Supply Chain Challenges
Today’s consumer is driven by an “I want it now” mentality, yet retailers are still not prepared to deliver. Reducing the time it takes an order to arrive at a customer’s home is every retailer’s objective, but while quicker fulfillment makes customers happy, it comes at a cost.
Although retailers are working hard to transform their supply chains to provide consumers the same ease, convenience and value regardless of channel (mobile, online or in-store), 80% of merchants are not prepared for the changes required to implement a customer-centric, omnichannel model.
This finding was revealed in the HRC Advisory’s “2015 Supply Chain Transformation” study, which also identified the challenges presented to retailers by their pure-play e-commerce counterparts, expensive online returns and cannibalization of in-store sales.
So how can retailers be better prepared to enable the transformations required?
Strengthen Supply Chain and Fulfillment Capabilities
Retailers currently lack the capabilities necessary to compete with their pure-play e-commerce counterparts, as only 35% of those surveyed had online capabilities, such as vendor drop-ship, or order in-store and deliver to the customer. Meanwhile, their e-commerce competitors have spent years investing heavily in these supply-chain capabilities.
Recent announcements of same-day, and even one-hour shipping, in addition to free shipping (e.g., Amazon Prime), are applying further pressure to conventional retailers. These competitive shipping offers are forcing traditional retailers not only to set up fulfillment centers in order to compete, but also to reconfigure their supply chains in order to service this new model. Wal-Mart’s announcement of plans to spend between $1.2 billion and $1.5 billion this year on global e-commerce efforts, amid ramped-up competition from Amazon, is indicative of the urgent challenge brick-and-mortar retailers are facing to catch up.
Reduce Returns of Online Purchases with Ship-to-Store
Ninety-five percent of retailers acknowledge that their biggest hurdle in transforming the supply chain is how to mitigate online returns, which can run as high as 30%. Even returns to a fulfillment center or direct to a supplier incur incremental freight costs, the risk of shipping-related product damage and a lost opportunity for a replacement sale in-store.
One solution, which can help to drastically reduce the rate of returns overall, is to have online purchases shipped to an actual store for pickup. When consumers come into the store to pick up their product, they are likely to touch and feel the fabric, try the garment on to test size and fit, or examine how the product actually works — all of which can reduce return rates to a more acceptable 15%.
Shipping to store can be advantageous for both the retailer and consumer. Consumers save on shipping costs they may incur by having the product delivered to their home (plus additional costs of return shipping, should they decide against keeping the item). Retailers enjoy the benefit of increased store traffic, and the likelihood that once captured in-store a shopper is more likely to make additional purchases. A win-win for all.
Leverage E-Commerce Sales In-Store
Seventy-five percent of the retailers surveyed indicated that their e-commerce sales are cannibalizing sales that would have otherwise been made in stores. And while e-commerce sales growth rates are often 10% to 15% greater than physical store growth rates, nearly three-quarters (70%) of retailers surveyed said they are still struggling to develop a profitable economic business model for e-commerce, while simultaneously maintaining acceptable store profitability.
While there is no simple remedy, retailers can begin by leveraging e-commerce sales in the physical store. We’re already seeing several smart retailers using kiosks as a way to sell merchandise not offered or available in the store.
This strategy allows the retailer to free up cash flow and space by maintaining less inventory in the store, while still offering the full online assortment to their brick-and-mortar shoppers.
Update Integration Between Physical Stores and E-Commerce Fulfillment
In order to successfully accomplish any of the above, retailers need better integration between the physical store network and e-commerce fulfillment. This integration has proven to be the best way of providing better inventory availability, increased gross margin, reduced shipping/fulfillment costs, lower return rates and increased foot traffic in stores.
However, more than half (52%) of the retailers surveyed admitted that they do not have the systems or processes in place to provide the required visibility to accurate inventory on hand in each store.
Eighty percent of the retailers surveyed identified inventory visibility and accurate assortment planning between online and physical channels to be the top two challenges in enabling fulfillment capabilities. In fact, only half of the retailers surveyed (53%) are currently able to present customers with accurate inventory information and to fulfill the entire order at the time of online purchase.
Further, only half of the retailers are able to ensure fulfillment from the closest location, when an item is available in multiple locations and distribution centers. To be most cost-effective and efficient, retailers need to be able to identify and present all inventory from store distribution centers, e-commerce fulfillment centers and physical stores as a single shared inventory pool.
Despite the working capital and operating cost challenges of funding, storing and distributing inventory for each channel in separate distribution facilities, 55% of the retailers continue to have dedicated fulfillment facilities for each channel. And only 25% of these retailers are launching initiatives to combine these facilities in order to serve both channels more cost-effectively and optimize their working capital investments in inventory.
With online and omnichannel customer demand growing rapidly, extremely high shipping costs and high return rates, retailers are working hard to transform inventory processes from the traditional inventory push model to a responsive, customer-centric model that provides flexible purchase and return options to the customer, and allows full access to all inventory across the system.
The primary challenge for retailers is to ensure they maintain consistent, high service levels for their customers regardless of the channel in which they shop, pick up orders or return goods, while maintaining profitability during this time of major transition.
Farla Efros is president of HRC Advisory, a leading strategic retail advisory firm focused on increasing retail profitability.