Retailers are increasingly embracing the omnichannel model, but balancing customer service and the bottom line is far from easy.
UK retail chain Argos had some creative thinking to do in 2012, as its traditional catalog-based sales model met growing pressure from new technology. Fast-forward to 2014, and the retailer has reinvented itself around a potent mix of online and digital stores, offering a glimpse into the future of omnichannel retail.
At its new digital stores, customers can pick up items ordered online – either with Argos itself or, in some cases, via partner eBay – or place orders for home delivery. This mixture of traditional retailing (even the catalog has survived) with new channels has led to a recovery in both profits and sales, and appears to have positioned the chain for future growth, after the business had initially been slow to embrace e-commerce.
As online and mobile become more established as sales channels, new pure-play e-tailers such as global giants Amazon and eBay, Flipkart in India, and Zalora in Thailand, are putting pressure on traditional retail operations to compete for customers. Cost is no longer the biggest driver. “The main driver for omnichannel is service,” says Mike Bernon, Senior Lecturer in Supply Chain Management at Cranfield School of Management. “Customers now expect to have a variety of ways of buying products, either going to a store, buying it on a mobile or on a laptop, and we now expect to have everything on every system at the lowest price, and on the same day.”
Increasingly, too, customers are mixing and matching their use of various channels to research products and services before committing to a purchase, and then picking a delivery option which best suits their needs at that time. “Sometimes they want to pick it up in the store, sometimes they want it delivered to their home, and it needs to feel like the same company doing both,” warns Jeanne Johnson, a Principal at KPMG in the US.
“Customers are not following a standard workflow. This means organizations have to rethink their distribution and fulfillment models. - Jeanne Johnson, Principal at KPMG in the US“
There’s more variability in what consumers want, whereas a lot of the fulfillment properties have previously been geared towards a more prescriptive path which they hoped consumers would go through. Customers are not following a standard workflow.” This means organizations have to rethink their distribution and fulfillment models, she adds, with a greater emphasis on flexibility and multiple options.
The growth in online grocery orders has forced retailers to adapt their distribution strategies. Dr Roel Gevaers, a researcher in transport economics at the University of Antwerp, gives the example of UK retailer Tesco, which initially introduced a model where local stores would pick items for online delivery and then distribute it locally. Now the company is opening so-called ‘dark’ stores, which are set up in the same way as conventional stores but only serve online orders. Other UK retailers, such as Sainsbury’s and Waitrose, are exploring the model.
Online-only retailers – such as Peapod, the US grocer that launched an app so users can shop from virtual stores at rail stations and schedule deliveries at their convenience – have had the luxury of building their systems around internet orders, focusing on item picking rather than pallets, and making more efficient use of technology.“
These distribution centers are much more automated and have a different set-up to the old-fashioned distribution centers, even for books or DVDs,” he says. “In traditional distribution centers everything is stacked on pallets; but in an e-commerce warehouse, it’s all placed in plastic booths or in cases that are easy to pick.” While in the longer-term such bespoke facilities will aid efficiency and lead to cost savings, they do require a larger upfront investment from retailers.
As the online market continues to grow, however, more retailers – and manufacturers – will start to see the business case for investing in dedicated online-only distribution, says Bernon. “It’s quite easy to put in fulfillment centers that are dedicated to home delivery,” he says.
“It’s more difficult where you have assets in place, because often you’re taking volume away from your stores yet you can’t lay down a whole new network because you don’t have the volumes for home delivery. A lot of companies are stuck in the middle. But we may now be getting to a stage – certainly in grocery retail – where businesses can realistically start thinking about having dedicated facilities for home delivery.”
Retailers are also adapting their stores’ formats to reflect new customer buying patterns, says Gevaers, increasingly viewing them as places where customers can touch and feel a product and place orders, which can then be delivered the same day or the following one. “It means you can have a limited assortment in your shop because you can just ship products from your distribution center outside the city,” he says.
“Storage – and in most cases, labor – will be cheaper in these locations: people in shops are more expensive to employ than those in warehouses.” At the same time, pure-play online retailers are also developing “experience” shops, says Gevaers, where customers can test products ahead of placing an order.
Some retailers are breaking down the delivery rationale at an individual product level too, says Bernon, offering online delivery on certain items and not others. “A number of home furnishing companies will now offer home delivery on their big-ticket items, and they won’t actually have those in the stores,” he says. “That allows them to increase their range to customers. You’ve got to segment your products in a different way.”
All this requires much closer working relationships with suppliers around both new opportunities but also managing risk, with the ability to react to situations as they emerge, says Johnson. “The trend for the last 10 years has been around cost optimization where you have strong contracting and pricing management. Now you really need to have dynamic relationships, the ability to act with some degree of flexibility, and to have a supply chain that is truly resilient,” she says.
“We’re seeing different collaborations, both on the cost and efficiency side and on the risk and mitigation side, to provide more transparency up and down the supply chain,” Johnson adds. “There’s a lot more focus on anticipating disruptions in the supply chain, either externally driven or internally with the supplier. Those in relationships with suppliers that are willing to be transparent will have the competitive edge in the future.” Retailers also need to make sure they retain sufficient control over their own operations to allow them to maintain the flexibility to react to unforeseen events, she adds.
Arguably the most challenging aspect of e-commerce, which has plagued retailers since the early days of the dotcom boom, has been that of the ‘last mile’: delivering items to consumers. People being out remains an issue, says Bernon, even when drivers call ahead to confirm appointments. “There are ways of improving it, but the proportion of times you cannot deliver is quite high,” he says. “If it’s a parcel delivery by a third party then often companies will drop it next door or find someone who can take it. For larger-ticket items that need to be signed-for, it’s still a significant problem.”
“With any online shopping model, your business won’t make money from a customer until they have bought from you around five times”- Mike Bernon, Senior Lecturer in Supply Chain Management at Cranfield School of Management
“This puts huge pressure on supply chains, but cost is not paramount anymore. With any online shopping model, your business won’t make money from a customer until they have bought from you around five times. It’s no longer just about offering the cheapest and most efficient solution – but the fastest and most differentiated one.” As a result some operators are now using branded trucks and ensuring delivery staff wear a company uniform, he adds.
Other countries have failed to embrace home delivery, says Gevaers, with Germany, Belgium and the Netherlands mainly using parcel deliveries through courier networks. In France, major retailers such as Auchan and E Leclerc rely on ‘le drive’, where customers can pick up goods from petrol stations or separate company ‘drive-through’ outlets at a specific time. This model is also developing in Germany and the UK, adds Srivastava, where goods are delivered to secure pick-up lockers in railway stations and convenience stores.
In Asia, meanwhile, higher populations in city centers, as well as congestion and pollution concerns, are driving initiatives to set up hub centers located out of town. In the future, retailers and manufacturers could be obliged by local regulations to drop off customer orders at these hubs. “It’s designed to combine volumes and take the pressure off the road infrastructure,” says Srivastava. “There are pilot projects happening in Singapore, Japan and China.”
In some areas, there is a growing move towards expecting manufacturers to deliver items direct to consumers, in some cases bypassing retailers altogether. “We’re seeing that happen even in more traditional supply chains,” says Bernon. “Moving towards direct delivery will change the relationship between retailers and suppliers, and it will certainly change the cost structure as well.” He gives the example of Amazon, which now offers more than 15 million products but operates a model where suppliers deliver directly to end-customers. “It’s early days but you would expect more direct deliveries from manufacturers, rather than retailers stocking everything,” he predicts.
There are pros and cons to this approach, says Srivastava. It can mean retailers avoid holding large amounts of stock they may be unable to store or sell, but also that they lose a degree of control over the end product. “Many retailers like the inventory to go through them because they can package the inventory in their branding,” he says. “It’s a mixed model.”
Currently, though, many manufacturers are no better set up to handle such deliveries than retailers. “They are not equipped to do item picking,” says Gevaers. “All the manufacturers produce enormous amounts of goods – in groceries they produce several thousand items per hour – and they ship full pallets or trucks. The majority are not suitable for shipping products straight to the consumer.”
Should they be able to overcome this, however, it also raises the prospect of manufacturers themselves selling online direct to customers. “There is a very big window of opportunity for the existing manufacturers and brand owners to go online, and we will see either existing incumbents or a new range of companies launching or manufacturing product portfolios which allow for last-minute customizations,” says Gevaers.
He gives the example of Levi’s in the US, which allows customers to select their own body shape or preferences so jeans can be tailored to fit. “Adoption of the postponement of a mass product from the manufacturing side is still not there because of a lack of competition. But that trend will happen,” he adds. Manufacturers who have a strong brand and a history of selling direct to customers in the physical world – such as Apple – will find this kind of transformation easier than those that have traditionally sold through either retail networks or franchise operations, he adds.
One trend with which retailers are increasingly expected to grapple is that of reverse logistics, or customer returns of online orders. “Customers have hectic lifestyles, and returns can be a hassle,” says Johnson. “They won’t want to fill out lots of forms, or be restricted to a single return method. They want the flexibility to return items in-store or by mail, whichever best fits with their daily routines.”
The ease of online ordering means the cost of returns from home delivery is more significant than it is from stores, says Bernon. “In some categories you might be doubling the returns level through a home delivery service. If you go to a store and look at a product then you’ll be less likely to return it than if you have the ability to perhaps buy five items, send back four and keep one.” Up to a third of online items can come back, he says, and the cost is around two-and-a-half times that of sending it out in the first place.
Most companies are now setting up reverse networks operated by third-party logistics firms, he says, and although they will usually be able to claim their own refund from manufacturers due to sale-or-return clauses in contracts, the additional costs of managing all this are significant. “Some companies are now saying they won’t send it back if it’s a low-ticket item,” says Bernon. “One company, where 40% of returns were under £15 (US$25), were sending them all back to their manufacturers and suppliers to get a credit, and the cost of that was over £100 (US$167). So they decided they wouldn’t send them back but they would still expect the credit.”
Retailers could control the volume of returns they receive, but, points out Srivastava, they increasingly feel they need to offer this to customers. “Consumers are getting into the habit of ordering three different sizes online because they have a very convenient and safe solution to return the two they don’t like. But if this option didn’t exist, no consumer would think of doing that,” he says. “That behavior has been partly encouraged by the retailers.”
The convergence of online and offline retail is only likely to continue, and as retailers move towards an omnichannel model, partnerships with suppliers and even other retailers will be particularly important. Those organizations that move early, pick the right partners, and collaborate well, will be the ones that ultimately succeed, believes Johnson.
“We’re likely to see a blending of functions because people are going to share real estate, optimize shelf space, and optimize virtual real estate and apps,” she says. “Customer preferences are going to shape how this will work, but this will be both an opportunity and a challenge. Some interesting collaborations will be required to make it work.”