April 17, 2017 | Written by: John Stelzer
Categorized: Articles | eCommerce & Merchandising
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Shipping costs matter
It’s hard to imagine a current retailer that’s not at least a little bit concerned about the potential competitive incursion of Amazon on their business. But, beyond the obvious price and product assortment aspects of competing against Amazon, there’s an area where many retailers have a competitive asset that they’re overlooking…it’s called “stores”.
Now, I don’t want to confuse this discussion by heading down the path of physical product access versus online shopping. Any of your brick-and-mortar competitors can play that card. And, it appears that Amazon is potentially headed down that path, as well. Instead, I want to focus on an area where Amazon has reset consumer expectations in the last decade that is increasingly imposing significant challenges for many retailers that have multiple channels through which they sell product and fulfill orders. Specifically, I’m talking about the perception that consumers have about “free” shipping and the expectation that their online purchases should arrive in two days…or less.
Roughly a decade ago, Amazon launched Amazon Prime (a service where Prime members pay an annual fee to get free shipping and guaranteed 2-day delivery on all eligible Amazon orders). This ushered in a world where consumers have become less patient with (1) shipping charges in general and (2) delivery times in excess of two days. In fact, consumer studies have shown that the number one reason for cart abandonment is unexpectedly high shipping costs.
Ninety percent of consumers say that low or no shipping costs are important when making an online purchase decision. 83 percent of consumers have chosen to forego an online purchase because of shipping charges, and roughly two thirds (i.e., 61%) do so frequently. In fact, sensitivity to shipping cost is so significant that 77% of consumers would choose to buy from a completely-unknown retailer (over a retailer with which the consumer had had a previous positive experience) if the unknown retailer offered no shipping charges.
But—as mentioned earlier—the Amazon threat/effect extends to more than mere shipping charges…although, that area alone is significant. Consumers’ expectation regarding what is fast “enough” is being altered. In a world where we used to pay extra for 2-day delivery, we, now, see many retailers delivering within two days whether or not we paid extra on line for expedited delivery. And, as many of you know, Amazon is now advertising 1-2-hour delivery in certain cities via Amazon Now. So, expectations are likely to rise yet again.
When we asked consumers about the importance of various expedited delivery services, we saw that the next generation of shoppers consider such services more important than ever. On average—regardless of age—a significant percentage of consumers consider rapid delivery important to very important for choosing to complete a purchase online:
Unfortunately, the undeniable reality of the situation is that shipping online orders costs retailers money (whether consumers want it for free or not), and expedited shipping costs even more. To make matters worse, downward price pressures from marketplaces like Amazon and pure-play Internet-only retailers (that do not have the cost overhead of brick-and-mortar stores) are putting many retailers between a rock and a hard place.
Ship from store as competitive advantage
But, several retailers are fighting back by expanding the role of their stores. Rather than thinking of their stores as locations where their customers pick up product—whether purchased in the store or online—they’re recognizing their stores as pools of inventory that can be used as fulfillment centers for shipping products to their customers. As former Macy’s executive Peter Sachse put it, “We’ve spent the last 153 years building warehouses…. We just called them stores.” Or, as former Gap CEO/Chairman, Glen Murphy commented, “Some people talk about Amazon with their 100 distribution centers, God bless them. We have 2,600 distribution centers.”
Best Buy and Dick’s Sporting Goods have enabled all of their respective 1,000+ and 600+ stores to ship online orders from those stores. And, Best Buy reports having cut its average online delivery times by two days. Finish Line ships more than 50% of its online orders from its nearly 700 stores. And, as long ago as December of 2014, Lowe’s President and CEO reported that approximately 70% of their online orders were either picked up at a store or delivered by the store.
Such rapid adoption of ship-from-store strategies shouldn’t be a surprise to anyone. Apart from reducing shipping time and costs by putting the ship-from location closer to the ship-to location, ship from store can be highly beneficial for those whose store footprint and format allow for it. Excess inventory can be sold on line at full price and fulfilled from an overstocked store rather than having to mark down that inventory at end of season at that location.
Your ability to save the sale in the face of a stock-out can be dramatically improved if you can source an out-of-stock (OOS) item from any in-stock location. In fact, the impact of being able to leverage the entire store network to save a sale in the face of an OOS is greater than many retailers realize. Many retailers have expanded the scope of their save-the-sale network beyond just the stores that are near to the OOS location to include inventory in their direct-to-consumer (D2C) warehouse(s). After all, a D2C facility is already enabled for fulfilling online orders. And, receiving additional orders from OOS stores to get the desired item into the hands of an expectant customer that encountered the OOS is typically not something that challenges the capacity of the D2C inventory or staff.
But, let’s think about the D2C facility for a moment. It typically houses inventory for the online channel…which for most retailers represents only 10-15% of their overall revenue. As such, that inventory represents roughly only 10-15% of the total inventory that the retailer sells and that exists in their network. [Yes. There are retailers that have a significant portion of their inventory that is available only on line, but even they are not exempt from being able to enhance their ability to recover from an in-store stock-out unless they make their online inventory available to store associates to use to save the sale.] That means that retailers that only leverage their nearby stores’ inventory plus the inventory in their D2C warehouse are failing to utilize some 85-90% of their available inventory for saving the sale from a stock-out. That could mean a substantial upside opportunity for a retailer that’s able to leverage the inventory across their entire network.
Ship from store example
As a simple example, a retailer with 800 stores, an average item sale price of $30, an average attachment item price of no more than $10, and an average value per shopping trip of only $25 per trip (i.e., because not every shopping trip results in a sale) would realize more than $17M in additional revenue each year if access to their entire expanded inventory network could net them no more than an average of only one additional saved sale per store per day. [As you’ve, perhaps, read in one of my previous blogs, saving the sale on an OOS item nets a retailer more than the price of that item. It also includes the high likelihood of the customer purchasing her originally-intended attachment items, as well as, not forfeiting one or more future shopping trips as a result of the out of stock experience.]
For those who might challenge this modest result, I would call your attention to the results experienced by an apparel retailer that no more than 30 days after launching their new save-the-sale initiative realized a chain-wide average of one additional saved sale per store per day and an average of 23 additional saved sales per store on Black Friday. And, these results were achieved without any additional in-store signage or promotion for their new in-store save-the-sale initiative.
But, as alluring as this upside potential may be, many retailers are concerned that the overhead that shipping from stores places on store inventory and store personnel is prohibitive…both in terms of cost and asset availability. Fortunately, concerns in both these areas (i.e., impact on inventory and store personnel) can be mitigated using the appropriate tools. And, in my next blog, I’ll dive into those nuances and show that adding ship from store to your existing omni-channel capabilities can be a negligible addition that causes a minimum of disruption…if you do it right.
Find out more – read Consumer Expectations Soar: What does it mean for retailers?
Read my other blogs in this series: