At Macy’s Inc., a million shoppers have gone for the bronze, and it could turn out to be both positive and pricey news.
The department store chain reported that since it relaunched its Star Reward program a year ago, 1 million customers have joined its bronze-level tier per quarter. This helped contribute to a sales gain of 0.7% at stores open at least a year, and $5.5 billion in fiscal first-quarter revenue overall.
At the same time, those active bronze members are getting closer to reaching the gold level of the program, with free shipping. And, as Macy’s is learning from its higher-tiered members, they not only will take advantage of free shipping, they’ll make more frequent purchases of smaller sizes, eroding Macy’s gross margin.
And therein lies a challenge facing almost every retailer with a rewards program in the world of Amazon: How do retailers manage the expected cost of free shipping — which totaled $1.5 trillion among U.S. companies in in 2017 — while still investing in rewards perks that surprise members and help the merchant stand apart from its rivals?
More than 50% Upping Loyalty Investments
Most retailers are increasing their investments in loyalty initiatives, according to the recent report “Loyalty Big Picture” By LoyaltyOne. Nearly 70% of the 1,200 global executives interviewed for the report said they upped the funding of their loyalty programs over the past two years. More than half, 55%, expect to further increase their spending in the next two years.
Those investments amount to 2% to 3% of annual sales among 47% of the executives surveyed; 24% are spending more than 3%.
The challenge has been just where to put those dollars. Only 30% of the executives said their loyalty budgets are earmarked toward increasing customer value. About 15% use their loyalty programs for more effective marketing or improve customer engagement.
There’s no question, however, that a lot is being spent on free shipping, even among startup rewards programs. The clothing chain H&M’s new two-tiered reward program, for example, incudes free shipping on orders of at least $40 for lower-tier members, and free shipping on all orders for higher-tier members.
With Amazon expediting its members’ delivery speed, free shipping seems unavoidable. Amazon in April said it would spend $800 million to ensure one-day free delivery for its Prime members, and is recruiting its own employees to deliver.
Ringing The Expense Out of Shipping
The shipping dilemma is especially vexing in the context of retailers’ rewards programs, whose loyal members expect not only free delivery, but fast delivery. Yes, that free shipping eats into the margin, but those program members spend two to three times more than nonmembers, 60% of the executives queried by LoyaltyOne said.
Yes, retail reward operators have to pay to play, but they (like shoppers) can find ways to pay less. Here are four ways retailers can control shipping and free up the expense for customer engagement:
- Sell the whole outfit at once, not a piece at a time. Macy’s offers free shipping at its gold level with no minimum on spending, so more members are ordering just one item at a time rather than bundling. Macy’s is testing what the free-shipping thresholds should be, so we may see it offer incentives to get members to combine or increase order amounts to balance out those shipping costs. H&M’s model offers free shipping to lower-tier members who spend more ($40), but it does not encourage limited orders or shipments.
- It’s letting shoppers BOSS it around. Macy’s encourages its shoppers to have their online orders shipped and/or picked up at one of its stores, often on the same day of the order. Its buy online, pick-up in store (BOPS) and buy online, ship to store (BOSS) orders now account for more than 10% of all digital sales. Macy’s also is consolidating shipments to store locations to reduce internal supply chain costs. These shipments come directly from Macy’s warehouse or the vendor brand.
- It’s finessing when to hold and when to flow. Macy’s “hold and flow” initiative is designed to reduce shipping expenses and improve margin by ensuring the right amount of merchandise is delivered to each store. Loyalty program data likely informs these decisions: While high-selling stores receive additional inventory, slower-selling stores receive less, for fewer markdowns. In the program’s 2018 pilot, improved in-stock performance contributed to a 15% increase in gross sales. It’s an area long-ripe for opportunities —recent research shows 43% of retailers overbuy inventory and 36% underbuy.
- Encourage in-store action. Macy’s Star Rewards members can win access to experiences special to the brand, such as fashion events that get them off the website and into the store. Such in-person rewards are not new to loyalty, and they could be expensive as well. But through strategic partnerships with sought-after designers and vendors, retailers can keep costs relatively low while offering VIP treatment.
Macy’s leadership recognizes that increased shipping costs are a necessary investment if they want to retain customers and improve customer loyalty. And investing in its loyalty strategy, even with its free shipping, is paying off. In addition to the 1 million quarterly bronze-tier members, spending among Macy’s free-shipping platinum members, which make up about 30% of all sales, rose 10% in the fiscal first quarter.
If that 10% higher spending, combined with other cost-management measures, can offset delivery costs by more than a few percentage points, it could present a golden opportunity not just for Macy’s, but for its customers.
This article originally appeared in Forbes. Follow me on Facebook and Twitter for more on retail, loyalty and the customer experience.
