Letter from America: Sales may not cover all sins

For many years retailers have proudly reported double digit eCommerce sales increases, with little if any information relative to margin and profit, perhaps operating under the retail adage that "sales cover all sins".  

The traditional thinking of eCommerce merchants has been that sales must be more profitable because they have no real estate and store staffing cost. The WSJ article identified significant expenses unique to eCommerce; requires heavy competitive discounting, has higher return rates, greater costs for web marketing, technology, cost of shipping and handling. Since the goal of all retailers, with the possible exception of Amazon, is to generate a profit, the Urban Outfitters article sounded an audible alarm for improving eCommerce operations to increase margins.

In America the focus to increase margin is centred on reducing delivery expense while meeting customer expectations, as suggested by RSR's managing partners, Nikki Baird and Paula Rosenblum, in their The State of Home Delivery 2014: Issues and Answers report.

They said: "A large majority, 88%, of the RSR survey's retailer respondents identify their home delivery offering as a competitive differentiator. Retailers face two big challenges in this area. One is simply mastering the logistics either on their own or via third-party shipping providers. The other challenge is doing so profitably."

Indeed, omnichannel retailing can have a huge positive impact on delivery costs.  Here's how:

1.) Buy online ship from store. Large retailers with many locations, for example Walmart, Target, Best Buy, Kohl's, benefit most of this method. Why? For example two-thirds of the US population live within five miles of a Walmart and shorter distances equate to lower costs and faster delivery. But caution, there are costs associated with this process; providing store pack, wrap and ship materials, employee training and payroll hours that must be compared to other methods of delivery. 

2.) Buy online pick-up in store (click & collect). Brian Hume, managing director of Martec International said in 2000 when eCommerce was beginning, "the cheapest method of delivery is to have the customer carry merchandise from the store" yet click & collect has only recently been offered by retailers. Again, this method has off-setting costs to consider, systems and processes that maintain 95% plus accuracy of inventory by stores and new business processes to serve the customer quickly and efficiently at pick-up. Many US retailers now have reserved parking places and guaranteed processing times for this function, the upscale department store Nordstrom's launched a 20-store pilot earlier this month.

3.) Buy in one store, ship from or pick-up in another store (endless aisle). But be aware that the same offsetting costs mentioned in points 1 and 2 above must be considered.

Third party courier deliver services provide another option to reduce eCommerce cost. UK retailers Argos, Oasis and others have been using Shutl, a network of couriers that operates 24/7 and can deliver local goods within hours. Online marketplace eBay recently announced an agreement to acquire Shutl, which indicates its value. 

Based on demand and apparent success of Shutl, the Huffington Post reported that Uber launched a courier service in New York City in April. Uber RUSH allows the app's users to have small packages delivered across much of Manhattan, for $15 to $30 per delivery, depending on distance. At that cost, clearly this is not an acceptable solution for all retail purchases. It is my judgment that courier services fill a niche for high-value purchases or affluent customers. Prior to recent profit pressures, courier services may have found a larger market when eCommerce operated on the "sales covers all sins" mantra.

Direct ship from manufacture and/or supplier. Gosh, I remember using this process as part of Electronic Data Interchange (EDI) implementation in the 1990s for select products. The advantage of this option is it eliminates buying, inventorying and, in some instances, shipping to customers. The pressure to reducing eCommerce delivery costs is leading to a revival of this process. Indeed, in this age of digital retailing some analysts predict that stores will be only showrooms with all products shipped directly from the manufacture, a la the Amazon model. However, recent surveys in the USA find that up to 87% of consumer still plan to shop in stores as frequently as in previous years. Thus a compromise is most likely in order with retailers purchasing and inventorying conservative quantities and contracting with suppliers maintain reserve inventory to fulfil some eCommerce and omnichannel orders. 

Manufacturers will no doubt increase cost of product or charge a fee for direct ship but these added costs will in part be offset by reduced inventory carrying charges, customer shipping and markdowns for the retailers.

Clearly there is not one solution to brining down the cost of sales to increase eCommerce profitability, but the good news is retailers are now exploring options having recognised that "sales do not cover all sins".

Richard Mader, is president of Mader International Consulting and former executive director of the Association for Retail Technology Standards (ARTS). He will be writing a regular US viewpoint article, exclusively for Essential Retail.