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Omni-channel rising but price still king

14 April 2014

HSS Editor Simon Duddy argues that it is price that will determine the future of online retailing, not convenience or service.

Gazeley recently handed over its second Magna Park Milton Keynes mega DC to John Lewis which will allow the high-end retailer to fulfill even more online retail orders. 
Amazon is surging across Eastern Europe opening huge DCs in Poland, as part of its European Fulfillment Network strategy, seeing Europe, not as a collection of separate nations & markets, but as one huge marketplace.

Yes, online retail is huge, and it is having a profound impact on the logistics landscape, equipment and processes. As the online retail market matures it is becoming about more than price. Convenience and service are increasingly important, especially in the mature UK market. This is seen by the success of John Lewis, certainly not a price-led retailer, which surpassed £1 billion in online sales in 2013.

This is encapsulated in the Omni-channel strategy, which makes perfect sense, as retailers focus on serving the customer to the same standard regardless of how they reach them, via website, mobile device, or in store.

The trend helps traditional retailers to justify their huge investment and legacy in physical stores. They can use stores to make collecting online orders and managing returns easier for the consumer and they can use the opportunity of extra store footfall to boost sales.

But I think there is a danger in over-egging this trend. I feel the traditional retailers are placing too much faith in it as a means to save the huge investment they have already made in physical infrastructure.

While convenience and service are increasingly important most online consumers are motivated by searching for low prices.

We’ve all heard of shoppers browsing in the High Street (Jessops springs to mind) taking advice but not making a purchase. The shopper then goes online to buy what he has identified at the cheapest price.

Also, while John Lewis has passed the £1bn mark, the combined online sales of Amazon and Tesco in the UK are closer to £10bn. This, to some extent, illustrates the comparative weight of those buying on price and those buying on service. Also consider that Amazon is the ‘prophet of no profit’ - a company with seemingly little interest in turning a profit.

This will continue to undercut the traditional retail sector, even if the Omni-channel use of physical stores mitigates it (but perhaps only temporarily).

A market motivated by price will only slow when price dynamics change. Just as the rise of Chinese manufacturing only began to slow when the wages of the Chinese worker rose, the growth of online retail will only slow when the price of goods online falls close to what can be achieved via a physical store.

What’s this got to do with logistics you may ask?

Well, logistics has a profound impact on the price of online retail goods. Equally a deeper switch from traditional retail to online retail will have a deeper impact on the topography of logistics.

If these huge online DCs can cheaply fulfill orders so that online retailers can keep prices low, the rise of online retail will continue inexorably. But if fulfillment capacity (both in terms of warehousing and deliveries) flatlines, prices will inevitably be pushed up and the logistics chokepoint that results will be the pie online retail finally gags on.