JUNE 2007 IN

Energy Prices Slam Online Markets

Higher energy prices mean higher shipping costs. The U.S. postal increase of last month is simply an adjustment for the higher cost of fuel, and the higher cost of shipping threatens to derail the online shopping express that previously appeared unstoppable.

Last month’s postal rate adjustment in the United States increased the cost of sending most small packages by about $2. This is not a large amount of money, but in some of the less expensive product categories, it represents a sudden large price jump that consumers weren’t prepared for. At the same time, the postage rates for many international shipments doubled, making it impractical for U.S. merchants to sell most products to customers overseas.

Some of the largest online retailers, such as Amazon, have initially absorbed the increase in shipping costs. Amazon still offers free shipping for most products, but the higher costs would wipe out their thin profit margins if they did not raise prices somehow. The product discounts at Amazon do not seem to be quite as frequent as they were earlier in the year, and other pricing adjustments might be necessary to keep Amazon in the black.

It is bargain-priced merchandise that has been hit the hardest by the higher shipping costs, especially in the categories of books and clothing. Consumers got used to finding online bargains and used items at prices as low as $5, but now that the cost of shipping is more than $5 for most items, the days of online bargains may be ending.

Amazon Marketplace, where Amazon collects payments for items for sale from anyone who has something to sell, has little choice but to charge customers a higher shipping charge in order to pass along an approximation of actual shipping costs to sellers, and customers are seeing higher prices as a result. It is a similar story on the more bargain-oriented Half.com, but there, many sellers have had to cut their prices in response. Now many book titles are available, sometimes in new condition, for prices around $2–$5, but when you add in the shipping charges, it is not really much of a bargain.

Shipping costs for music CDs were artificially high under the old postal rates, so the rates increased only slightly. Most online CD stores seem content to absorb the increased cost, and the same is true so far at BMG Music Service, but the used CD market online is not doing as well. With many music albums available for download at prices like $9.99, and with zero shipping charges on downloads, buyers of used CDs may now save just a dollar or two, which may not seem like such a bargain.

Online auction giant eBay, already struggling through a massive transition from a free-market auction model to a virtual-mall approach, seems to be showing the most obvious effects of the higher shipping costs. EBay buyers had been grumbling for years about the exaggerated shipping charges of many sellers, and the recent two-dollar increase may have been the straw that broke the camel’s back in bargain-oriented categories such as clothing. A survey of current auctions on eBay finds that only about 1 in 8 is attracting any bidders at all in some clothing categories. With only one bidder on most items that sell, items sell at the minimum price set by the seller, and there is no benefit from the auction format. Sellers are reacting by abandoning auction listings for fixed-price listings. Fixed-price items appear to outnumber auctions for the first time in eBay’s history.

One reason for the difficulty in online clothing sales is the suddenly lower prices at clothing outlet stores, where many items now sell for $10–$15 and clearance items regularly go for $5. With the cost of shipping an online sale around $5, it is hard for online sellers to compete with the outlet stores.

The U.S. Postal Service is already cautioning that further rate hikes are inevitable if gasoline prices continue to edge up toward $5 a gallon in the United States, as oil industry observers say is likely to happen. This could lead to further increases in shipping, perhaps adding another $2 for a typical small package sent within the United States.

The big winners in this change are the large established online retailers, as it will be almost impossible for new companies to set up to compete with them. Buying music CDs online can no longer be considered a convenience now that it takes only a few mouse clicks to download an album and burn a music CD, so the music-download market may benefit from the higher cost of used CDs. Another possible winner is eBay, who should be able to use the transition to squeeze its sellers and solidify its position in the marketplace. The biggest losers are ordinary online sellers, who may have to abandon bargain-oriented categories and switch to pricier merchandise. Consumers may have to change their buying habits, but they should still be able to find bargains elsewhere; however, consumers who have limited mobility and cannot easily go to retail stores are likely to find that life is suddenly more expensive.

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