Wednesday 21st Oct 2020 - Logistics & Supply Chain

The real online cost

The hyperbole at times is a little OTT: did, for example, the IMRG/CapGemini e-Retail Sales Index really mean to imply that online had reached 23 per cent of total UK retail business in July when it estimated internet sales for the month at £4.8 billion? Or was it just a case of someone not applying a reality check to the extrapolations? Such estimates excluded, most analysts currently put online retail sales somewhere around 4.5-5 per cent of total UK retail. It’s a similar figure in the US, with both countries reporting growth rates in e-retail of up to 11 per cent or so depending on product category.

With high street sales at best stagnant, such growth rates provide a bright spot in an otherwise bleak landscape: for many multi-channel retailers, web site sales are now ranked among their best performing branches and cannibalisation of high street business is becoming a very real problem. So, too, is understanding the real costs involved in fulfilling all those online orders.

Most retailers began their online operations with a separate fulfilment centre for online sales – often simply a cordoned off area at the warehouse or RDC to break bulk and pick individual items. Some, like Tesco, began by simply taking stock from the retail shelves and only when this began to impact store operations did it set up dedicated online fulfilment operations (basically a physical store with just pickers roaming the aisles rather than real customers).

Dedicated online fulfilment centres bring their own merchandise management headaches too: they need to be allocated stock just like a real world branch with all the inevitable under- and over-stocks that result as the season’s sales develop. Retailers also have to cope with ever more demanding customers who expect to be able to wander unimpeded across the channels as they shop: finding information online, ordering by phone, collecting at a store or whatever. Keeping up with these meanderings can be a nightmare for any retailer which has yet to fully integrate all its channel operations.

It can also prove rather expensive: in a recent study consultancy business, CVL, argues that running a separate fulfilment centre can cost twice as much per order as fulfilling from an integrated distribution centre and erode up to six per cent of margin. “Online sales can be less predictable than real world business in terms of demand patterns,” says CVL consultant Ray Fowler. “Costs can also go up with collect in-store models – especially if the item has to be shipped to the store specially for a customer.”

Based on analyses from its clients, CVL suggests that processing a typical online order – from receipt of product to final dispatch, but excluding the actual cost of the home delivery – costs £2.07 from a separate fulfilment centre but just £1.04 if an integrated DC managing both store and home deliveries is used. Comparable figures for shipping an individual item to a store for collection it estimates as, respectively, £2.81 and £1.08.

Few retailers – with of course the exception of Argos and its “catalogue showroom” model – have sufficiently sophisticated real-time stock control to handle reservation and fulfilment from store stocks. Yet, reserve online and collect in-store is becoming a popular option for customers with goods generally available at the store within 24 -48 hours. It is usually a free service but, according to the CVL data, could be costing almost £3 per order to fulfil.

Retailers also have to cope with ever more demanding customers who expect to be able to wander unimpeded across the channels.Picking both bulk and individual items from a single pick face is not difficult, argues Ray Fowler, citing one fashion retailer which does just this, sending the broken packs to selected branches which can make the necessary goods inwards stock adjustments.

When online sales were few and far between, spending an additional £1.73 or so on handling each order was probably not something that concerned too many retailers. It was rather like the early days of online grocery shopping where the £5 delivery charge was accepted as coming nowhere near the £13-£22 (depending on which retailer you spoke to) that it actually cost to pick and deliver the goods. As online sales grew the supermarkets had to improve efficiency and cut costs: it is now just the same with non-food online shopping – a time to measure and control.

With discretionary spending continuing to fall and with discounting increasing, giving away margin unnecessarily by duplicating fulfilment operations is surely something that very few retailers can afford to do for very much longer.

Penelope Ody is a regular columnist for SCS and is a retail market specialist.

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