This is the first in a series of articles on getting home delivery right, while not breaking the bank. Customer expectations are continually on the rise for ever-faster and more convenient delivery, at ever-lower costs. In part one, we take a look at the challenges.
Introduction: Convergence of Etailers and Retailers
The home delivery genie is out of the bottle, with ecommerce the fastest growing segment of retailing. Many big brand retailers have reached the saturation point with their stores in every mall across the world. To deal with this, they are developing new brands and store concepts; and of course, the biggest investment is in Omni-channel fulfillment. Smaller retailers can reach the world, we know, through the web. But they, too, need to sharpen their act to keep up.
Etailers from Amazon to Wayfair to Alibaba and now Google want the consumer’s entire wallet — not just for books or furniture or hard to find items; they want to deliver your bananas, too, supplanting the corner store. With their infinite catalogues, they surely can’t stock all items in warehouses across the entire country. But in a sense, that is just what they are struggling to do as they determine where to put warehouses, what to stock and how to fulfill locally. This regionalization may include creating private fleets. Those are big investments to fulfill a delivery promise. And with big promises, the retailer’s brand is at stake — and so is their financial future.1
Traditional retailers who once thought the web was their way to greater sales with better margins are now realizing that ecommerce sales come with their own burdens and greater costs.2 Turns out those brick and mortar locations might be an advantage, after all. Although many shoppers do their research online, many still want to see, touch, or taste before they buy. So a location, aka a local store, is still important. And many of the goods customers purchase in the store, such as a new PC, washing machine, or entertainment center will require home or office services. Click and ship from store is a growing area for retailers who are leveraging store inventory and locality for short delivery windows. This increases ship-from locations, thereby adding complexity to inventory strategies and logistics networks.
In fact in retail, the very definition of location is changing. Though the physical store is still — and will be — very important, point of sale is now wherever the customer happens to be at that moment.
Wholesalers and manufacturers are not out of the loop here at all. Many wholesalers have gone retail and sell direct to consumers. Many retailers are beginning to lean on their suppliers to drop ship. In perishables, wholesalers and manufacturers have been doing daily direct-store delivery for years with everything from fresh bread to ice. But now they will have more competition on the road for logistics services and may well find the cost to deliver increasing.
Logistics service providers are seeing the opportunity and merging, expanding, and developing services in new territories to provide regional and last mile delivery services on behalf of their customers. This is a place your bet on Omni-channel strategy that is radically changing the carriers’ business models.
Carriers and warehouse fulfillment operators need to be key players in the Omni-world. Otherwise major retailers will supplant them with their own services.3
All this activity — this convergence — is driven by the customer and the competition: whether small businesses or consumers, they yearn for fast and, often, free service. Yes, the genie is out of the bottle. But rather than a genie granting wishes, it’s more like the Gift of the Magi,4 extracting an exchange for that gift of more customer sales.5 All segments are feeling a heavy burden to address the home delivery challenge.
Home delivery is not just an issue for logistics. In fact, it is very much an issue of transforming and integrating customer-centric business processes. How to serve the way the customer wants it — and do it profitability — is the question on every seller’s mind.
|The Myth of Free ShippingFirst movers in free or same-day shipping are waking up to lower — or no — profits. The loss per shipment in these scenarios can eat 5% or more margins from the sale. In addition, outbound last mile costs between three to five times as much per item than inbound.|
Consumers are becoming more return oriented. As their online shopping habit increases, they have become less likely to absorb bad purchasing decisions and expect equitable — or free — returns.
Even as a Prime member, the customer has no assurance of free — or fast, for that matter, on every item. Successful retailers know that free only works in association with many other factors that make free viable. But retailers who are blanketly offering this are finding Omni-channel a lot more costly than anticipated.
And retailers who persist in charging high fixed fees to deliver are losing business.
Lately, retailers, behind the scenes, have instituted drop ship or warehouse charges to suppliers, passing the cost of delivery on to them. However, this is surely a method to alienate suppliers and also maintain high supply chain costs which will be reflected in the overall product costs over time.
The bright spot here is that advancements in technology are providing retailers and suppliers with newer approaches that can work for the retailer (i.e., keep customers) and the customer (i.e., not cost too much for shipping).
Profitable Home Delivery
Today, retailers are spending billions on building new warehouses for fulfillment. They are offering customers a variety of shipping and services, mostly at fixed rates. For parcel shipments, retailers most often present a simplified view of rate tables from the major parcel carriers to the consumer. But behind the scenes, these are not the true costs the retailer is paying. Due to higher demand, major parcel carriers introduced Dimensional Weight (DIM) rates about a year ago, that now provide behind-the-scenes challenges for retailers in determining which parcel carriers to use.6
For other types of delivery, other cost drivers such as mileage, weight, or other attributes add to the retailers’ cost to serve.
Occasionally, retailers do have policies (based on some rule of thumb: e.g., the value of the order, density of customers, or just the need to compete) that they use to offer reduced or free shipping fees. With all free shipping/free returns, though, they place no incentive on the customer to purchase more. In addition, they generally have no mechanism to absorb the cost of returns.7
Can we agree, then, that fixed shipping fees have nothing to do with the real cost of delivery?8 In reality, consumers may be getting a great or raw deal. A retailer who may use a weight range, for example, may be charging a consumer an $8 shipping fee for a less than one pound item. As consumers get smarter about shipping options, they are unlikely to be repeat purchasers.9
Conversely, consumers clamoring for free shipping can seize the opportunity for those heavy-weight items. But here, the retailer is taking a bath. For a retailer, neither of these scenarios is a sustainable situation.
A home delivery model has to be a lot smarter to be financially sustainable. In the transportation world carriers have been modestly profitable by using routing and rating approaches that are fine tuned to the actual shipment — the mileage, dimensions of the package, and other service factors. In retail home delivery, the model is rather backward — rates are set long before the cost of transportation is known. Traditional transportation buyers, on the other hand, can often shop around for rates or a mix of services and find an equitable service/price deal.
If delivery is so important to consumers — and it is — shouldn’t they, too, be able to shop delivery options? To do this the retailer needs to consider delivery as part of the order — not an afterthought. This is important since we know that consumers will shop sites for availability and shipping options. They have a wider view of an order; thus, the retailer should too. The retailer’s10 all-inclusive view of the order — product availability by location, customer location and service requirements, and what it will take to successfully fulfill them — is essential in order to optimize delivery services.
To do this profitability (and with choice for the consumer) smarter delivery planning has to begin while the customer is ordering — not afterward. By immediately beginning to evaluate their options, the retailer can present various attractive services and delivery appointments to the customer. Customers can be incented to select schedules for a variety of value propositions. For retailers, options are expanding to leverage ship from store, not just warehouse. The store may be closer to the customer, thereby reducing delivery times and costs. In fact with mobile sales on the rise,11 which can provide the customer’s precise location, a retailer may even incent a customer to pick up in store — saving the retailer further delivery costs.
Customer-centric home delivery is more than planning and assuring exceptional execution through the whole process. It’s a total package today — a stellar customer experience which includes merchandise, the delivery service, and ongoing multi-channel customer engagement — in person, on the web, and mobile — and personalized to each customer. This is the true definition of the Omni-order today.
In part two of this series, we look at how continuous optimization can be used to drive dynamic policies that optimize the delivery choices given to the customer at the time they place an order.
1 Retailers who offer free shipping find an impact of 5% to 9% margin loss on their online sales. In the race to open new warehouses, major retailers are spending from tens to hundreds of millions of dollars. Of note are moves by Amazon to acquire and build logistics services. — Return to article text above
2 For example, last year the cost of free shipping to Amazon amounted to $5 billion, or 5.1% of Amazon’s sales; up from $4.2 billion, or 5% of sales in 2014; thus, Amazon’s recent change to their shipping policy — increasing the minimum order from $35 to $49 to get free shipping. — Return to article text above
3 Several major retailers are taking back their warehouse management as well as investing in fleets. — Return to article text above
4 See O. Henry’s stories in which the gift is always accompanied by irony. — Return to article text above
5 Online sales grew across the world at an astounding rate in 2015: for example 30% in China, 12% in the UK, and in North America (US and Canada) ~ 21%. — Return to article text above
6 Based on weight and dimensions one carrier may offer a better price. — Return to article text above
7 Traditional retailers can absorb the cost of returns by leveraging in-store personnel. Not so with online. — Return to article text above
8 Unlike B2B shipping where service fees are based on mileage and a host of other contractual services, in retail the price is fixed upfront regardless of what happens on the backend. In long haul transportation, by comparison, often the final bill is not created until the delivery is complete and the miles and services have been tallied. — Return to article text above
9 Or they hold out for the promotional free-shipping opportunities, which impact the retailer’s ability to plan and forecast sales. — Return to article text above
10 We use the term retailer to mean any shipper as well as the agent for the shipper, i.e. carrier. — Return to article text above
11 Data in on 2015 sales showed an increase — to 20% of online orders — coming from mobile devices. — Return to article text above
To view other articles from this issue of the brief, click here.