05/2014 case study IG&H Consulting & Interim Make strategy work! IG&H Consulting & Interim Retail, Trade & Logistics The understated potential of stores in omni-channel fulfilment Insights from an IG&H case study in non-food Mirjam Karmiggelt & Thomas Bloemarts 1
The hidden gem of bricks and mortar Online is booming in all almost all segments of the retail market, disrupting traditional business models in its track. Bricks and mortar retailers only recently starting the transition to an omnichannel proposition must come around to fend off the increasing competition from large (crossborder) e-tailers and pure players. These competitors provide the crucial ingredients for a successful proposition, namely a broad product range, the lowest prices and an increasingly short delivery lead time. Witness Amazon s strategy to open new distribution centres as close as possible to city centres. This sets the benchmark in the customer expectation of shopping anytime, anywhere and having the order home delivered at the preferred location and time, often at no additional cost. A stark contrast compared to a typical traditional shopping journey on a rainy afternoon, aggravated by limited parking space, crowded streets, a wait in the queue at the information desk, to find that the product is indeed out of stock. All, however, is not lost. Physical stores are increasingly adapting to exploit their unique strengths. Amongst these are an unforgettable customer experience, the touch and feel of the product or the personal attention of the store staff. More and more stores are also discovering that their store network and product inventory could well be a hidden gem when it comes to fulfilling the demands of the online shopper. 2
The rationale for store fulfilment Amazon recently published healthy sales growth, but underneath, the fulfilment costs grew even more. Fulfilling online orders is thus a challenge, even for the giants in the market space. Where pure players have no other option than to fulfil orders from a central location, omnichannel retailers have two alternatives to evaluate, when deciding on their most competitive route to market. Should they invest in a central fulfilment operation or should they use their store network as fulfilment centres? Five arguments could push the decision towards the store fulfilment option. leverage legacy flexibility launch & learn same-day To start with, cash strapped retailers can leverage the available store space, inventory, IT systems and personnel costs, when fulfilling orders from the shop floor. A store model requires limited or no additional investments in the logistics footprint, no central stock, no advanced inventory and warehouse management IT solutions, and picking & packing could be done during personnel s idle time. In addition, increased stock turns would decrease the risk of markdowns. 3
What s more, some retailers are locked in historic investments (such as store assets) and contracts (such as rental agreements running well into the future) or labour union severance conditions. Despite not being an attractive starting point, for many retailers it is a reality that must be faced and exploited in the best possible way. A third argument is flexibility to roll out capacity in line with sales growth. Despite the plethora of growth projections, some retail segments are still in their online infancy and will take time to reach a significant scale. During this transition, a store network is an ideal stepping stone, rolling out pick & pack capacity to more stores as demand develops. In addition, a flexible rollout allows for a launch & learn and low risk approach. With limited investments up-front, adjustments can more easily be made to processes, order management and inventory replenishment procedures. Online shoppers have different shopping preferences than their offline counterparts, and these must be deciphered, avoiding the potential risks of a big-bang launch inherent to a central fulfilment model. Lastly, a key benefit of store fulfilment lies in delivery speed based on local-for-local express networks. Both e-commerce giants (e.g. Google express, E-bay now / Shutl) and local startups (e.g. Frank Express in Amsterdam and City Deliveries in 26 cities in the Benelux) have pounced on this terrain. Stores located in the hearts of urban areas are ideally suited to benefit from these networks to service their online customers living in the vicinity. 4
Case study: insights from a non-food omni channel retailer The non-food market is characteristically more cyclical than primary products such as food, seeing revenues drop more sharply as the economy slows. The upside is also true, where the latest outlook is showing signs of an upturn. Based on this new momentum, non-food retailers are re-investing in their online proposition to catch up on other sectors and better compete against (international) pure players cherry picking from the market. Currently focused on reserve & collect in stores, the key question in this case study is how to further extend the product range and (delivery) services to better accommodate customer needs. With a dense network of larger stores, generally holding a full range of products in stock with a low stock turn, it is understandable that store fulfilment seems an attractive option to explore. Below we share four insights on the trade-off between store fulfilment versus a central DC solution. Our analysis shows store fulfilment: has lower go-live investments has competitive running costs is scalable beyond 2020 allows local-for-local home delivery 5
Lower go-live investments Go-live investments store fulfilment mixed model central/dc fulfilment Rolling out a full omni-channel proposition combining home delivery and store pick-up requires up-front investments in IT, inventory and infrastructure. Our finding is that a store model requires less than half the up-front investment compared to a central / DC model. The main driver of this difference is inventory. Where a central / DC model adds an additional inventory point, the store model benefits from the already available store stock. Competitive running costs Costs to serve central/dc fulfilment mixed model store fulfilment e-commerce revenue Our case study shows costs to serve as a percentage of COGS in the range of 20-25% with a bandwidth of 2-3% between the different fulfilment scenarios. Interestingly, the store model shows the highest benefit from economies of scale, due to increased pick & pack productivity in stores. Where DCs can batch orders from the start, knowing inventory will be available, stores must make frequent pick-runs. As volumes grow these become more and more efficient. 6
Scalable beyond 2020 Maximum scale of store fulfilment FTE per store % store sales FTE per store CAP % of store sales years The main drawback of fulfilling online orders through stores is disrupting normal store processes. By taking the labour required and the online sales as a percentage of normal store sales as proxies, our analysis shows that for our case study, stores should manage to fulfil orders well beyond 2020. As the graph illustrates, the limiting factor is the sales generated. The impact on FTE s being less profound and reaching the cap at a later stage. Local-for-local home delivery Almost daily announcements are made of start-ups launching (peer-top-peer) delivery solutions accelerating the possibilities for home deliveries direct from stores. What s more, these services are being offered in the same price range as national parcel distribution. For our case study the combination of a high density store network and these delivery services provides a unique proposition compared to competitiors with a central fulfilment operation. 7
Overcoming store fulfilment challenges The store model of course also has its challenges. A priority is inventory accuracy. Several ways to improve and/or mitigate this risk is by executing targeted stock counts and setting correct safety stock parameters. In addition, if fulfilment is done from several stores, orders can be (re-) directed to the store with the highest inventory. A second worry is the consistency across stores. Making sure every order is correctly picked, packed and shipped in every store, every day, requires simple procedures and close monitoring. Rolling out fulfilment store by store in line with market demand, allows the retailer to funnel orders to a minimum number of stores. This creates a critical volume, making the task a more daily routine and thus ensuring quality. A final obstacle in store fulfilment is the order cut-off time which is limited to store opening hours. Online shoppers however, are used to ordering until late with a next day delivery. Two solutions spring to mind. Firstly, stores could extend opening hours to allow for a late pick run, creating an additional opportunity for traditional store sales. A second solution arises in combining an early morning pick run with same-day delivery. As the industry matures and volumes increase, the challenges above become more and more prohibitive. A central fulfilment operation, which overcomes most of these challenges, would then be a more reliable option. However, in this non-food case study, the growth expectation is such that for the coming years the benefits of store fulfilment outweigh the downsides. 8
The understated potential of stores in omni-channel retail The ongoing rise of the online marketplace continues to increase competition, putting more and more pressure on cost efficiency and challenging conventional ways of doing business. It also means looking for creative solutions to benefit from existing assets, or even better, to create a unique and hard to replicate customer proposition. The store network can be seen as ballast, holding back growth, or as an asset, conveniently positioned close to customers to quickly fulfil customer orders for a competitive cost base. Our case study in the non-food sector shows that a case can be made for store fulfilment under the right circumstances. What s more, several (international) retailers such as Macy s, Sears, Walmart, Best-Buy and Saturn have identified the same opportunity and decided on the same route, raising the question who will follow in their footsteps. 9
About us IG&H Consulting & Interim is growing. We are a leading independent business consulting firm in The Netherlands, working closely with our clients in three consumer oriented sectors: Financial Services, Health and Retail, Trade & Logistics. New business models, omni-channel and e-commerce redefine the business agenda in these sectors. IG&H has transformed its consulting model to help our clients succeed in this new era. Our approach is unique. We Make strategy work! This is how we deliver results. In 1988, IG&H was founded by Jan van Hasenbroek and Kees van der Geer in Rotterdam, The Netherlands. Many years later, close to 150 Consulting & Interim professionals share a single passion: to make the difference for our clients and our own employees. We are proud of our employee satisfaction (MTO) of 8.1 and our customer satisfaction as measured by the Net Promoter Score (NPS) of +49 in 2013. 10
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Authors IG&H Consulting & Interim Hondiuslaan 102 Postbus 572 3528 AC Utrecht I: www.igh.nl T: +31 (0)30 20 40 900 F: +31 (0)30 20 40 999 Mirjam Karmiggelt Director m.karmiggelt@igh.nl Thomas Bloemarts Project Manager t.bloemarts@igh.nl 12