Because they serve as fulfillment centers for online retail, stores have become essential as online sales continue to rise.
A new report from McKinsey Group found that despite incredible innovation amid the pandemic, retailers still have to use stores as fulfillment centers for pickup and delivery orders.
McKinsey found that when delivery times or waits are too long, almost half of online consumers surveyed will shop elsewhere. The research indicates that more than 90% of U.S. online shoppers expect two-to-three-day shipping. Most are primarily unwilling to pay for the speed even amid widely reported supply chain challenges.
One in five consumers said they would accept a marginal increase in shipping fees for faster shipping than standard free-delivery options.
McKinsey said that with the high and rising costs of omnichannel order fulfillment, which is now between 10 to 20% of sales, retailers have to make tough decisions to improve delivery speeds and profitability.
McKinsey said Amazon’s free-delivery offering has accelerated more than 75% since the early 2000s. Shipping times have been reduced from eight days in 2000 to two days in 2015. Large markets went to one day in 2019, with same-day in select markets by 2020. While Amazon has been the pacesetter for fast delivery in the past decade, Walmart and Target have worked to have comparable services with minimum orders required.
The report also found that 75% of apparel, specialty, and other retailers plan to offer fast delivery within the next two years and 42% aim for one-day service by 2022. McKinsey said supply chain efficiencies would have to improve significantly for many as seconds count.
“Most fulfillment operations need time to pick and pack deliveries,” said John Barbee, one of the McKinsey researchers and report author. “By itself, that process takes an average of four to eight hours, though best-in-class omnichannel operations can fulfill orders within two hours of customer purchase. Once picked, parcel carriers must pick up shipments from the distribution center, which often influences order cutoff times — the latest time a retailer can accept an order to meet the promised delivery time.
“Once a package is in the parcel network, traveling the final mile to the customer can take more time. Bringing it all together, one- or even two-day shipping requires tight cycle times and excellent execution across multiple parties in the supply chain.”
A significant factor in retailers’ success at omnichannel involves stores being used for fulfillment and pickup. But using stores for order fulfillment creates other challenges for shoppers and the retailer. McKinsey said inventory accuracy is essential when stores pull double duty as fulfillment and shopping locations. The report found that stores typically have lower inventory accuracy rates (70% to 90%) than traditional distribution centers (99.5%).
Complexity in the assortment is also a challenge as retailers often offer more products online than they carry in stores, and third-party marketplace sellers further complicate inventory counts. When retailers have to split shipments into multiple deliveries, the cost rises and margins erode. Retailers that consolidate orders into one box can reduce the overall cost. Amazon and Walmart offer consumers the choice of getting just one package, which takes longer and is often the same or lower price.
Demand forecasting is also a challenge for retailers using stores as fulfillment centers. McKinsey said positioning inventory across distribution centers, various store types, and market fulfillment centers is a struggle for most retailers. Then there are elevated picking costs. McKinsey said that for most retailers, in-store picking is 1.5 to 2 times higher on a cost-per-pick basis than picking at distribution and fulfillment centers.
Harps Foods CEO Kim Eskew recently told the Northwest Arkansas Business Journal that paying someone to shop for customers is a negative profit for small- to medium-size retailers. That is why many retailers have turned to Instacart to help them become omnichannel overnight.
McKinsey also said stores are not typically designed with fulfillment in mind, nor are they necessarily staffed or equipped with the technology to do so at scale. At peak times, it is hard for many stores to manage exceptions, ensure accurate picks and tightly control cycles times to customers, according to McKinsey. Customer experience hinges on retailers do all of it well.
McKinsey said solving the speed dilemma for fulfillment and then delivery will only get more complicated. Food, grocery and beauty delivery expectations are less than one day. That compares to less than two days for apparel, electronics and general merchandise.
Four recommendations McKinsey made for retailers regarding online fulfillment include more investments in network expansions. Walmart plans to add 120 micro fulfillment centers this year and next. The centers will be equipped with automation and be located adjacent and connected to supercenters in high-demand areas.
Target, where stores fulfill about 80% of online orders, plans to open two sorting centers in October, followed by two more after the holidays, to support its ship-from-store capability. Target said the new centers offer faster delivery times at a lower cost in markets with a high density of shipments. They will also free up backroom space at store locations.
McKinsey said adding distribution centers can cost more than $100 million each, which is not feasible for many retailers. Other retailers in urban areas are using dark stores as dedicated fulfillment centers to expand the distribution network. The capital costs are generally $5 million to $15 million, a fraction of the cost of standing up a new distribution center.
Sam’s Club did that with five clubs closed more than two years ago, including one location in Memphis.
McKinsey also recommends using analytics and automation to help raise the efficiencies associated with picking or fulfilling orders. Walmart has done just that with personal shoppers picking orders in stores now following a path around the store that has been configured through analytics. Walmart is also using automation in select stores that pick, aggregate and store orders until they are picked up. That means fewer steps and increased time efficiency in the picking process.
Accurate inventory distributed through multiple locations is key to achieving supply chain efficiency. Still, McKinsey said that often requires companies to consolidate the online and in-store inventory systems into one system. Walmart recently accomplished the feat, and it took the retail giant several years.
There are also plenty of last-mile challenges in play for retailers. McKinsey said even the fastest fulfillment operation is still at the mercy of the speed and quality of the final-mile delivery service. The most common way retailers have tried to solve this is by partnering with third-party services like DoorDash and Uber. Target acquired the delivery platform Shipt, which has been helpful to the large retailer, especially amid the pandemic. Walmart uses a combination of options, including Spark, an internal operation using store employees and third-party delivery services.
McKinsey also warned that with supply chain transportation costs escalating this year, it would become essential for retailers to have strategic partnerships with carriers and offer consumers pick-up locations in stores, lockers or other neighborhood collection points.
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.