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IREU Top500 The Customer Report: 2018

IREU Top500 The Customer Report: 2018

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End of the free lunch (IRM54)

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John Lewis shocked the industry by bringing in a charge for its Click & Collect service at the end of July. Emma Herrod takes a look at the thinking behind the move and the implications for the industry.

John Lewis  introduced free Click & Collect in 2008, understanding before many of its competitors that the high street model needed upending. Three years later it expanded the locations from which customers could pick up their online purchases to the network of Waitrose stores as well as the independent CollectPlus network. The benefits for the business are there for all to see: the service has been a massive success and is still growing, processing six million orders over the past year compared to 350,000 in its first. It has helped online shopping sales’ share to more than treble, from 10% to 33%, and produced record-breaking sales figures in 2014. “It’s an archetypal case study of how bringing a new model into an industry can revitalise and refresh it,” comments Hedley Aylott, CEO, Summit.

However, John Lewis Managing Director Andy Street has referred to the free service as “bonkers” and “unsustainable”.

As of 28 July this year, Click & Collect is no longer free: John Lewis customers are now being charged a £2 fee for orders of under £30. Is this a first step that will lead to a major change across the retail industry, a backwards step for John Lewis or simply a message to customers that there is a cost to fulfilling orders?

The company says that the charge reflects the unprecedented growth of online shopping and is its way of ensuring that the service remains fit for the long term. Click & Collect has rapidly grown to become the fulfilment option of choice for customers with 56% of all online orders collected. Every night tens of thousands of parcels are shipped from John Lewis’ distribution centre to more than 360 collection points across the country ready for customers to collect the following day.

Mark Lewis, Online Director at John Lewis, comments: “We offer our customers a wide variety of delivery options but we know right now the delivery option of choice is next day Click & Collect. The change... will mean that the majority of orders will remain free of charge while allowing us to invest further in the expansion of Click & Collect to ensure it continues to delight customers as it grows in popularity.”

The retailer is investing more than £80m in its supply chain and £100m in IT this year alone – the latter being five times more than it invested five years ago.

But how far does the new £2 fee go to offsetting the investment for the longer term? “The reasons given by John Lewis certainly do make sense, when viewed in a logistical context. “Transporting small ticket items between stores and depots is not cheap, so the retailer is well within its rights to add a markup,” says Aylott.

Andrew Starkey, Head of e-Logistics at IMRG, agrees: Click & Collect has become sufficiently popular and retailers are starting to understand the costs involved in fulfilling orders per unit per movement, he explains. These costs will be different for each retailer and depend on the extent of their store network, whether they are fulfilling orders from stock that is already in the store (and that they have visibility of that stock) or whether customer orders are despatched from a warehouse. Starkey adds that the cost is dependent on whether Click & Collect orders are sent to a store at the same time as stock for store replenishment. If a store receives stock only on a weekly basis then next-day Click & Collect orders have to be sent separately, such as via a carrier. A B2B delivery is cheaper than a B2C one but the retailer still incurs a cost.

“If it’s a large order, it’s worth retailers carrying the cost – which is still cheaper than delivery to home. For a small order, there is a cost,” says Starkey, especially when you consider that fulfilment of Click & Collect orders to Waitrose outlets will consist of stock not held in store.

COST & THE WIDER ISSUE

Shoppers are used to the concept of order thresholds for free delivery to home, and Amazon has recently raised its to £20, or £10 if an order includes books or other home entertainment products. Amazon Add On is used as a way to increase the basket size by offering customers inexpensive products that tip the basket value over the threshold to qualify for free shipping. Mudit Jaju, Digital and Data Partner, Head of Ecommerce, EMEA, MEC, suggests a similar approach for John Lewis: “I would like to see John Lewis potentially use this as a way to engage with manufacturers: shipping incentives are highly valued by consumers, and brands want to be close to things that consumers value.”

While retailers such as M&S have announced that their Click & Collect service will remain free – and even expanded to franchised Simply Food stores – John Lewis is not alone in introducing a charge. For example, Sport Direct – a retailer that thrives on its in-store discount model – overhauled its online offer with a £5 Click & Collect service. “Expensive, you may think,” says Aylott. “But when you offer a £5 in-store voucher it suddenly becomes a savvy move, altering its business model to one that is cross-channel and highly competitive.”

Despite it being launched only in the second half of the year, the service already accounts for more than 20% of the company’s UK online orders, a figure that the company is hailing as “exceptional”.

Tesco, which offers free Click & Collect on grocery orders over £25, raised the minimum shop to £40 from 23 July, a move that highlights the cost of picking grocery orders in store. The charge for orders below the threshold currently stands at £4. In-store collection of orders from Tesco Direct remains free.

At some point, retailers will have to hold their hands up and admit that the party is over, believes Dan Murphy, Partner, Kurt Salmon. John Lewis has taken a brave step, admitting that the cost of Click & Collect is unsustainable. It ships Click & Collect stock from central locations rather than existing store stock, so its costs are higher than other retailers. Although it won’t be covering the full cost of the service by introducing a £2 charge, it will be highlighting an important message for customers: there is no such thing as a free lunch.

Until retailers start to charge customers the true cost of delivery, they will effectively be paying their customers to shop with them, and this is unsustainable. The more this service grows, the worse the problem becomes. “At some point someone will have to stand up and say the economic model does not work. John Lewis just said this in a very quiet way,” says Murphy.

Starkey believes that the retailer, as a market leader, hasn’t taken the decision lightly. But he does think it’s a “sensible move” and one which could be followed by others. He says that they will at least “have got their calculators out now that John Lewis has let the genie out of the bottle”.

Click & Collect, though, is all about convenience for the customer. Other retailers may follow suit and introduce a charge, or shoppers may go elsewhere – or choose the convenience of a third party collection point. “It’s a brave move by John Lewis, no doubt driven by sensible cost management and a strong belief in their in-store customer experience proposition,” says Surash Patel, CSO, mGage. “The question that remains is whether less loyal shoppers will want to pay the premium.”

Phillip Smith, UK Country Manager, Trusted Shops, puts the cost to customers into perspective: “Of course some shoppers will berate the charge but many of them would think nothing of leaving a £2 tip in a restaurant for food to be delivered only a few paces from the kitchen – something has to give.”

However, if customers are paying £2 to collect their order from their local Waitrose and perhaps then going on to fill a basket with goods costing over £30, I for one think that John Lewis parcels should at least be handed over with the same smile that you get for a £3 home delivery.
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