Comment: Don't promise what you can't deliver

Last month I discussed how uncontrolled sales growth and poor insight can erode online profitability, now I am turning to the nuts and bolts of the supply chain.

Balancing fulfilment costs with delivery charges

Whilst retailers compete with each other to offer faster and more flexible delivery and returns options, the impact of doing so often significantly increases operating costs. In most cases these costs are not passed on to the consumer – at least not completely – as retailers fear doing so will drive customers elsewhere.

This is a vicious circle, with retailers automatically reacting to competitor propositions and continuing to suffer from spiralling costs. Recently, a few of the larger market players began to charge a nominal amount for lower value click & collect and home delivery orders. However, even with this shift, it is unlikely that the full costs will be recovered. It will be interesting to see how many others follow suit and if the charges gradually increase, causing the spend threshold for free delivery to move upwards. Who will be brave enough to charge customers what it really costs to pick, pack and ship their order? Someone must, because the current model is unsustainable.

Don't promise what you can't deliver

To entice more customers, retailers are often making delivery promises they simply cannot keep and leaving customers frustrated when they fail to deliver.

For example, trying to find out where an important delivery is during the weekend can prove problematic. In many cases the call centre is closed and customers are reliant on a courier company which knows nothing about the actual order. Retailers need to understand people choose next-day delivery for a reason.

Offering it and failing to deliver on their promise damages the brand and costs the retailer dearly through call centre expenses, refunded delivery charges and loss of future business.

Poor communication on the status of an order will inevitably lead to an increase in queries to the call centre. Rather than increasing headcount to deal with this, retailers need to better understand the problem from the customer’s perspective. It’s important to identify why they are calling and what processes and technologies can be introduced to minimise queries. Remember, nobody enjoys dialling that number, so don’t make customers do it.

For more expensive, bulky two-man deliveries, retailers need to minimise the risk of a failed delivery with first-class customer communication. If executed professionally, this can both enhance the customer experience and reduce the likelihood that they won’t be at home when the delivery arrives. The technology to support this level of service exists; some companies already make good use of it. Those who don’t will see a higher rate of dissatisfaction due to failed deliveries.

Setting realistic targets

Whilst the negative variance between delivery costs and delivery charge income is a critical component in the online profitability equation, it is not the only problem faced by retailers. Many issues start much earlier, even before the retailer receives stock.

As discussed in my first article, Uncontrolled sales growth destroys online profitability, sales targets are often overly optimistic and therefore, set at an unrealistic level. Buying plans are based on the sales plan and if incorrect, they can commit the business to large stock purchases, which may not be in line with the subsequent actual demand. This problem can have a devastating effect on the retailer’s profitability, as it can increase costs in multiple areas. For example, as more and more stock arrives, storage and handling costs rise and the distribution centre becomes congested and therefore less efficient and more costly to operate.

Managing the markdown addiction

Excess stock is eventually marked down; whilst this improves turnover, it has a major negative impact on the realised margin. In many cases the margin on these items becomes insufficient to cover the delivery cost, so the retailer takes a double hit. Worse still, if this happens often enough customers become conditioned to only buy when discounts are heavy and margins low, adding further to retailer’s declining profitability. We can all probably think of retail businesses that have allowed themselves to be caught in this position and it is a long hard road to get back on track.

Minimising and managing returns

As sales grow, so too do the volume of returns. This can occur even more so with heavily discounted items as their returns ratio increases due to customers choosing to return any "bargains" that didn’t quite match their expectations.

Retailers can again become exposed to significant additional costs, especially if they offer free returns on top of free delivery. By the time retailers add in the costs of returning the product, repackaging, handling, storage or any subsequent re-distribution, any profit will be already devoured. In many cases the basic manual processes to deal with returns at the distribution centre can no longer cope, stock accumulates but is not recycled quickly enough and is often not identified by replenishment systems to factor against re-order calculations. This ability to recycle goods quickly and efficiently is particularly important for a seasonal business so as to avoid being left with a warehouse full of last season’s returned stock. This capability is absolutely essential for fashion retailers, who can easily experience 40 to 50% returns rates.

Customers will more often return goods to the store rather than pay to ship their return. If free returns are not offered, retailers must have a robust process in place to handle and track physical returns. What should they do if the line returned is not in that particular stores range? In many cases it either disappears off to the stockroom never to re-emerge or gets marked down to clear.

Returns requiring collection (such as bulky two-man delivery items) are particularly expensive and expose further risk of damage if the goods have been opened and are not in their original packaging. The couriers can make their best endeavours to rewrap and protect the product, but for these items the damage rates will inevitably be higher for returns than the original delivery.

Shoppers expect to be able to return goods but retailers must help themselves by developing better quality controls, improving the accuracy of product information and imagery on their websites and providing consistent sizing in apparel. If not, the goods will just keep coming back.

Former Carpetright IT director Ian Woosey is a senior director at professional services firm Alvarez & Marsal. He writes a monthly column on the challenges of modern retail, exclusively for Essential Retail.

In the final article next month Woosey will discuss the significant digital marketing and technology challenges retailers face in today’s ultra-competitive multichannel world.

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