Omni-channel dream or nightmare?

LCP Consulting ‘wrote the book’ on Omni-channel retail with two influential reports in 2013 and 2014, charting the fast changing impacts of online on the retail world, and also on the fulfillment and logistics functions that make it all happen. Here, we talk to Phil Streatfield, retail partner at LCP Consulting.

The LCP documents focus on the many retailers who take the eCommerce challenge seriously and are trying to create sustainable businesses. But is that true for the market as a whole?

A story in the Financial Times that emerged after the troublesome peak season, which included the demise of courier City Link, portrayed online retail logistics as a ‘Wild West’ with couriers as the cowboys.

Simon Duddy: How far do you think the FT’s story is a fair comment?

Phil Streatfield: I wouldn’t describe the eCommerce world as the Wild West with couriers acting as cowboys. I think what we are seeing is the development of the marketplace on two fronts.

First, the retailers are developing their own offers around Click and Collect and also looking at their own efficiencies, customer promises and inevitably cost. Some will take a view that they can do their own thing – especially those with volumes such as Amazon.

This density of volume is very attractive in the do it yourself world. By bringing in-house such volumes the general parcel market loses access to those efficiencies / drop densities and so starts to lose the “good” volume. As the volumes begin to fragment then parcel carrier efficiencies from consolidated postcode drops start to be eroded. The “less good” volume – to more far flung places is what, over time, may be left. So the efficiencies / economics of parcel carriers will start to become eroded.

In my view this must lead to the second development. It must inevitably lead to consolidation as the weaker / less viable players fall away. This I’m afraid is all about market economics and the evolution of the business landscape. This is a volume game and so with consolidation will be the continuation of the stronger players – with prices adjusting over time because there is a demand for the service. The risk for parcel carriers is that if they try to increase their rates it will drive retailers to think more about doing it themselves.

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Consumers are also driving this to some degree because as Click and Collect behaviour develops it has the effect potentially of helping consolidation of volumes to pick up points which helps the economics – but also if it is from a retailer’s own network they will be tempted to run their own internal delivery service – again potentially taking volume out of the general parcel market.

There is also the challenge of providing tracking, delivery timeslots etc which drives up IT related costs and increases risk for third party parcel carriers who will potentially be subject to penalties for non on time deliveries as retailers look to protect their reputation which gets tarnished if a third party carrier doesn’t fulfill the promise to the customer by delivering on time in the promised way.

SD: Is there a chance that fulfillment challenges – and a ‘race to the bottom’ among couriers, can damage the brand of eCommerce?

PS: I think the UK market now expects this to work effectively. The economics still aren’t that great – ultimately somebody has to pay for the service if it is to be provided by a third party – otherwise there won’t be anyone to provide the service. Simple economics. I think we are almost at the bottom on cost (apart from fuel impacts) – so the management of parcel carriers really have to think hard about their decisions on rates etc otherwise they will lose their shirts – as proven by City Link.

SD: How likely is that online retail will plateau or flop due to these issues? 

PS: Unlikely. It’s the consumer driving this. Ultimately consumers might have to pay a little more if things get really squeezed – but it’s now an expectation that this is the way we shop.

SD: In the latest Omni-Channel Report it reads the customer is driven ‘by the desire to receive a more personalised retail experience’. Is most online retail not driven by price therefore creating an less sustainable dynamic?

PS: It seems that online retail sales grew by 14% last year (IMRG). There is still an appetite for it. Are Amazon / eBay high end shopping experiences? This looks like mass retailing to me – so we aren’t just talking about the high end of things. I saw a report the other day that looked at retail globally for 2019 – it suggested Amazon would be in the top 3. What has become less sustainable are the retail operating models built around big out of town sheds / hypermarkets. These models are looking more vulnerable due to their high fixed costs and the fact that individuals seem to want to fragment their shopping rather than to have a one stop shop which was the model that developed during the 1990s.

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Look at the challenges that Tesco are facing. It’s about convenience now. So it’s not a simple price dynamic. It’s about service, convenience and price – and individuals make their own trade-offs depending upon what they are buying – what their shopping mission is. It’s not one size fits all either – so it’s got a lot more complex that just being about price.

SD: In the report, you say Multi-channel or Pure-play are better options for some retailers. Can you give me some examples?

PS: This is about really optimising a model and making it work for you. An Aldi or a Lidl with no frills, narrower ranges and really focused on discounting are not going to want to develop the costly omni channel approach that others have.  It is also doubtful that a pure play with scale – such as Amazon will want to add its own retail store footprint – provided it can access other people’s pick up points or its own lockers when it comes to Click and Collect. In these two cases it’s about horses for courses. Others have to adapt. One of the best so far is John Lewis with its steadily developing Omni-channel model.

SD: John Lewis is the Omni-channel leader. Does a retailer have to have a high margin model to make Omni-channel work?

PS: The team at John Lewis have developed an integrated Omni-channel operating model by paying attention to several elements of the customer offer at once (role of stores and online in an integrated way), coupled with development of physical infrastructure and systems to support it. The culture of the business and the way it treats its customers has led to brand loyalty coupled with a high level of trust. The brand values that it has – and its ability to stand by them in an internet mediated world – has meant that it has, in my view, been able to harness the technology solutions now available without losing that personal touch. You know they care when you buy from them. If that means they can charge a premium and that customers keep going back to them because it works then I guess that would be reflected in the ability to make a good margin. I see it as an integrated whole experience rather than one that happens because they have a high margin model.

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