What's Coming Next in the Free Shipping Wars

It may seem as if everyone is shopping online, but there's actually a lot of room for growth, and that means online retailers are at war to get new customers and keep the ones they have. The weapon of choice at the moment is free shipping.

For a long while, Amazon has been the king of discounted shipping, with its free shipping with low minimum purchase. And it's also the king of online retailing, with the largest market share. If any retailer can unseat Amazon, it will likely be Walmart. The world's largest retailer just bought Kosmix, a social networking startup for an undisclosed sum. The plan is to integrate Kosmix into @WalmartLabs, a technology group it formed to help foster innovation in the company. Along with a new test of home delivery and expanded free shipping to stores, it's another shot over the bow as Walmart prepares to take out its online-only competition.

But no matter how much Walmart integrates social media and cooks up new selling techniques, it still will have trouble topping Amazon's regular shipping discount. Simply offering unlimited free shipping on all items at all times is not really feasible right now — it's just far too costly. And that breaks open the field to all sorts of creative competition. Everyone suddenly has a trick up their sleeve.

Here's what shoppers can look forward to as the battle heats up:

Free shipping on select items.
Expect retailers to offer free shipping on a small number of key items, like linens in January to coincide with white sales in department stores. That will make it easier for the likes of Bloomingdales and Bed Bath and Beyond to compete with both Amazon and Overstock. Target has been doing this since last year, rotating through product categories like baby items or dorm furniture, and offering free shipping on several hundred SKUs for a limited time.

Form a band.
More retailers will group together to collectively offer free shipping deals. Membership initiatives like Shoprunner, which costs $79 a year for 2-day shipping from participating retailers, are a good example, says Don Davis, editor of trade magazine Internet Retailer. "Even big retailers like The Sports Authority aren't big enough to offer something like Amazon Prime. There's no evidence yet that this is gaining any traction — they're still getting the thing off the ground, there's a fee and a lock-in (cost) — but there is a benefit to retailers being in the group."

These groups will be especially good for specialty retailers that can secure a place in a group as the only store of its kind — one sporting goods chain, one office supply house, one home accessories retailer, etc. Together they will form one large multi-departmental store, like a warehouse club or discount store. The $79 membership for Amazon Prime and Shoprunner may be a barrier for some consumers, but the more reliant we become on online shopping, the less prohibitive the cost will seem.

Ship to stores.
This really only works for chains with a large national presence and at least a thousand locations, which is why Walmart's efforts here are among the most threatening. Walmart's site to store initiative leverages its ultra-efficient distribution infrastructure and offers a bona fide added value to consumers. This past year, the site to store benefit was especially evident when used for Black Friday doorbusters. You could order an item and have it sent to the store, then pick it up at your convenience, without having to wait in the cold at 3 am.

Home delivery.
Walmart's next step may well be home delivery of fresh grocery items. Internally dubbed "Project Titan," San Jose, Calif., may be the first test market according to Bloomberg News. It's one way for Walmart to conquer urban markets where grocery delivery is more common and the service in demand, and it allows it to bring something to the table Amazon can't quickly duplicate, even with the initiatives it has in the works.

While Amazon Fresh is a similar program currently offered in the Seattle market, it will take a long time to build out the kind of infrastructure to expand quickly. That gives Walmart the advantage in much the same way Amazon has one in everything else.

"Amazon has built real online scale advantages that will be hard to combat," says Stern. "It has invested in technology that is somewhat a barrier to entry. Walmart has a different kind of infrastructure; its skill-set is shipping to the store, not the home. But they are big enough that they can have a significant impact," if Walmart wants to, and apparently it does.