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Unpick the profitability problem

15 February 2021

The growth of online retail comes with a kick – it’s more expensive to fulfil than the store model. What can retailers do to logistics costs to boost margins? BearingPoint’s Stuart Higgins has some answers.

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

Profit struggles in e-grocery too

Online grocery may be booming, but keeping it profitable will be the challenge. The pandemic has advanced consumer engagement with online grocery by between 5-10 years, and although online orders still only account for about 10% of the overall mix, the phenomenal growth rates experienced by retailers over the past year are likely to tip the balance on the most widely adopted fulfilment model. 

A number of grocers have invested heavily in huge automated warehouses, a few are using the strength of partnerships, while most retailers are relying on their existing store footprint to satisfy this massive surge in demand.  

In-store grocery fulfilment is by far the most widely adopted approach. It has the huge benefit of being close to the customer, which minimises delivery costs or eliminates those costs if the customer picks up. However, there are drawbacks that have only been exacerbated by the uptake in online order volumes, and now a tipping-point has been reached.

An emerging solution is micro-fulfilment. These small-footprint, low investment, highly automated systems – typically occupying 3,000-10,000 sq. ft – can be built into the backroom or on the perimeter of existing stores, or may be deployed as a stand-alone facility to serve a cluster of local geographies. 

The idea is starting to level the playing field for businesses competing in online grocery.

The technology makes picking much faster and more accurate, offering the capability to provide online grocery pickup in under an hour from placing an order, while saving on expensive manual labour and distancing picking operations from browsing customers.

A key advantage of the automation is that it maximises use of the cube, enabling a wide range of products to be stored densely and retrieved quickly, enhancing product choice, availability and customer service. And locating a Micro-fulfilment Centre (MFC) inside a store benefits from the site being an established replenishment point on the grocer’s main network, so no additional drops are required.

Importantly, MFCs are far less capital-intensive than large warehouses to set up and can be fully functional within just a few months.

Bis Henderson Consulting has been working closely with leading grocers in this space, both in the UK and the USA, and are also working with leading property developers in the urban logistics arena. Our comprehensive understanding of the challenges involved puts us in a strong position to help businesses.

Overall, micro-fulfilment has the potential to deliver substantial labour savings, faster order processing, enhanced value from property assets, and a significantly reduced cost-to-serve.

Louisa Hosegood, digital and strategy director, Bis Henderson Consulting

For more information, visit www.bis-hendersonconsulting.com

Pandemic brings investment forward

Covid-19 has required businesses to do things that either weren’t on their roadmaps or were planned to be several years in the making. Deciding on where to prioritise their 2021 investment - either in their direct-to-customer channel, or a combination of this with a store fulfilment role - is at the forefront of their minds.

The retailers that have emerged from 2020 in the best shape have been those with mature, online fulfilment channels, able to pivot and scale at pace. Those with ‘bricks and mortar’ orientated models have been forced to rapidly adapt and move more online at great speed.

Businesses with large asset footprints (stores, trade counters, etc.) are now asking themselves how they can use this estate more effectively to service customers. The right solution will vary, but an increasing theme is to leverage this estate (in whole or in part) into micro fulfilment centres. Out of town retail parks provide opportunities for click and collect hubs, a method we’ve seen supermarkets use effectively; while high street stores are well placed to work as returns points, for example.

For Wincanton, these challenges present opportunities. Establishing new fulfilment channels, increasing capacity and enabling store-based customer fulfilment are all live examples of how we’ve supported our clients in the past nine months.

Wincanton has expanded into dark store space recently by partnering with Waitrose.com to open a fulfilment centre in West London to serve its online consumers. This is a major shift for both businesses, with Waitrose reacting to clear trends in the market and Wincanton using its expertise and experience in eCommerce to provide a solution that suits changing consumer behaviour; in the process becoming the first UK 3PL to run such an operation.

Last year, we also opened an eFulfilment facility in Nuneaton in part to serve a variety of eComm clients.

Paul Durkin, MD of Digital & eFulfilment, Wincanton 

For more information, visit www.wincanton.co.uk

 
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