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Home delivery costs – a sinking ship?


Dan Murphy, a partner at Kurt Salmon, the global management consultancy that specialises in retail and consumer goods, believes retail CEOs are caught between a rock and a hard place. This is because as quickly as ecommerce sales have grown, their associated costs insist on keeping pace. Is this all becoming unsustainable, and what are the inevitable consequences for the delivery sector?

Dan Murphy , Kurt Salmon

Dan Murphy , Kurt Salmon

Many years ago, a venerable CEO of a highly respected retailer said to me: “Retailing is a very simple business, run by overly complicated people. You sell stuff at a profit and manage your costs carefully so that you have something left over.” But oh my, how complicated retailing has become in the last few years.

In the last 10 years or so, retailers have all decided that they have to jump on the ecommerce bandwagon or be left behind – with the exception of a few traditionalists like Sir Ken Morrison, who refused to invest in loss making activity. But mostly the new digital warriors persuaded major retailers to invest millions in growing online. Today, pretty much all retailers boast a gleaming website and multichannel digital business, with a fine selection of new directors and senior executives – ecommerce this, digital that, and various heads of multichannel customer experience.

But what’s this we hear, the nagging sound of doubt about the real costs of ecommerce? A recent analysis indicated that the major UK supermarkets are losing as much as £100m a year in online shopping. Massive investment in complex technology; costly physical order fulfilment; unfocussed digital marketing spend; and lost add-on sales in stores – the more the online channel grows, the more money it loses. At what point should retailers consider letting go of this particular rising balloon?

When ecommerce was still young, running at a few paltry per cent of total sales, the costs could easily be absorbed into the main business. Email marketing campaigns; single picking for home delivery; web technology; price matching – it was all an exciting new experiment, and the costs could easily be accommodated under the heading of “keeping up with the Joneses.”

But by Christmas 2014, online shopping accounted for a shade under 25% of all UK Retail spending, so now retailers have to take it seriously. The problem is that the costs of online retail have continued to grow in line with sales and it’s now a major problem. Let’s just take one element, the costs of home delivery. Most analysts agree that the real cost of a home delivery is about £20, especially if it includes fresh or frozen / chilled foods. Retailers know that they can’t charge customers this, they can only charge about £5. So they lose about £15 on every delivery, and this is what generates much of the £100m losses.

So what should they do?

Up until now, most retailers have been trying to keep the cost of home delivery as low as possible by using whichever third party parcel carrier offers the lowest delivery price. The problem with this is that these carriers simply cannot provide the service at these low costs, especially at peak times like Black Friday and Christmas, and this is why we saw such a meltdown in deliveries over the Christmas period last year and Mother’s Day 2015.

Many carriers, such as Yodel, simply stopped making deliveries whilst others such as City Link threw in the towel and went bust. Yodel is one of the largest carriers and has tried its best to provide a decent service at these rock bottom prices but has discovered that it is impossible. They have been voted the worst carrier for the last two years in terms of customer service. Recently their exec chairman Dick Stead has told their major retail accounts that they cannot simply offer (Black Friday) next-day deliveries to their customers without agreeing the volumes with Yodel in advance. This does not sound like a recipe for successful customer service.

The inescapable conclusion is that the economic model just doesn’t work and retailers are now agonising over what to do about it.

Retailers find themselves caught between a rock and a very hard place. On the one hand they know they have to offer their customers a strong mix of product, quality, price and service if they are to compete and survive (it’s called “retailing”). On the other hand they know that providing the level of service their customers demand is generating huge losses and their customers simply won’t pay the extra cost.

So what is the beleaguered Retail CEO to do? Well, perhaps the best place to start is with what they all claim, i.e. “the customer is at the heart of everything we do.” Does promising something that you know you can’t afford to deliver make for satisfied customers? Of course it doesn’t. So be honest. Tell your customers that if they want a guaranteed next-day delivery they have to pay for it. If they want the lowest cost delivery, they can’t have it delivered at 6pm on a Friday evening. And their Mother’s Day flowers may not show up until the day after Mother’s Day. Tell them the truth, honesty really is the best policy.

We are seeing some early signs of this happening. John Lewis and Tesco both caused considerable customer angst recently when they announced that they would be putting the charge for delivery up to help cover costs. But what else can they do?

The model is no longer sustainable. The ship is sinking.

Customer service has never been about promising the earth and then failing to deliver it. Good customer service is being honest with your customers about what you can deliver, and then executing with excellence. Retailers have to sit down with their carriers and analyse exactly what the realistic costs and delivery standards are and specify them carefully so that everyone makes money and customers know exactly where they stand and have a transparent choice.

And if any retailers doubt that customer service really is the foundation stone, just look at what Ryan Air did recently. A business that seemed to pride itself on keeping costs low at the deliberate expense of any customer service finally realised that the party was over. In 2014 Ryan Air embarked upon a massive drive to improve customer service, which many suspect gave Michael O’Leary more than a few sleepless nights. And what was the result? A 66% increase in profits. Primark experimented with online shipping (through but realised it wasn’t cost efficient and stopped offering it. They don’t seem to be suffering much as a result.

If Ryan Air and Primark can understand the importance of cost-efficient customer service and act upon it, then all other retailers should be able to do the same. Stop pretending that you can offer stuff for free when it is costing a fortune. That is not good business, it’s insanity.

And it simply cannot continue.

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