Serendipitously, Christmas and Chanukah fall at the same time this year. So, there will be no spreading out of the pain that retail logisticians and retail bean counters will feel about getting all those packages to customers on time to make them happy, and to recognize 2016 revenue. And this promises to be a pretty good year for retailers, if we can get it right. According to the NRF, retail sales should grow 3.4% this year.1
“Economic indicators are showing positive trends for retail,” says NRF President and CEO Matthew Shay, citing the improved housing market, job growth, higher wages and other factors that have boosted consumer spending. “Challenges remain, with some greater than others, depending on the retail category. But consumer confidence remains high and we believe that retail customers will continue the positive trends we have seen in the first two quarters of the year.”
In fact, economic indicators showed about a 4% rise in retail sales in the first half of the year, so the potential to exceed that forecast is good. We have not seen such good numbers for a long time. But the share that each retailer enjoys continues to shift with the dynamic changes to the retail model.
Omni, Omni, Omni
Ecommerce sales continue to be the main factor in the overall retail growth, with current channel sales increase of 11% over last year. For many retailers, ecommerce is becoming a major part of their business, as much as 25% to 50% for strong brands. Some of this growth is also due to the growth of mobile sales, a source of promotional marketing/impulse decision making and price analytics.2
Sadly, though, some traditional retailers are still struggling with their Omni-models. Having the goods somewhere for the offering is just not good enough. It has to be available. Consider my recent trip to Macy’s. I needed to try on, feel the fabric—the exact cut of an item. Thus it was worth the trip to the store, I thought. Alas, they didn’t have it in the store. No sales person actually offered to guide me to the web or to try and make this effort turn out well for Macy’s—or me. (I did find it elsewhere and bought out the entire quantity of the item at another retailer.) On another trip, a friend and I were both in the market for wireless headphones. Aficionados know that this is a purchase of $300 to $500 for the cool Beats or Bose. And yes, the sound quality, fit, feel and looks matter a lot. Another ‘try-on’ item. And this was a two shopper retail sale for the one who could satisfy the customer. But again, the retailer did not have the selections readily available for us. Thus, sales went elsewhere. These types of experiences are happening more and more to retailers. But how long can they afford to not get it right on how, where and what to stock.
Mobil Is Driving Down Size and Value of Each Order
As the profile of shoppers gets younger, the shift to mobile shopping is increasing. Mostly millennials, but not to count out the rest of us, mobile is fast becoming a highly competitive channel. There are some stats that say each item purchased through the mobile channel reflects a higher retail value. But mostly what we have heard directly from retailers is that is a doubtful number. They however are most concerned about the quantity of items ordered through mobile. No matter how mobile-savvy the shopper is, the mobile device is not a substitute for the ease of perusing the whole catalogue and comparing multiple items often from multiple retailers. The actual quantity of items per order/shipment therefore tends to be lower for a mobile order. That means the cost of logistics for that mobile order can be higher, especially if the retailer is offering free shipping. The logistics economics for a $5 tee shirt or a $150 blouse are pretty much the same.
This means having the agility of the overall fulfillment process to handle these one-each or low-dollar orders, since warehouse costs are a constant.
High Stakes and Big Budgets
Retailers spending on tech, facilities, store makeovers and process transformation have gone through a lot of phases on the road to Omni, from website redesigns, new logistics strategies and warehouses. But not enough of the science methods that technology can offer is being adopted, such as forecasting based on this new reality.
At ChainLink, we have done four major primary research projects in retail in the last year, ultimately interviewing about 200+ retailers around the world, and they told us they are spending at a staggering level to meet the Omni-challenge. New systems, facilities, and methodologies are at the core of their efforts, yet the rate of change is not fast enough to reflect the current reality and attitudes of shoppers. Yet several retailers told us about a 5+ year strategy to make these changes,3 and were concerned that this was too fast. Given that these are huge changes, and as we know, organizations just don’t change that fast. Yes, it is hugely burdensome to put in even one system or warehouse, what to say of doing all of that—and more. But that is just what has to be done—and fast. From smarter merchandising, Omni-strategies, home delivery, fulfillment and forecasting, and supplier management—we have to get it all right.
The Three Major Pain Points
In reviewing what the major challenges are, retailers and suppliers have three major areas where they have the biggest challenges. At one level, these are overlapping issues yet also require unique expertise to be successful at in each area:
1: Supplier Management/catalogues
The web is a world of infinite offerings. And many retailers now have more product to sell than they stock in the store. For general merchandisers, food and drug, and retailers who carry others’ brands, the relationship with the supplier is an ongoing transformation. Today, many retailers are offering wider choice without actually taking possession of these items. Areas of focus are:
- Catalogue/ Product Management.Their first challenge is a cost affordable, accurate catalogue. There are several product management standards, based on the product category, and Product Information Management (PIM) systems, as well as catalogue and configuration systems to choose from. But the problem is not so much technical, as in getting an agreement to have an affordable process in place between the retailer and supplier so that there is an alignment of the offering, data, pricing and so on.
- Availability. Online the assumption is that if it is offered, the retailer ‘has it.’ If we see customer requirements as a continuous stream of demand, availability has to be understood in real-time. This is a new way of thinking and a new capability for many. Think of it this way: When people used to shop only in physical stores, whatever was on the shelf was available to them. So now, for web businesses, the race is on to attempt to emulate, or replace, that instant experience as much as possible. Furthermore, customers don’t just want to locate an item or service. They want to know when and how they will get it. That means that transportation services’ capabilities also need to be visible to the customer while they are shopping.
All this means tightly linking with the supplier’s inventory and logistics systems. Not only do customers need to know if the product can be gotten, but what are the shipping terms associated with it. Shoppers do sift through this data today to understand time as well as cost of shipping.4
- New Rules in the Financial Relationship Between Suppler and Retailer. There are a lot of nuances in Omni-channel such as purchase online and pick up at store. If the customer then declines the item, who owns it? Who paid for the shipping to the store? The supplier? The retailer? And if it is not a regularly stocked item in the store, what happens next to that item?
And what about drop ship? Who pays for that free shipping promise? The retailer or the supplier? These are just common examples of many details that have to be addressed and that represent the intricacies of the financial relationships. Accounting systems need to reflect the new rules.
2. Home Delivery
Truly a hot topic in the whole Omni discussion in the home delivery element. To respond to the demands of ecommerce many retailers have spent billions on new warehouse space to manage their own fulfillment, not just turning to 3PLs. And regional logistics carriers are growing at a rapid pace, offering that extra service that may be required beyond what the basic parcel carriers such as US Mail, FedEx and UPS provide.
The economics of the game are not in the retailer’s favor. 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 do not represent the true costs of logistics. Every order is different. A thousand-dollar suit or a one hundred-dollar suit fit in the same size box and cost pretty much the same to ship. Yet the profit for the retailer is quite different. Customers can order high volumes of low to no margin goods in which the retailers may then also throw in free shipping. That is a very bad deal for the retailer. In addition, as consumers spend more online, they are becoming much more used to returning goods. That adds more shipping costs and additional handling. And based on the poor condition of returns, it is sometimes a total loss for the retailer.
Same day, free shipping and other promotional logistics offerings have increased the cost of goods sold. At the same time, parcel carriers are cleverly finding ways to raise prices. Labor costs are also bound to go up, as the improving economy sets expectations for rising incomes.5 All these issues have eaten away at the thin margins that retailers earn.
For retailers to become profitable at home delivery, logistics services should enhance the value of the order in the eyes of the customer, and thus deliver more revenue to the retailer. To do that, the retailer has to redefine the order as both product and delivery.
Ultimately, home delivery is not just an issue for logistics. In fact, it is an issue for the retailers’ very definition of itself. It is transforming the very notion of customer-centric business processes. How to serve the way the customer wants it, yet do it profitability, is key here.
3: Making Sure that Stores Still Matter
Major retailers are focused—or should be—on enhancing the in-store experience. Yoga classes at the mall. How about ‘how to use your new climbing gear’ on the rock climbing wall in the store, or running workshops, cooking lessons, fashion shows, wireless in the store, coffee bars, and so on. But beyond these enhancements, retailers still need basic retail sense. Who’s shopping? Is the merchandise presented in the best way to move it? Store operations are also in the process of a makeover, catalyzed by technologies such as RFID and mobile for sales associates.6
Several issues plague the store: The aforementioned issue, understanding the local shopper and their buying habits and needs so that the right type of merchandise and quantities are in the store. And the other issue is labor management. Retailers have put the squeeze on headcount over the years to their loss. The lack of analytics on shopper traffic, and how well the retailer responds to shopper traffic is critical. Most retailers still lack these basics and lose a lot of business due to their lack of ability to sense customers’ needs and serve them. Labor scheduling and sales associate training make a huge difference in the success of a store. Retailers are struggling with that right balance of labor and how to maximize their effectiveness, putting the right tools in the hands of the sales associate, so they can represent the product lines, find the right merchandise for the customer, whether in the store or within the retailer’s network, and ensure that it is delivered to the customer.
Omni-channel has been a catalyst of major changes in retailing. And the chapters of the book are still being written with new innovations in retailing happening at a rapid pace. In Part Two we will discuss what some of the solutions are to tackle these three areas so as to ensure success in Omni-channel.
1 For more economic consumer indicators, the Kiplinger has a succinct analysis. — Return to article text above
2 and a growing preferred channel of millennials — Return to article text above
3 Many retailers have multiple projects either concurrently or serially. Examples are: assortment and allocation takes a full two years to experience the benefits, since enough history is needed for analytics; or a new web site—one to 1.5 years; or one to 1.5 years to build a new fulfillment center; or a year to begin mastering a next generation home delivery system. — Return to article text above
4 Shoppers of Amazon also know that what Amazon stocks often has different terms such as free shipping, that may not apply from the supplier. But for other retailers this fact is not posted. If the shopper is on, say, a Walgreen’s or Macy’s site, the shopper is shopping “at Macy’s.” — Return to article text above
5 Whether the federal government does increase minimum wage or not, many states and municipalities have raised minimum wage. — Return to article text above
6 For a great roadmap for retailers and RFID see Road to Value With RFID. — Return to article text above
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