Groupon grapples with soaring shipping costs as it enters Amazon’s turf

groupon boxGroupon is no longer just a daily deals company.

It sells anything online, from face moisturizer to dog beds. But unlike Amazon, the aspiring retailer has not figured out a thrifty and efficient way to ship products to customers.

That was exceedingly clear after listening to last week’s first-quarter earnings call.

Groupon said its shipping costs can be as much as two times comparable online retailers’ costs. It also mentioned that if it weren’t for its shipping and fulfillment costs, its North American gross margins — sales minus payments made to suppliers — would be more than 30 percent. But with those debilitating expenses included, margins ring in at only 5 percent.

The Chicago-based company is not alone as it struggles with the costs of delivering items to online shoppers.

Amazon’s shipping costs for the Q1 hit nearly $1 billion, an all-time high for a non-holiday period, according to the company. That’s up 28 percent from the same period a year ago. Speed and capacity are also issues for rapidly growing e-commerce companies. Take Seattle-based Zulily, for instance, which sells mom and children gear and apparel. It is struggling to get goods to customers fast enough as sales soar.

Groupon said it has a plan that will help it double margins for its Goods business by the end of 2014.

To get costs under control, Groupon’s CEO Eric Lefkofsky said it has changed its free shipping threshold from $20 to $25 per order; it’s also increasing units per order; and shifting more of its business to drop ship (where the supplier ships the goods directly to the consumer) ; and shipping more from its fulfillment to its own distribution center in Kentucky, which opened late last year.

No one should be surprised if Groupon ends up borrowing a page from Amazon’s playbook to solve this issue.

In 2013, Groupon hired Robbie Schwietzer as VP of operations. He comes to Groupon after a decade at Amazon, most recently as VP of Amazon Prime. Other ex-Amazonians in its ranks include: CFO Jason Child and COO Kal Raman.

While Groupon recently raised the minimum order to qualify for free shipping at the end of April, Amazon has also raised prices of its two-day shipping program from $79 to $99, citing shipping costs as the no. 1 reason.

Both companies also recently announced bulk purchasing programs.

Screen Shot 2014-04-23 at 7.38.17 PMGroupon Basics, a service launched earlier this month, allows customers to order certain household essentials in “warehouse sizes” and have those items delivered for free as long as an order costs $25 or more. Meanwhile, Amazon launched Prime Pantry, which allows Amazon Prime subscribers to fill a 4-cubic-foot box with up to 45 pounds of selected items for $5.99, plus the price of the items included.

Of course, Groupon still has a long way to go, and by cracking down on costs at this point in the game, it is sacrificing growth.

Revenue from Groupon’s North American Goods business totaled $225 million in the first quarter, putting it on track to hit $1 billion this year (that’s how much Amazon spent on shipping in the first quarter). Meanwhile, Groupon said the cost of revenue in North America totaled $251.4 million in Q1, with most of the year-over-year increase driven by the cost of inventory and shipping and fulfillment costs related to Goods.

To be sure, shipping will continue to be a hot topic going foward as companies look for ways to keep costs low and savvy consumers seek out the best deals online.

  • Salty_Swede

    I stopped using Groupon when they over reacted and bowed to pressure from anti-civil rights groups. They have since changed their stance, but to little too late for me.

    • stephenreal

      Everybody’s money is green in the business world retard.

      • Salty_Swede

        Evidently you missed the entire point. Thanks for the personal attack though. Quite clever of you.

  • stephenreal

    Groupon’s Kentucky warehouse is the central shipping location and the key to driving down costs since shipping costs across the board from Amazon to regular folks using the mail to ship is going up.

  • Nielsen

    “It also mentioned that if it weren’t for its shipping and fulfillment costs, its North American gross margins — sales minus payments made to suppliers — would be more than 30 percent.”
    It is almost as if Groupon (or the analysts) didn’t realize that transporting and storing physical products costs a lot more money. Having consumers print out a coupon and relying on the small businesses who signed up with them to carry those burdens makes for great margins.