It’s no secret that Amazon has logistics aced and most of everyone else is getting lapped—but some retailers are adjusting what they do on the back end to at least remain in the race.
Today’s consumers want it all—and all the time—and retailers and their logistics have to catch up to accommodate. And not accommodating will mean a matter of life and bankruptcy.
“How retailers and their freight partners respond to the challenges—and opportunities—emerging in this changing landscape will spell the difference between success and failure in the future,” a new report out by consulting firm AlixPartners said.
According to the report, e-commerce has grown at an annual rate of 17 percent between 2000 and 2015, reaching $343 billion in revenue for 2015. As such, e-commerce has commanded an even greater share of total retail sales, growing from roughly 0.5% to 7 percent over the same period (by contrast, retail sales that happened offline grew just 3 percent in those years).
With half of respondents in a survey AlixPartners conducted in May 2016 buying something online at least once a month and placing an average of 15 e-orders a year, traditional transportation models for final-mile delivery likely won’t work for much longer.
“Consumer respondents increasingly expect free delivery, which may be on its way to becoming table stakes in the retail game,” the report said, adding that 97 percent of survey respondents said free shipping impacts their ordering decisions and of those, 75 percent said free shipping “greatly” impacts their ordering decision (that number has jumped from 64 percent in 2012). What’s more, in 2012 74 percent of customers were willing to wait five days or more to receive their orders and as of last year, only 60 percent were.
If retailers can’t figure out how to manage this demand, they’re going to be paying the price in more than just shipping costs.
“As free shipping becomes table stakes in the retail game and as more companies feel compelled to offer ever-faster delivery, profit margins may erode if companies don’t fully understand the true costs of providing such services,” according to AlixPartners. For example, the report continued, “Providing same-day service as a knee-jerk reaction could trigger a dangerous pattern: one that already afflicted the office supply business when next-day delivery became standard in that industry. Major competitors began matching one another’s services, thereby eliminating speed as a source of differentiation. Result: A higher cost structure for the entire industry.”
How does Amazon do it? And how can retailers that aren’t Amazon do it?
For Amazon, its technology service offerings allow for uber-customer friendly delivery options like two-day/same-day/one-hour deliveries, and the volume it sells as a result means it can pay for its own trucks, planes and automobiles (and ships and drones and whatever else is next).
For retailers that aren’t Amazon, they’re going to have to compete differently.
“Because there’s no guarantee that enhanced service levels would generate profits, retailers must carefully consider how to balance cost with service,” AlixPartners said. “They may also have to reconfigure their operating models. For instance, to rein in the cost of providing faster delivery services, retailers might have to move their inventories of fast-moving stock-keeping units closer to the points of consumption.”
Customers don’t care who delivers their products as long as they arrive intact and on time, so whichever methods retailers take to deliver on that desire will mean better, more robust relationships with both their transportation and technology partners.
“Given that shipping options influence online shoppers’ purchase decisions, retailers will likely need e-commerce website designs and fulfillment solutions that make it easy for customers to view and filter delivery methods and inventory locations,” the report noted.
Logistics companies are also going to have to step up their offerings in the face of stiff—and increasingly innovative—competition.
“Today’s consumers’ heightened requirements also have implications for the freight companies that support retailers. Freight businesses must understand the new kinds of competitors entering the arena. Some of the emergent rivals could also be major customers (think Amazon). Others are backed by the might of the U.S. government or by scale and financial heft derived from consolidation,” AlixPartners said. “Whatever their origin, new players are stepping in to offer retailers a wider array of options for getting products to customers. And they’re poised to reshape the logistics landscape.”