Unpick the profitability problem

Covid-19 has had a huge impact on customer buying behaviours, with many more customers buying online rather than in retail stores during the pandemic. 

Data shows e-commerce grew by 25% during March 2020 alone. The truth is that this change is here to stay, with 60% of customers anticipating that they will maintain new online shopping habits after the pandemic is over.

However, the shift in channel from store to online has posed many challenges for retailers, who face increased costs as online fulfilment is typically 7p in the £1 more expensive than store fulfilment. Retailers’ profits are at risk of erosion if no immediate action is taken to improve efficiency and productivity within the supply chain. By fully understanding their costs at a product, channel, and customer level, this article shows how retailers can effectively make eCommerce financially viable.

Distribution centres

During Covid-19 lockdowns, customer buying patterns drastically changed; for example, in the UK, DIY product sales went up by 35%, while holiday swimwear sales went down by 27%. These demand fluctuations directly resulted in stock shortages as well as requirements to increase warehouse capacity where non-movable products took up storage space. H&M and Argos are among the agile firms who are already tackling stocking issues through re-purposing their stores as fulfilment hubs, DPD parcel drop offs or collection hubs; a strategy that also enables them to recover store cost base overheads. In addition, by using AI, retailers can develop accurate demand forecasting, scheduling, and replenishment techniques to avoid future stockouts and achieve efficient capacity utilisation.

Many retailer DCs are designed to service stores and not individual online shoppers. This has meant that many retailers have had to rapidly re-think their approach to distribution based upon the increasing volume of single package unit picking required to fulfil online demand. On top of this, social distancing measures and workforce illness have limited the number of staff available to handle the increased workload. Maximising the efficiency of the processes already in place is key for retailers’ short-term survival. One approach is to use computer simulation and modelling to identify and remove Covid-19 related pinch points limiting productivity. Another is to introduce technology solutions, like Autonomous Mobile Robots (AMRs), to handle the movement of goods around a DC, as Amazon successfully does, enabling pickers to remain in target zones that maximise their pick productivity while maintaining social distancing. 

Delivery 

Home delivery costs commonly make up the largest share of total fulfilment costs. As most retailers face similar challenges, many are collaborating to reduce costs by sharing assets such as delivery vans and warehousing space. Alternatively, firms are influencing customers towards click and collect options or using delivery price elasticity to encourage the take up of longer fulfilment lead times that enable greater workload smoothing and increased efficiency. Amazon has developed a feature that allows customers to mark purchases as non-urgent, thus enabling the firm to consolidate multiple purchases into single deliveries. Other retailers, like Houseof, have managed to reduce delivery costs by 65% simply by asking customers to pay for part of the shipment cost. A clear understanding of the full costs of each delivery option and customer’s price perception of them is key for these strategies to succeed. 

Returns

Increased online volumes inevitably drives increased return volumes – a double whammy as far as profitability is concerned. The costs of returns go beyond delivery; products must be sorted and graded, those damaged need to be scrapped, repaired, and repacked and seasonal items might need to be discounted. Experts estimate that UK returns market is costing almost £60bn annually and will continue growing if retailers do not take immediate action. 

The solution is simple; retailers must reduce the number of returns. To do so, they should avoid overpromises and provide customers with detailed and accurate product information at the point of sale. Communication with customers should be quick and responsive and there should be regular monitoring of customer reviews and product return information to enable casual tracking and problem resolution at source. Diesel’s 3D virtual avatars or Curry’s PC World ShopLive service are examples of firms using technology to increase transparency – helping to ensure that customers buy exactly what they want first time. In addition, by enabling real person to person interactions that bring online “to life”, firms are also improving customer retention and satisfaction rates.

The pandemic has created a retail profit challenge, but it has also generated an opportunity for differentiation for those retailers that improve supply chain productivity and efficiency. Importantly, mitigating solutions that seek cost savings in online fulfilment also result in positive environmental impacts, as more efficient operations tend to be less carbon intensive – something that also has increasing appeal to customers.

The Covid-19 crisis has created a retail profit challenge, but it has also created an opportunity for differentiation in the marketplace. By using the catalyst of increasing online demand, retailers can use a clear understanding of data and the costs involved in online fulfilment to re-engineer their operations for the future and at the same time create a more attractive and sustainable offer for their customers.

Stuart Higgins, partner, BearingPoint. Stuart was supported in writing this article by Laura Santiago, research assistant at BearingPoint.

For more information, visit www.bearingpoint.com

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