A study by JDA and PwC finds that only a small percentage of retailers and brands are able to fulfil their omnichannel sales profitably…
Retailers and consumer goods manufacturers are spending an enormous amount of money, energy and time to improve their omnichannel sales capabilities. While this may not be surprising given the current business environment, a new JDA study reveals an unexpected and disturbing fact: despite these significant investments, only 16% of companies say they can fulfil omnichannel demand profitably today.
This finding, and others, are highlighted in The Omnichannel Fulfillment Imperative, a report prepared for JDA Software Group by PwC. This study is based on a global survey of more than 400 retail and consumer goods CEOs from around the world, conducted in late 2014.
What is eroding retailers’ margins as they sell and deliver products across multiple channels? It’s simple: the high cost of fulfilling orders. A full 67% of respondents reported that these costs are growing as they increase their focus on selling across channels. Survey respondents reported their highest costs associated with omnichannel selling as:
¦ Handling returns from online and store orders (cited by 71% of respondents);
¦ Shipping directly to the customer (67%);
¦ Shipping to the store for customer pick-up (59%).
The CEOs in the study recognize that they need to continue investing in business improvements to enhance their omnichannel performance. However, reducing the associated logistics costs is not their primary focus. When asked to rank their top initiatives for improving business operations, CEOs’ number-one choice (57%) was spending capital on creating new customer experiences. Similarly, when asked to rank strategic growth enablers for the year, reducing/reformatting physical store footprints to focus on expanding the ecommerce business was the top choice at 53%.
“Every time retailers receive an online order, they have a number of options to fulfil that demand. They can pull the product from a local store, send it from a centralized warehouse or ship it directly from the supplier. JDA’s new study demonstrates that most retailers lack the insight to make these decisions in a profitable manner – and are not sufficiently focused on this critical capability gap,” said Kevin Iaquinto, Chief Marketing Officer at JDA.
“They need intelligent logistics and fulfilment solutions that can reveal the hidden costs, and the customer service trade-offs, associated with every delivery option. 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.”
While they might not be focused on actions today to create profitable fulfilment and delivery schemes, the JDA study leaves no doubt that CEOs are aware of the importance of profitable omnichannel fulfilment to their future survival. Seventy-one percent of respondents said omnichannel fulfilment is either a high or a top priority. And these CEOs are planning to invest an average of 29% of their total capital expenditures for 2015 on improving their omnichannel fulfilment performance.
The fulfilment capability most cited as needing attention was transportation and logistics, named by 88% of CEOs as a priority for the future. The second capability CEOs will focus on is improving inventory availability to fill orders, cited by 85%.
“Having products available, then finding the most profitable way to deliver them – are critical activities that lie at the heart of supply chain excellence,” noted Iaquinto. “The CEOs in the survey clearly understand the challenges they have ahead of them with regard to fulfilment, and they know they will have to innovate if they are to be profitable while meeting customer expectations across channels. The good news is that advanced technology can help retailers and consumer goods manufacturers master omnichannel fulfilment. However, until companies fully leverage these solutions, they will fail to realize positive financial returns on their omnichannel investments.”
IRUK 500: New services and consumer demand
InternetRetailing’s research team is making the final touches to the Operations and Logistics performance dimension report, the latest instalment of the UK Top500 Index (IRUK 500). Here Martin Shaw, Senior Researcher, provides an exclusive preview.
Logistics is one of the performance areas where retailers are bearing the brunt of consumers’ demand for instant gratification. The cut off for next-day delivery is getting later with logistics virtuosos delivering on the day the order was made and offering reserve and collect from store within the hour. At first glance the challenge of reinvigorating fulfilment systems seems horrendously difficult, time consuming and expensive. But we’ve evaluated retail offerings on a number of KPIs to draw out examples worthy of emulation. Examples of companies that are – somehow – delivering things faster, cheaper and simpler; offering returns so conveniently that you’d think it didn’t cost them money; and taking the lead on new trends like collection from lockers.
Our latest logistics research will be distributed as a supplement with the May issue of InternetRetailing magazine. To measure performance, as a separate concept to revenue, we’ve used over 100 metrics to evaluate UK Top500 retailers. The disruptive influence of new technologies and associated changes in consumer preference are visible in the following chart, which plots the capabilities of the largest 100 IRUK 500 companies on the vertical axis against consumer preferences on the horizontal. Red dots indicate delivery channels and blue dots represent other services some consumers consider important to making a purchase.
The first thing the graph reveals to us is that benefits accruing from offering collection services are probably marginal. The survey data (by UPS “Pulse of the Online Shopper”, March 2015) implies that either many consumers are still unaware of alternatives to home delivery, or that many don’t believe in the increased convenience of the alternatives. Which isn’t to say that click and collect, or even drone delivery, won’t take off in the years ahead – it only takes an annual growth rate of seven per cent to double in ten years. But in 2015 direct, door-knock delivery remains consumers’ chief preference, the most-offered fulfilment option, and is the chosen method for the lion’s share of ecommerce transactions.
A second draw-out is that free returns contribute to total sales with 54% of UK respondents in the UPS survey saying they both review returns policies prior to purchase and are more likely to buy when free returns are offered. A similar proportion of UK retailers provide the service, 59% of the largest 100. Costs and benefits differ from one retailer to another, but the free return policy’s impact prior to purchase may in fact be greater than some companies had supposed.
Third, the graph leads us to question the validity of consumer preferences, even though it possibly undermines the earlier point about collection services being ‘marginal’. “If I’d asked people what they wanted they would have said faster horses”, Henry Ford is supposed to have said. The quote (which may in fact be apocryphal) was one of Steve Jobs’ favourite sayings. It serves to remind us that consumers are often unaware of what they want in terms of new technology because they don’t yet know what it could do for them. This principle can be applied to emerging delivery methods, where preferences may shift suddenly as knowledge and understanding of, say, locker collection at train stations becomes mainstream. The pace of change is impossible to predict, but it’s likely that consumer polls underplay the potential.
In a market of emerging fulfilment services, flexibility could well be more valuable than perfection in any one area. In this scenario, adaptive companies respond to consumer preferences as they become significant. Readiness could be achieved by localised or small-scale offerings of emerging fulfilment services before ‘winners’ become apparent.
To summarise, new technologies are likely to profoundly change fulfilment services in the near future. It’s tempting to predict when and how quickly, but it’s hard to support such predictions and declared consumer preferences are a poor guide for future trends. Services are likely to be used by a minority for a period before the majority become aware of them; thereafter they have the potential to suddenly become broadly popular, a scenario that rewards adaptive companies.
The InternetRetailing UK Top500 (IRUK 500) is a commercial, comparative performance index charting the successes and failures of the largest ecommerce and multichannel retailers in the UK, and observing trends – those that take off and those that fizzle out. Download at internetretailing.net/iruk and join the conversation about #IRUK500 with @etail.
The IREU 500, launched at InternetRetailing Expo in March, expands the Top500 scope well beyond the borders of the UK into the entirety of the European Economic Area – the world’s largest economy, when measured in aggregate. “Europe is not a single homogenous entity and to treat it as such only leads to confusion and frustration” writes Sean Fleming in the first IREU report, which lists 650 shortlisted European retailers and asks six experts to give their opinions on what it means to ‘perform’ across the continent. There are very different delivery, payment and returns expectations across the continent, not to mention the customer service challenges that arise from selling to various language groups. A company that occupies a ‘premium’ slot in the UK will find itself unable to offer the same level of service in Poland (unless and until sales reach a point to justify local distribution centres or physical stores).
There are seven ‘dimensions’ in the index, including:
0 – Footprint: the ‘size’ of a retailer, measuring turnover, stores and web traffic. March’s IREU Footprint report names the largest 650 retailers. At InternetRetailing Conference in October, the final 500 will be ranked according to performance in:
1 – Strategy and Innovation
2 – Customer Experience
3 – Operations and Logistics
4 – Merchandising
5 – Brand and Engagement
6 – Mobile and Cross-channel
Download the Footprint report from internetretailing.net/ireu
This feature first appeared in the second print edition of eDelivery Magazine, EDM02.