Technology has revolutionized how we shop. Fifty years ago, discounters and department stores ruled retailing. Wal-Mart, big box retailers, and specialty stores reinvented retailing. Where there used to be only 40 retailers with catalog operations, now there are millions of .coms competing. Now even a trip to the store starts with an Internet search a high percentage of the time.
Given all this change, what is unfolding now could make this look like child’s play as retail and direct-to-customer is changing how we service the customer. Here are seven game changers your competition is undertaking.
1.Understanding Retail’s Sea of Change
Amazon has reached sales of $100 billion. Some studies show 44% of online customers start their purchases directly on Amazon’s site versus 21% on a specific retail site. By having multiple DCs in many states, Amazon can offer four-hour delivery (ordered online, delivered to home) in many areas. Amazon is historically willing to operate on low margins and “give away” shipping cost to get the order.
The customers and the competition are both forcing change. Shoppers want preferences: they want to options when it comes to the when, where, and devices of their choosing.
All of this has caused a major channel shift within retail companies. Compared to several years ago, annual reports show that retail brick and mortar operations have become less statistical about their online success. One thing for sure is that many retail companies’ sales are relatively flat year to year compared to their double digit growth increases year over year in the e-commerce arena. Here are a few tea leaves showing the changes:
Wal-Mart –In Wal-Mart’s 2015 annual report, Doug McMillion, President and CEO, talked about the importance of integrating digital and physical stores in a seamless fashion. “Through our more than 11,000 stores, websites, and mobile apps, customers can access Walmart in more ways than ever before… In 4Q 2015, approximately 70% of www.walmart.com came from mobile devices… But the future of retail is not just in-store or online – it’s putting the two together in new ways. I’m excited that we’re leaders in integrating digital and physical retail in a seamless fashion. We’ll continue to test and learn as we explore options for convenient merchandise pickup or delivery to save customers’ time.”
Kohls.com – Kohl’s 2015 annual report shows 2011 to 2015 retail sales per square declined from $232 to $228. Kohl’s has made huge investments in e-commerce and adapting to omnichannel shipping from stores. They have online DCs in MD, OH, TX, and CA (4.82 million sq. ft.). 2015 Annual Reports mentions rapid growth of less profitable omnichannel sales because of shipping costs.
Neiman Marcus – $1.3 billion sales online in fiscal 2015, accounting for 25.5% of total sales.
Williams-Sonoma – Online sales grew 12.1% in fiscal 2014; web sales reached 50.5% of $4.7 billion total sales. Some of their brands were historically were heavily catalog marketing and fulfillment based.
Cabela’s, the outdoor specialty retailer – In addition to its major B2C business, it has 79 mega stores with large backrooms and four DCs to ship from. Additionally, the DC network includes a return center and a consolidation DC on the west coast where imports arrive.
The customer is demanding preferences and immediate shipment of orders, and they want low or no shipping costs. When retailers — which can be defined broadly – don’t stay competitive, someone else does.
2.E-Commerce Fosters Competition
The internet spawns new ideas for selling goods and services at a dramatic rate. Look for competition to increase. As an example, merchandise vendors to big retailers have not competed with their retail customers. However, there are major strategic advantages for manufacturers, wholesalers, and distributors to enter the internet marketplace.
Recently, we developed a strategic plan for a $1 billion apparel manufacturer to relaunch an e-commerce business. The first few years of sales will be less than five percent of total sales, since this is considered a test. But the strategic importance to the wholesale business is paramount. Initially, the manufacturer dabbled with selling and fulfilling orders on Amazon ($20 million annually). Now developing their own e-commerce business lets them show their entire product line. They learn what the customer wants and thinks, and they can test new products. They are synergistic with their retail store customers by drop shipping their customer orders and featuring store locators on their sites. SEO and social media are part of their marketing and promotional mix. It’s just the beginning of new competitors emerging.
3.Multi-Shipping Points Improve Time to Customer and Reduce Shipping Costs
As mentioned above, brick and mortar retailers have the potential for every sales floor, backroom, and DC being a shipping point for customer orders. The closer the proximity to the customer, the less shipping costs by using one or two days ground service.
By having strategic multiple shipping points, your competitors will gain an advantage. Analysis shows that multichannel companies that have four or five DCs strategically placed can ship to 95%+ of their customers via one to two days ground. Multiple shipping points is the lesson from Amazon, WalMart, and the brick and mortar retailers as discussed above. Again, the customers’ preferences and expectations — “point, click, deliver” — are driving this requirement.
4.Third Party Logistics (3PL) Makes Multi-DC Shipping Possible
Admittedly, 3PL isn’t for everyone — most companies feel they need to control the entire supply chain. However, we see many major multichannel companies using qualified 3PLs to jump start their implementation of multi-DCs. The cost per order is competitive and makes fulfillment a variable cost. It allows you to scale to peak easily. 3PL lets you avoid the use of capital for new facilities and systems. It allows for increases in sales without increasing staffing headcount. 3PL greatly simplifies International order fulfillment.
One of our clients selected a 3PL provider to transport and replenish (i.e. cross dock) its hundreds of base stores in the US and Japan rather than building several new DCs. A big factor was the significantly reduced time to be operational — it took months rather than years.
5.Inventory Systems Becomes Customer Facing App
Inventory systems in brick and mortar retailers were always considered “back office” applications. Now we must give the customer accurate item availability (for example, the location where they can go to see the merchandise or pick up an e-commerce order in-store or at the DC) and whether the order will ship from a remote store or DC. The order management system (OMS) — which most retailers didn’t have prior to e-commerce — must communicate delivery time and shipping cost.
Additionally, the OMS must reserve the item at that location for that customer. This has turned every store into a mini-fulfillment center with employees picking, packing, and shipping the order. When you reflect back to the William-Sonoma and Neiman Marcus examples above, that’s a huge change.
Having the strategic placement of DCs is one thing. Having the right level of inventory by item is another. Multi-DC operations require much more inventory. Each additional DC adds a double digit increase to inventory levels.
Additionally, returns from online orders are higher and more expensive than at retail. In stores, customers see and perhaps try on the item. The biggest reason for returns in e-commerce is “customer choice.” “No-quibble” return policies build trust. Retailers may take back returns to locations that never had that assortment or item originally, which means more costs for labor and shipping to get it to stores during the season or to be liquidated.
6.Labor Cost Increases and Inefficient Fulfillment
The fulfillment processes in many companies is largely manual. Our benchmarking cost per order shows no relationship to company size and efficiency. Now unemployment is under five percent and the quality of new hires is not so good. Labor costs are increasing, and we face a $15.00 per hour minimum wage in the 2016 presidential election.
To understand the impact, consider this example. A direct-to-consumer client with sales over $200 million employs about 275 full-time employees (FTEs) at an average wage of $10.50 per hour. If they are paying $15.00 per hour, every one dollar increase in wage rate results in an incremental cost of $418,000 annually. To move from $10.50 to $15.00 per hour is a total increase of $2.3 million annually, a 42% increase. This does not count the increases in administrative and clerical departments.
Your competition is getting serious about committing to continual process improvement programs throughout in the entire supply chain. To stay competitive, you must eliminate inefficiency and waste. Formalize department and individual productivity reporting; just focusing on labor use will improve productivity. Investigate adopting incentive pay for increased performance. And then, of course, there is automation and technology.
7.Automation and Technology Is a Competitive Advantage
Again, Amazon is at the forefront of adopting technology and automation in their massive DCs. It acquired KEVA, a warehouse robotics company, several years ago. In some warehouse ads, pay is $12.50 to start. Many of our industry leaders like Crutchfield, Wal-Mart, Colony Brands, Cabela’s, etc. are already heavily automated. The result: lowered cost per unit processed for orders, packages shipped, returns, etc.
Small- to moderate-sized businesses should adopt RF communications, barcode products, and warehouse locations as well as implement scan technology. Today, there are warehouse management systems that more powerful and cost-effective for small- to moderate-sized retailers. These become the building blocks for more sophisticated sortation and automation as your company grows. Voice-enabled applications are commonplace throughout the fulfillment process for online data entry and tracking, not just voice picking.
The rate of change in retailing continues to accelerate. The customer has spoken, and so have your more advanced competitors. Now each company has to find the ways to improve processes, lower costs, and provide competitive customer service.
Curt Barry is Founder & Partner at F. Curtis Barry & Company, a consulting firm specializing in direct operations and fulfillment. He is the author of two new eBooks: 70+ Cost Reduction and Productivity Improvement Ideas; and How to Improve Your New Systems Selection and Implementation, available at www.fcbco.com. Visit www.fcbco.com/services for more information.