More customers, fewer profits?
Retailers are investing heavily in their supply chains in order to cope with surging e-commerce volumes, but customer experience enhancements must be planned carefully if profitability is to be maintained.
Consumers want more from retailers as e-commerce develops and grows. Accenture’s 2015 “Seamless Retail” research, based on a survey of 10,000 customers across 13 countries, shows high levels of demand for new services. Almost 90% of those polled are interested in ordering out-of-stock options via their mobile phones when shopping in stores, for example, while more than a third shop online before visiting a store to check on availability. More than 60% of consumers say order consolidation is important to them, while a quarter now use click-and-collect services.
To meet these demands, retailers are making sizeable investments in their supply chains in order to meet these expectations. Accenture’s “seamless retailing” study also benchmarked 189 retailers across 12 countries, and found almost 60% now offer a free delivery option, while close to 50% allow customers to return unwanted online purchases to stores. Other services are gaining traction quickly: almost 15% of retailers now offer drive-through pick up facilities.
Many retailers are thinking about new ways to meet their customers’ desire for faster, cheaper and more convenient fulfilment, often on a global basis. One British retailer has conducted trials with eBay to offer click-and-collect services for the latter’s goods in its stores, as one example.
Tough cost choices on fulfillment
While the potential for e-commerce is exciting, scaling up the supply chain to meet customer demand is expensive – and the future costs are uncertain. Today, many retailers are investing in order to support online sales that account for only 10% of total turnover – how much more will they have to spend as that figure increases?
Cost pressures are already beginning to bite. Accenture research shows that one major online retailer’s fulfillment costs as a percentage of its sales rose from 8.1% in 2009 to 11.2% by 2013 – an annual increase of 8.4%, and life is going to get tougher. A study of 40 retailers found that all but one offered some form of free shipping to customers – while warning that key logistics partners in the U.S. plan to increase their prices this year.
Meanwhile, alternative fulfillment strategies create their own problems. The click-and-collect model may reduce shipping costs, but one large retailer recently warned that it could soon need three trailers full of goods parked outside every one of its stores in order to fulfill customers’ orders. The drive-through collection operations being trialed by retailers in the UK, France and the U.S. will pose similar challenges.
The danger for retailers now is that they invest ever more in new capabilities that deliver a seamless customer experience but lose them money. Too few retailers are planning strategically – either for when they should make these investments or for how they should balance speed and scale of fulfillment against complexity and cost.
The ‘what if’ question
Part of the answer is more use of scenario testing. Retailers need to spend more time asking “what if?”. What would it mean for the supply chain if consumer behaviors evolved in different ways – and how would the company maintain profitability while scaling up fulfillment at the right time in each case?
Imagine, say, that based on its market research and customer insights, a global retail chain sets out three possible scenarios for its e-commerce over the next five years. These scenarios envisage a low, medium and high increase in online sales, and estimate how much supply chain disruption each outcome would cause given three different types of shopper – those making regular purchases, those buying missing items, and those browsing and buying on impulse.
The impact of the first of these scenarios, where online sales increase to around 15% of total turnover, would be manageable. Fulfillment would become more challenging, but not overwhelming. Maintaining profitability would require creative thinking but should not be impossible.
At the other extreme, however, where online sales move to 25% of turnover, the impact is much greater. More consumers make regular purchases, click-and-collect centers come under even greater pressure, and scheduled deliveries rise. In this scenario, the retailer has to reinvent its supply chain for a different business model.
These simulations are crucial if retailers are to work out the right approach to logistics for their specific situations. Retailers understand they must invest in their supply chains in order to respond to changing consumer behaviors – or risk falling behind their rivals – but scenario testing is the key to deciding how much to invest, as well as where and when.
Nor is scenario testing only useful at this headline level. Retailers who test at the right level of detail can justify supply chain spending commitments while also securing benefits such as reducing cost-to-serve through greater integration of store, distribution center and e-commerce operations, and optimizing returns processes.
Agility turns insight into action
Scenario planning will provide retailers with the insight they need to plan their supply chain enhancements, but those lacking organizational agility will not be able to execute such strategies with sufficient speed. Increasingly, retailers recognize this imperative: a Retail Week report last year found that a third of retail executives now rate agility as one their top three supply chain challenges.
Confronting that challenge will require action on several fronts. Agile organizations have experienced managers throughout the business, with the capabilities to cope with diverse circumstances; they also have a culture of accelerated decision making; they prioritize strategic decisions; they invest more in data and analytics; and they work with suppliers, customers and partners to measure outcomes quickly so that they can rapidly change direction if needs be.
These attributes are crucial. Better scenario testing will enable retail leaders to identify where investment is best targeted in order to cost effectively provide customers with the services they need most. But those retailers lacking agility may find that by the time they have built supply chains fit for such purposes, customers have already moved on.