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IREU Top500 The Customer Report: 2018

IREU Top500 The Customer Report: 2018

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Stalking the silent killer (IRM54)

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Few retailers it seems have a very clear understanding of the costs of omnichannel fulfilment: it is something they cannot or will not measure. As every manager knows only too well, what you cannot measure you cannot control – and those fulfilment costs are a very real threat to retail profitability. Penelope Ody investigates.

Ask omnichannel CEOs about the profitability of their online orders and the answer is unlikely to be one of unremitting glee. According to the annual JDA and PwC CEO survey, fewer than two in 10 of those questioned could say that they were fulfilling omnichannel orders profitably: put another way it could mean that 81% of retailers cannot make a profit from omnichannel delivery – or more likely have no idea whether they are or not. Returns, shipping direct to consumers, and ship to store for customer collection were ranked as the top three loss-making activities in the survey.

Quote these figures to retail consultants and the response is disbelief: not surprise that so few are making profits on these orders, but incredulity that any of them actually are. “I would guess that the 19% claiming to deliver profitably are perhaps being economical with the truth,” says Dan Murphy, Partner with Kurt Salmon. “Over the past few years I’ve worked with many retailers and none of them is making money on home delivery. Pure plays have an entirely different cost base so they can make profits, but traditional retailers have always depended on the customer to fulfil that last mile – i.e. take the goods home with them – so their cost to serve is entirely different.”

A few years ago, in a growing market, when online orders barely accounted for three or four per cent of any retailer’s sales, there was little pressure to evaluate delivery costs. Today when online can hit 25% or more, those little losses on each order are mounting. “Retailers cannot continue to hide these costs under the carpet,” says Murphy, “CEOs and CFOs will ultimately call a halt and perhaps we’ll see home delivery charges going up to a realistic level.”

Back in the mid-1990s when Tesco launched its home shopping service, its rivals calculated that each home delivery actually cost £25, leading the then IT Director of Waitrose to declare that his company would never get into online grocery until those costs were down to £5. Today the true cost of picking, packing and delivering each online grocery order is still significantly more than the nominal amounts actually charged to customers, so it is hardly surprising that Tesco, following a similar move by Asda, recently upped its minimum online order to £40.

MARGINS

“Retailers may have a view of the total costs involved,” argues Craig Sears-Black, MD for UK and Ireland at Manhattan Associates, “but not the actual cost per order as the level of granularity simply isn’t there, so it is difficult to make appropriate offers on free or reduced delivery costs.”

If, he argues, a particular item is high margin then offering free delivery on that line will still lead to a profitable sale. Similarly if a particular customer has a high potential life-time value then occasionally making a loss on delivery can be sustainable. What is needed is not just immediate real-time information about the stock availability of every SKU, but its margin, location, storage and despatch costs, as well as individual customer history and buying pattern.

For example, if Mrs Smith in Bristol wants to collect tomorrow from her local store an item that is currently only available at a warehouse in Birmingham, then is it cost effective to fulfil if Mrs Smith has a history of returning 50% of the items she orders? Should she be charged for collection or told that the item is unavailable? Retailers may have much of the information needed to answer such questions lurking somewhere in their systems, but they are unlikely to have the analytics, integration and number-crunching capability to deliver it in real-time to the webpage when Mrs Smith places her order.

The result, says Sears-Black, tends to be a blanket – one size fits all – approach to delivery charges. John Lewis may have introduced a £2 charge for click and collect orders, but with suitable technology, suggests Sears-Black, it could be more selective charging only where margin is damaged or where customers have a poor purchasing history. “Such tactics are a blunt instrument rather than being item-specific,” he says, “because retailers don’t have the necessary information.”

The technology certainly exists to provide this sort of instant item-level information with rules-based engines capable of recommending profitable or preferable solutions in real-time – but it’s unlikely to be a low-cost option. “How to make omnichannel more profitable is top of mind for retail CEOs,” says Jason Shorrock, Retail Strategy Director at JDA. “They know they must improve efficiency, but it’s a big investment and involves major change so most retailers have been putting it off, but as the proportion of online orders has grown, many realise that they cannot put it off any longer.”

As a result JDA is seeing increasing investment in up-to-date warehouse management systems, automated picking and in-store systems to cope with click and collect. “Retailers are also looking more closely at what customers actually want,” he adds, “rather than just joining the ‘arms race’ to keep up with what their competitors are offering.”

PREDICTING THE DEMAND

JDA’s customer surveys, for example, suggest that convenience is becoming more significant than speed of delivery, so a local pick-up or handy locker site may be preferable to goods “guaranteed within 90 minutes”. Amazon appears to be hedging its bets on customer preferences by using predictive analytics to ensure that sufficient top selling lines are in convenient locations to give rapid and local delivery. If, for example, current purchasing patterns suggest that five of item X will be sold in Manhattan tomorrow, then Amazon ensures that five item Xs are in town, with its staff taking trolley loads of parcels on the New York subway to provide rapid delivery.

“It is still important to balance inventory against cost,” adds Shorrock, “you need inventory optimisation or what we call ‘destination driven demand’ to make sure the products are in the right place. We’re seeing retailers develop one of the, perhaps, five or six outlets they have in a region as a mini-fulfilment hub, where additional stock is located. That can then be moved quickly to nearby stores to meet customer demand.”

Customer demand may be rather easier to meet than customer expectation if the twitter storm experienced by Tesco when it upped its minimum order level is any indication. Shoppers have become accustomed to “free” services – be that next day delivery, same-day collection, free returns or whatever. Introducing realistic charges for such services will be challenging, but may soon become essential: no doubt where John Lewis leads others will soon follow and much click and collect will soon have a price tag attached.

Dan Murphy recounts a recent conversation with some fund managers covering European retail stocks. The financial watchers, it seems, are starting to worry about retail profitability and are trying to analyse the online costs incurred by the major omnichannel players. “Their view is that the major investments needed for online – technology, infrastructure, marketing, promotions and discounts, returns, logistics, ecommerce headcount and so on – are generating massive and growing losses for all these retailers,” reports Murphy. “The phrase they’re using is ‘The Silent Killer’.”

With online sales continuing to grow, today’s approach to low-cost delivery and collection may well be unsustainable. Clever technology may – at a price – help to bring those overheads down but, one suspects, the subject of “omnichannel fulfilment costs” will become a rather worrying Boardroom priority.
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