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Online Retailing - Facing Logistical Challenges

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Online global retail sales are continuing to grow, with retailers such as Amazon, Alibaba and Zalando gaining market share at the expense of traditional retailers.

Department store chains are especially badly affected, encumbered as they are with sky-high property and business rate costs.

2018 has witnessed the demise of the iconic Sears brand in the US. In the UK, House of Fraser was saved from administration by Sports Direct. Debenhams and Marks & Spencer have been closing stores after poor profit and sales results.

In the latter case, the decline in food sales has partly been attributed to a lack of an online delivery option. But is this true?

Logistical Challenges

Online sales have been driving the performance of many retailers in recent years, though this is not necessarily the case across all retail sectors. In our new edition of Logistics and Retail Management, Sparks and I assess the logistical challenge of the growth of both e-commerce and m-commerce on company operations.

In non-food sectors, the challenge has been to realise and meet increasing customer expectations for next-day delivery of orders. In fashion particularly, this is not only to cater to the 24/7 consumer, but also to meet demands for returns. With up to 45% of clothes returned, many retailers use third-party logistics companies to manage the reverse flow of stock. For example, ASOS use Clipper Logistics to manage return operations throughout Europe, with an emphasis on getting products back quickly and in good condition for resale.

Case Study: Schuh

Logistics and Retail Management includes several detailed case studies. One study of Schuh, the footwear retailer, shows how the company has developed its own proprietary warehouse management system that serves both stores and online customers. Initially, the MD, Colin Temple, who co-authors the chapter, had been cynical about selling footwear online. Now, however, online is an important part of the business accounting for c20% of sales.

Schuh is a truly omnichannel retailer. A customer can choose to reserve online to pick up in store, buy online to pick up in store, buy online for a timed delivery, have delivery to a local 24/7 shop or have free deliveries and returns. This means flexibility for the customer who can enter a shop that does not have the correct size or colour of shoe but can have the product delivered to them the next day.

The whole system is driven by the best stock in the best location so that fast movers are shifted to the best sites and slow movers or distressed stock are sold at discount on their website.

However, the grocery sector faces the greatest logistical challenges with online retailing. Many consultants and industry experts question the impact on profit margins of grocery retailers’ online businesses. The complexity of picking a grocery order (60-80 items) across three different temperature ranges and then delivering within 1-2 hour times slots is a costly operation.

When UK grocers competed in the 1980s and 1990s, market share and profitable growth were fuelled by the number of stores that could be built. Logistical costs were kept down by shifting large volumes of product through distribution centres to stores.

The online model is very different. An increased scale does not necessarily generate more profit, and, indeed, may increase costs. Home deliveries to customers are estimated to cost around £15 per order, far less than the charge to customers (£4 - £7.50). Click and collect can reduce costs, as the customer bears the transports costs. Yet, when Tesco began charging up to £4 for customer collection during busy periods in 2017, there was considerable customer resistance.

Subscription systems may provide a steady income and some certainty, but the cost problems remain.

Fashion retailers seem to have made online shopping work for them, using technology to enhance the offer at an acceptable cost. Consumers are also less concerned about any additional costs of delivery.

Grocery retailers, on the other hand, have built a system that replaces the retail activity and rewards an alteration of behaviour. This is coming at a business cost which is unsustainable.

Logistics is proving to be the Achilles heel of online retailing in some sectors.

What of the Future?

There has been much debate about the impact of new technologies on last-mile deliveries.

Many online retailers and logistics service providers have trialled drone deliveries. However, the economics of such operations are poor, notwithstanding the safety and environmental constraints of such a technology.

Similarly, trials have taken place of delivery robot ‘droids’ that can carry 12-15kg over 3km at a pace of 6km/h. Although technically feasible, these ‘droids’ have to share pavement space with pedestrians, making it difficult to achieve public acceptance.

Such experiments, however, point to the continuing search for cost-effective solutions to meeting what is a growing consumer demand.