Amazon Prime Triggers Shipping Price War Among Retailers

Interesting piece at Business Week, "What's in Amazon's Box? Instant Gratification: Customers love Prime, Amazon's two-day shipping program. Now rivals such as Wal-Mart, Target, Best Buy, and J.C. Penney are copying it":

Ruth Tinsley made two momentous changes to her life in the last year. In December she had identical twin girls. A few weeks later she signed up for Amazon.com's free shipping service, Amazon Prime, which guarantees delivery of products within two days for an annual fee of $79. The combination of those two events turned the graphic designer from Birmingham, Ala., into an Amazon loyalist who now buys software, jewelry, and birthday gifts on the site. Her 2010 Amazon total heading into the holidays: 150 individual items, up from 82 in all of 2009. "Now if I see or hear about a product somewhere else, I'll always check first to see if Amazon has it," Tinsley says.

Amazon Prime may be the most ingenious and effective customer loyalty program in all of e-commerce, if not retail in general. It converts casual shoppers like Tinsley, who gorge on the gratification of having purchases reliably appear two days after they order, into Amazon addicts. Analysts describe Prime as one of the main factors driving Amazon's stock price—up 296 percent in the last two years—and the main reason Amazon's sales grew 30 percent during the recession while other retailers flailed. At the same time, Prime has proven exceedingly difficult for rivals to copy: It allows Amazon to exploit its wide selection, low prices, network of third-party merchants, and finely tuned distribution system, while also keying off that faintly irrational human need to maximize the benefits of a club you have already paid to join.

Now six years after the program's creation, rivals, both online and off, have sensed the increasing threat posed by Prime and are rushing to try to respond. Wal-Mart Stores (WMT), Best Buy (BBY), Target (TGT), and J.C. Penney (JCP) have recently unveiled free shipping promotions for the holidays, turning the fall shopping season into a race to see who can go furthest in lowering shipping costs. In August, eBay announced its first rewards program, eBay Bucks, which gives shoppers 2 percent back on items purchased on the auction site using PayPal. Last month a consortium of more than 20 retailers, including Barnes & Noble, Sports Authority, and Toys 'R' Us, banded together with their own copycat $79, two-day shipping program, ShopRunner, which applies to products across their Web sites. "As Amazon added more merchandising categories to Prime, retailers started feeling the pain," says Fiona Dias, executive vice-president at GSI Commerce (GSIC), which administers the ShopRunner service. "They have finally come to understand that Amazon is an existential threat and that Prime is the fuel of the engine."