Think Tank: Striving for Profits in a Costly Omnichannel World
The bar for retailers has been raised significantly due to the shift in consumer expectations and behavior. A sharply increasing percentage of retail consumers are changing how they want to engage with retailers, whether they are ordering, picking up, receiving or returning product. Given that most e-commerce and omnichannel sales dollars represent a channel shift from physical stores, rather than increasing total sales, the dual implications for retail chains are an increase in complexity and a negative impact on earnings.
While the retail competitive landscape is changing rapidly with the decline and, in some cases, disappearance of chain retailers such as Bon-Ton, Sears, Kmart, Sports Authority, Limited Stores and Toys ‘R’ Us and the massive store closures of many other traditional retailers, the market share released by these retailers is being transferred to the mass retailers such as Target and Walmart and to the strongest off-price, specialty and department store chains and to the e-commerce giant, Amazon.com.
The bar for traditional retailers has been raised significantly due to the shift in consumer expectations and the transition from a fixed-cost economic operating model to a combination of a variable-cost e-commerce model combined with a de-levering fixed-cost model.
Given that the total sales pie is not growing for most, for retailers to thrive they need to meet their customers’ expectations by playing to their strengths over e-commerce-only retailers.
Most retailers have rushed to roll out their omnichannel offerings in order to meet customer demands, to compete effectively, and leverage the advantages of their physical stores over e-commerce-only retailers. These new capabilities have required large investments and changes to organizational roles, business processes and systems, and require associate training. Despite the top-line sales pressures and the reduced profitability resultant from increased penetration of online and omnichannel sales relative to physical store sales, retailers must rapidly adapt to the new environment and develop new store operating models which eliminate the distinction between channels.
In the urgency to roll out the omnichannel capabilities, retailers have overextended themselves and encountered significant operational and execution challenges that are affecting both the customer shopping experience and retailers’ own profitability.
Retailers are experiencing sharply rising freight and fulfillment costs, as well as merchandise margin challenges due to the high return rate from e-commerce orders. At the same time, consumers expect faster delivery, pressuring retailers to meet those expectations to remain competitive. Few retailers have formal scorecards to measure the performance and profitability of their omnichannel efforts, which impacts their ability to take the necessary service and profitability corrective actions
Five Key Challenges in Enabling Omnichannel
BOPIS/ROPIS (buy or reserve online, pick up in store) is not consistently reliable due to inventory inaccuracies. The customer experience is challenged when the online ordering system indicates to shoppers that an item is available for pick up in their local store when the store does not actually have it in stock. Inventory accuracy breakdowns can occur in many places in the supply chain, from the vendor through the retailer’s distribution network to store backrooms, sales floors and, finally, at the point of sale.
Inefficiencies in shipping e-commerce orders are creating delays in deliveries, which negatively impact the consumer experience. Most retailers ship primarily from e-commerce fulfillment centers instead of from local stores, which may be closer to customers’ homes or offices, which would allow customers to receive their orders more quickly. These retailers only use local stores as a backup when the e-commerce fulfillment center is out of stock, even though using store-level inventory is often a better option for speed and reduces overstocked inventory in those stores, which in turn avoids future markdowns for those items.
Retailers are not minimizing split shipments and consumers are often receiving multiple packages. A small minority of retailers are not optimizing their customer order systems to prioritize filling the entire order from one location, causing split shipments where customers receive their order in multiple boxes. This creates consumer frustration and an increase in fulfillment and freight costs.
Omnichannel data is not being used effectively to identify where demand is generated (online) versus from where it is fulfilled (the store). Most retailers do not effectively allocate inventory to local stores based on customer demand from that specific location. As a consequence, retailers may make incorrect decisions about where to allocate inventory to best service local customers and maximize inventory productivity to reduce markdowns.
Retailers are not using predictive analytics tools effectively. Few retailers are using predictive analytics, and most are struggling to figure out how to integrate such analytics into operational processes and how to develop robust benefit cases. When these tools are being used, they are almost always being used to support decision-making in a narrow function, such as determining which store to fulfill an online order from or to enhance new product testing.
Five Key Recommendations to Improve Consumer Experience and Profitability
Prioritize and roll out the “right” customer-centric omnichannel capabilities and omnichannel scorecards
Redefine the role of the physical store in enabling omnichannel capabilities
Assess inventory accuracy through the end-to-end supply chain
Eliminate barriers, integrate and make inventory available across channels.
Determine true store-level customer demand to optimize inventory investments
Antony Karabus is chief executive officer of HRC Retail Advisory, a retail advisory firm, based in Northbrook, Ill.
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