Omnichannel puts retailers in the red
Buried by the high cost of fulfilling online orders across multiple channels, only 16 percent of companies can fulfill omnichannel demand profitably today, according to a new study from JDA.
The "Omni-Channel Fulfillment Imperative" report, based on a global survey of more than 400 retail and consumer goods CEOs, also found 67 percent of respondents reporting that these costs are growing.
The highest costs associated with omnichannel selling:
- Handling returns from online and store orders (cited by 71 percent of respondents);
- Shipping directly to the customer (67 percent);
- Shipping to the store for customer pick-up (59 percent).
The fulfillment capability most cited as needing attention was transportation and logistics, named by 88 percent of CEOs as a priority for the future. The second was improving inventory availability to fill orders, cited by 85 percent.
JDA pointed out that every time an online order arrives, retailers can either pull the product from a local store, send it from a centralized warehouse or ship it directly from the supplier. However, they "lack the insight to make these decisions in a profitable manner — and are not sufficiently focused on this critical capability gap," according to Kevin Iaquinto, chief marketing officer at JDA.
Seventy-one percent ranked omnichannel fulfillment as either a high or a top priority. The respondents planned to invest an average of 29 percent of their total capital expenditures for 2015 on improving their omnichannel fulfillment performance.
Mr. Iaquinto said retailers need intelligent logistics and fulfillment solutions that can reveal the hidden costs and customer service trade-offs associated with every delivery option. He added, "In addition, to truly win in the omnichannel marketplace, retailers need the upfront demand forecasting tools to make sure products are already distributed across all locations in a manner that supports profitable delivery."
Discussion Questions
Will the costs of seamless omnichannel fulfillment be absorbed as companies learn to work more efficiently? Will expectations around omnichannel capabilities and/or expected costs to consumers likely have to be reconsidered?
Online is a “gimme” business.
Gimme the lowest price.
Gimme free shipping.
Gimme no tax.
Gimme free returns at any point.
Someone has to pay the piper for all the gimmes—and it appears it is those who actually go out of their way to drive to a brick-and-mortar store where “gimme” is service. And it is a place where you can truly juice sales, not just go after the lowest common denominators of “gimme.”
Everything is dictated by shopper expectations. Retailers simply need to figure out all of the issues associated with serving their customers in an efficient manner. The most important issues pointed out, delivery logistics and inventory/supply chain, are two of the main reasons retailers exist in the distribution chain. If you’re not excellent in these two areas, why shouldn’t shoppers purchase directly from the brand?
The retailers who address this gap will maximize their success. Brands will be monitoring this issue as they develop methods and processes to engage directly with their customers. Shoppers will not pay more for this capability. This is the expectation and the new normal. Shoppers do not put a premium on this capability. The challenge for retailers is to provide excellent customer service that is valued by their shoppers.
The key in this process is to first look at the best practices around the world. I find too often that local companies do not leverage the efficient processes of experienced companies. Take the best elements of the task and implement them in your organization. Next, look at specific-line item costs and extract those elements of the tasks. A great way to identify those tasks is to compare against publicly-traded peer companies and look at their financials. Determine the values of key metrics (e.g., COGS per employee, etc.) and drive those down in comparison to your peers.
Consumers will only continue to demand these services, so it is critical to mitigate these costs right away. It is too easy to let them get out of control.
Although the term omnichannel has become ubiquitous in the industry, this indicates clear proof that retailers are a long way from successful execution in an omnichannel world. It would seem that some of the critical issues can be addressed by learning from what worked in addressing the same challenges across widely-distributed store networks (demand forecasting, merchandise allocation, responsive/adaptable supply chains, etc.) along with learning from best practices of those who are succeeding today, as already suggested by Ralph Jacobson.
There’s a part of omnichannel that retailers are overlooking today and that’s social. I’m sure having better product descriptions, better photos and incorporating customer reviews on product pages could possibly reduce the high percentage of returns. That’s a mitigation strategy. Retailers should look to social to jump on opportunities to increase revenue by surprising and delighting shoppers when they comment about needing help buying an item or turning a poor customer experience into a good one.
The results of this study are hardly surprising. The onus is on companies to make seamless omnichannel fulfillment work from a financial perspective as customer expectations are unlikely to change.
The costs will go down once the mechanics are in place and paid for. Customers don’t seem all that interested in paying more for the convenience of multiple methods of acquiring products. In this case retailers will have to use the technology to also create efficiencies, not just convenience.
The problem that retailers are having with omnichannel selling is the complexity of two, three, four or more data files working against one another to come to a single conclusion. Anything more than a single enterprise database file being used to determine critical transaction methodology and support is a guaranteed time delay with error possibility, consumer-targeted delays and lost merchandise increasing exponentially as higher transactions per minute climb.
This is no news to genuine hands-on and experienced IT managers and executives. All of these problems occurred when the decision to include two or more software packages with totally incomparable data file structures was made. This same issue is the reason for big data nightmares and rising third-party support costs. Companies that delay in choosing and migrating to a single point-of-sale package will only insure the loss of financial management of the existing or potential incompatibilities. Most c-suites are living with answers from IT departments such as “There is not much we can do at this point” or “This is what we have to work with” when proven options should be discovered, approved and implemented.
The “omni,” meaning all, in omnichannel should be replaced with the word “onechannel” as in one data file for both POS and financial reporting systems. Remember this for the future as well, buying enterprise software no matter how much you think it is necessary without source code will return you to the land of out-of-control cost increases.
First, let’s look at the source of the study. JDA wouldn’t be publishing this if they didn’t think it favored their solutions in some way, shape or form: “retailers need intelligent logistics and fulfillment solutions that can reveal the hidden costs and customer service trade-offs associated with every delivery option.”
Most retailers are reacting to omnichannel rather than having planned for it, which definitely leads to higher costs early on. My question would be: how many retailers started pursuing an omnichannel strategy before 2013 and how many have a roadmap detailing their investment focus and timeline for implementing? As we’re early in the cycle, often times the first few years of pursuing a new area aren’t as efficient as when firms have more experience. While I firmly believe early adopters will benefit, they also have to be disciplined about how they budget and spend.
Just as we’ve seen ride sharing services, we are beginning to see task services. Organizing that people channel along with Uber might be the—what seems crazy—way things will play out. Here is some movement in this direction from today’s TechCrunch.
This is just growing pains. Retailers drag their feet in improving back-end systems to provide better visibility. I am not surprised at all. However, now that there is some pressure to get these issues resolved, supply chain visibility will also improve bringing with a whole lot of other improvements.
For some reason, people think online fulfillment is free and it is not. There is a transportation trade off of shipping large volumes either truck load or less than truck load versus package delivery. Pulling inventory from the store results in the inventory multiplier greatly increasing and dislocation of inventory, especially for seasonal merchandise. Retailers have no option but to absorb this added cost.
At this time, consumer expectations are not realistic. Consumers visit stores and plan to take their purchases home with them. Same for order online and pick up at the store. The idea of 1 hour delivery is not realistic unless the warehouse or store is within a few miles of the consumer. Just communicating the transaction and getting the fulfillment executed takes time away from transportation.
It is best to let the competition sell the customer on 1 hour and continually fail than to offer a service you cannot do successfully every day.
I suppose we can stipulate that fulfillment and delivery have always been the hardest parts of e-commerce, and its primary competitive disadvantage versus self-service brick and mortar stores. It’s fairly self-evident: the cost per unit to ship a pallet of items to a store is significantly lower than the cost to pick and deliver one unit to a home address.
So when a retailer invests in mechanisms that will shift a portion of sales from in-store to online, it must anticipate the kinds of challenges to profitability re-identified in this report. This is compounded by online price transparency, which discourages e-retailers from making up some of the expense by padding margins. Competitive pressure for rapid delivery and liberal return policies add extra layers to the micro-economic model.
A reminder of one of Tenser’s Laws: A service standard that can be experienced anywhere will be expected everywhere.
Success in this realm begins with a single system that tracks inventory continuously with visibility to where each item is located across stores and distribution centers. Then retailers need a set of business rules or algorithms that enable smart fulfillment decisions at high speed. Sometimes shipping from the nearest location is not the optimal, most cost-effective, or even fastest option.
As all online sellers have learned, delivering on the promise is costly, in terms of technology investment, organizational changes, and the variable costs of third-party delivery. It doesn’t feel fair some of the time, but it is driving innovation. I’m convinced retail winners will learn to tune the model and earn some profits, while some others are left behind in the digital dust.
You mean retailers now have to deliver things fast—14 minutes or less if I read another thread correctly—AND make a profit? That’s just so unfair….
Okay, okay, but as the latest buzzword loses its glamour, and the reality of what “omnichannel” entails settle in, we will have more questions like this—as well we should. Some will be able to handle it, and some won’t; and as that latter group drops out, success rates will rise and/or average costs will fall. But the model that many retailers have grown comfortable with, where a small number of underpaid employees are expected to staff a 10-100K GSF operation isn’t going to work if you add inventory control, pick/pack and shipping to their duties.
I have been studying this concept for a business start up for several years, and there are several issues that you can not sweep under the rug. None of us are Amazon, which is first and foremost, nor do we have their set-up, and never will, as we do not have the capital or the incredible logistics to take advantage of. The fulfillment process is a huge bottleneck for any retailer, as it takes manpower, and when the product arrives at the destination, it better be in the proper condition it was when it left the store.
I am speaking as a supermarket owner, which if done right for e-commerce, takes extra special care and expense to pull off, and the consumer must absorb the cost, as the margins on the sale cannot absorb the effort to get it to the homes. This is one stumbling block, along with complying with local and state laws on refrigerated trucks, with multiple holding temps required to insure safety of the product without freezing the bananas or tomatoes. Selling fresh foods is difficult at times even inside the store, let alone delivering them to someone’s home at the right time, and a price the consumer is willing to pay, which is a whole other story.
In talking with a leading retailer at a meeting, they said that since they are charging for local grocery delivery at only $8.99 per stop, the customer average order is at $155.00, which is fine, but again someone has to take the order, fill it, and have it delivered within a 2 hour window, and still make a profit. Adding costs to the prices for them is something they will not do, and fear repercussions for doing so, and it has not been a profit center for them thus far.
Sorry for being long winded, but in my business, ordering online and picking up curbside is IMO a good way to go, as a $5 charge for this would not be out of line, or a yearly fee, as I have seen this done already. Clothes, shoes, cigars, and electronics can all be in one vehicle delivered by a company who specializes in this for a set fee, but groceries added into the mix without proper care handling perishables would be very difficult, without a fancy van to assure the integrity of the product.
Great topic for discussion. Have a great day everyone.
Yes, the costs of seamless omnichannel fulfillment will be absorbed as companies learn to work more efficiently. That, of course, involved reconsidering of expectations, mostly on the part of the retailer. And, finally (drumroll), the demand forecasting tools/predictive analytics is/are here! “How Predictive Analytics Are Revolutionizing Retail.”
I’m not at all surprised by the results of the JDA survey. True omnichannel is still a work in progress for most retailers, and there aren’t yet best practices to work from. There are some key goals for retailers who want to succeed here, though, including product visibility, and processes in place for picking and shipping. The clock is ticking to stay relevant…!
It makes sense that there is a learning curve for omnichannel commerce. It’s still a rather new facet of retail and the bumps in the beginning of the road will make retailers reevaluate their this strategy early and often. Seamless omnichannel is possible, it will just take some time to learn the best way for each individual retailer to implement it.
No. These will continue to impact the bottom-line profits. There has to be a better, more seamless way for omnichannel fulfillment to work efficiently.
Absorbed? Does that mean included as cost of sales since one could argue they are necessary to compete? Are omnichannel costs listed above more or less expensive that e-commerce? Free shipping, extra IT support, etc? I’ve seen no challenges to these costs, most consider them required.
In my judgment, properly marketed, consumers will pay a bit more for the conveniences of omnichannel services; think of them as a check bag fee.