The Supply Side: Fulfillment, delivery strategies that don’t break the bank

The most expensive part of e-commerce delivery lies in the so-called “final mile” to the customer. Amazon spends about $7.5 billion annually on shipping costs for its 54 million Prime customers, getting packages to them in two days or less.

While Amazon can get by with absorbing those staggering costs, most other retailers are not willing to shoulder that kind of loss for the long term. Target and others may offer free shipping through the holidays on a shorter term, but analysts say it’s not sustainable for brick-and-mortar retailers to provide free, expedited shipping year round.

The final-mile leg of the delivery constitutes up to 55% of the total transportation costs, according to Matthew Robertson, CEO of NetDespatch, an on-demand express transport software company. He said Amazon and Zappos changed consumer expectations for receiving and returning products purchased online. He said shoppers are never going back to the way things were, which means retailers have to be creative in their offerings to connect consumers with their purchases.

Ken Cassar, vice president at Rakuten Intelligence (formerly Slice Intelligence), shared his insights recently in a RetailWire webinar on the topic of final-mile fulfillment. He said retailers like Best Buy have been able to keep Amazon at bay in one of Amazon’s strongest categories.

BEST BUY
In a case study with Best Buy, Cassar found the retailer was leveraging its click-and-collect option at its stores, which serve as fulfillment centers for online purchases in addition to being retail shopping venues.

In the past two years, Best Buy has increased its percentage of online sales using click-and-collect from 32% to 42%. That means delivery costs have come down for the retailer, while still being able to serve customer needs and meet expectations.

“Click-and-collect has been an ace in the hole for Best Buy that Amazon can’t yet replicate,” Cassar said.

The case study revealed Best Buy has reduced the ship-to-door time frame from 6.3 days in 2016 to 2.7 days this past September. Cassar said nearly all of Best Buy’s click-to-door improvement comes on the delivery side, which is the most expensive.

The retailer saw a 57% decrease in its ship-to-door speed over the past two years. Best Buy still has a 2.7-day click-to-door speed, which lags Amazon. For Best Buy to reduce its click-to-door rate further, it would certainly incur hefty shipping costs for the expedited service. Cassar said free shipping is a minimum level of investment today in online retail and doing it at large scale is expensive.

LEVERAGING PICKUP
Retailers with brick-and-mortar stores who also have the ability to offer click-and-collect or in-store pickup have to leverage their physical presence as much as possible if they are going to compete long term with Amazon.

Cassar said that’s the only way retailers can maintain parity in shipping speed and costs with key competitors like Amazon. Because more retailers like Walmart are using stores as fulfillment centers for online orders, the average speed for click-to-door transactions have improved dramatically in the past two years, from 6.7 days to 4.2 days.

He said Amazon’s shipping speed advantage is significant, but it has been halted in the past two years. There was a 4.9-day gap between Amazon and the rest of retail in mid-2016, but today the gap has shrunk to 2.4 days. Meanwhile, merchants excluding Amazon have reduced their ship-to-door rates from 6.5 days to 3.4 days in the past two years. There is a 2.6-day average lag time between when an order is placed and when it’s shipped.

Cassar said the rates for expedited shipping rise sharply, from five days to two days. United Parcel Service’s five-day rate for a 1-pound package is $9.43. That jumps 100% to $18.57 for two-day delivery. Federal Express charges $7.58 for the same five-day delivery, but for a two-day guarantee the rate jumps 131% to $17.52.

Meanwhile, Amazon’s speed improvements continue with ship-to-door rates as low as 2.2 days, down from 2.9 days in mid-2016. The click-to-ship rates are 1.4 days, compared with 1.9 days in 2016.

Cassar said while other retailers can’t compete with Amazon Prime’s two-day free delivery, click-and-collect can offer consumers a free option with a more immediate gratification. He said the pickup options at Walmart are a huge win for that retailer. He said click-and-carry now represents 25% of the sales on Walmart.com and Target.com. In the lead-up to the holiday last year, click-and-carry sales rose to nearly 40% at Walmart.com.

Cassar said the addition of Walmart online grocery pickup has pushed Walmart’s click-and-carry share of online sales above 50% over the past two years. He said grocery, pet, baby and beauty are categories showing significant click-and-carry penetration at Walmart. As much as a third of apparel and home goods sales online were also picked up in stores at Walmart during the past year. He said retailers like Target and Walmart are also doing more ship-from-store deliveries, and that is one way to radically reduce the number of miles a package must travel to the end consumer.

Walmart operates stores within 10 miles of 90% of the U.S. population, and that is a huge advantage if the retailer can effectively scale its ship-from-store capabilities. Walmart has said it will be using 800 stores as fulfillment centers for online grocery orders that can be delivered for a $9.95 fee or picked up for free. This program is designed to reach roughly half of U.S. households by the end of the year.

Using a football analogy, Cassar said fulfillment is the offensive line of online retailing — under-appreciated, but critical. He said it’s hard for retailers to buy their way to parity with Amazon, which has already built out the infrastructure and can leverage at scale with its two-day free delivery service. He said click-and-carry offers clear opportunities for cost and service differentiation for retailers. He said store-based deliveries such as lockers, pickup towers or containers are beginning to come into focus, but there is still testing being done.

Cassar also said just like brick-and-mortar can leverage its physical assets, online-only retailers need to get smart about developing tactics to compensate for the absence of stores. The buy-online orders picked up in stores jumped 73% on Thanksgiving and Black Friday a year ago, a clear indication consumers are willing to forego delivery to save money or get the items faster.

Cassar said consumers are widely embracing pickup in stores because it gives them instant gratification and the ability to look at the item before taking it home. He expects to see retailers repositioning some stores in the future to take more advantage of fulfillment opportunities.

“Some stores will close, and there will be changes in the layout of stores in the future,” Cassar said. “I can foresee hybrid fulfillment centers/retail stores. A significant amount of labor in stores will be focused on delivery and picking items of online orders in the future.”

Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.