could eventually bring big gains to shipping giants FDX Corp. (NYSE:FDX) and United Parcel Service Inc. (NYSE:UPS).

"For a UPS or FedEx, this is increasing volume in their highest yielding business," he said. "Bigger margins exist with the expedited products, so upgrades benefit anyone who can provide expedited service."

Shipping companies say it isn't yet clear how or when special promotions will affect them. A spokeswoman at UPS in Atlanta wouldn't comment on how, if at all, these offers affect UPS, only saying the company plans to ship some 300 million packages between Thanksgiving and Christmas, up slightly from last year.

At FDX, a spokesman said the company is "certainly aware" shipping discounts and upgrades are happening, but it is too early to detect new trends.

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