NEW YORK (TheStreet) -- Wal-Mart (WMT - Get Report) and Target (TGT - Get Report) are rolling out a series of programs designed to reduce costs associated with their online purchases that will help the retailers better compete with their Internet nemesis Amazon (AMZN - Get Report) .
Both chains already have a series of deals on the books offering everything from free shipping to in-store pickup, but the companies know constant innovation is necessary to remain competitive.
The most recent shot fired in this battle was Target's move this week lowering its free shipping threshold to $25, from $50. The company also announced it is opening two new distribution centers in Memphis, Tenn., and York, Pa., to service Target.com customers, and that the chain will expand its program of using local stores as shipping points to help speed delivery.
Instead of lowering its $50 online order requirement fee, Wal-Mart is doing its utmost to leverage its fulfillment network, comprised of distribution centers and stores, to create programs that give its customers different options to save money when ordering online.
This is all being done to counter Amazon's Prime plan that offers free delivery, including two-day delivery on millions of items, for a $99 yearly subscription fee. Other non-shipping related benefits with Prime include free streaming movies and book downloads.
Target also offers free shipping for purchases made with its REDcard debit card and through its Target Subscriptions program. The latter gives customers free shipping plus a 5 percent discount on a restricted list of household, grocery and office supplies. The catch is the customer has to set up a schedule for the selected items to be delivered at specific intervals. Between the two programs, Target says that two-thirds of all items it sends to customers ship free of charge.
There is a great deal of speculation on whether Amazon makes a profit with Prime, said Yuri Wurmser, retail analyst for eMarketer, but there is no argument that it is a great generator of revenue and new customers.
"Free shipping makes a difference to consumers. It ranks highest along with lowest price when they are asked what's important," said Wurmser, adding that a free shipping offer is no longer a just simple value-add benefit for a retailer, but has become a customer expectation. Shipping costs are a major reason why online shoppers abandon their shopping carts.
Shipping deals also help bring in new customers that are then exposed to other deals offered by each retailer.
"The decision to lower the year-round free shipping threshold to $25 was made based on the success we saw from establishing a $50-threshold site-wide last summer, and the great guest response to our free shipping offer on all purchases this past holiday," said Target spokesman Eddie Baeb. "After introducing free shipping for the past holiday season, conversion rates showed significant gains and non-REDcard orders increased dramatically from the previous year suggesting we brought in new customers."
Wal-Mart said that whenever the company rolls out a new shipping-related online offer, whether for better value or convenience, there is an immediate positive response from its customers. The company would not state that a subscription delivery plan is on its road map, but it did leave the door open saying the company is always evaluating its options.
Target and Wal-Mart are also trying to leverage their greatest asset -- the thousands of local stores that can act as pickup points for online customer orders, as well as local distribution centers. Since it is quicker and cheaper to ship something three miles instead of 500, using some stores as a distribution node can save the companies a great deal of money, helping offset the free shipping costs.
In-store pickup works as a win-win for the customer and the chain. In that scenario, nobody pays for the final leg of delivery and the shopper receives their purchase almost immediately. Wal-Mart has taken this an extra step, testing a quick pick-up deal for those who buy groceries online. Customers do not even have to come into the store and can stay in the parking lot while an associate rolls the purchase out to the car, and Wal-Mart says its customers can be in and out in five to 10 minutes.
Wal-Mart reported that it has been successful with these plans to the point where 40% of online orders touch their stores in some fashion. In addition, the company said it has tweaked its ordering software algorithms, enabling a 15% improvement in delivery time and a 22% reduction in shipping costs.
The amount of money in play makes all of these machinations well worth the effort. ComScore (SCOR) estimated that $53.3 billion was spent online during the past holiday shopping season from Nov. 1 to Dec. 31 alone.