Stores are playing a larger role in fulfillment but retailers should carefully weigh the pros and cons of using brick-and-mortar locations to support e-commerce, according to Goldman Sachs.
Though store-based fulfillment was on the rise prior to Covid-19, consumers seamlessly made the switch during the pandemic, leaning on same-day services like curbside and buy online, pickup in store (BOPIS) to limit their contact with brick and mortar.
A Goldman Sachs research note led by retail analyst Kate McShane stated that stores in densely populated area typically see “greater store fulfillment penetration,” and companies like Target have turned to technology to create an efficient inventory system needed to power a fast, low-cost last-mile solution.
Despite the rising popularity of store-based fulfillment, many retailers are likely to leverage traditional warehouses in tandem with their brick-and-mortar-based services, choosing the most cost-efficient channel to meet shoppers’ needs, Goldman analysts said.
What’s more, they believe demand for same-day store fulfillment of digital orders will continue its ascent, following last year’s growth from 43 percent in Q1 to 60 percent by Q4.
Demand for same-day services fulfilled by stores via curbside and drive-up, as well as BOPIS, is expected to continue for the foreseeable future. That demand during the pandemic did help to fuel the move to stores becoming more central to digital fulfillment because of its proximity to customers. Goldman analysts said store fulfillment for digital sales rose to 60 percent in the fourth quarter of 2020, up from an average of 43 percent in the first quarter of 2020.
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Online orders fulfilled through a same-day store service drive higher margins, as items shipped from a distribution center or store incur higher delivery costs. On the other hand, retailers setting up BOPIS and curbside absorb an incremental cost of front when reworking parking lots spaces and signage directing shoppers to designated locations. Ongoing costs connected to picking labor, also factor for most digital orders, can typically come down over time.
Store-based same-day order fulfillment has its own drawbacks, however. Most DCs are highly automated—and therefore, efficient—thanks to their centralized inventory management systems, and sophisticated packing and sortation technologies. According to Goldman analysts, this means retailers will likely stick with DC-based fulfillment for overnight and two-day shipping while stores will fill in with same-day services for select e-commerce products. This hybrid model, they added, means stores will needs more frequent replenishment if they’re fulling digitally originating purchases.
“Although delivery related costs per order are typically lower with store fulfillment, we highlight real estate and labor costs are typically higher than DCs given store locations are in higher density areas,” McShane said. “While store labor likely shifted tasks toward digital fulfillment during 2020, we highlight the potential need for additional staff to support both the return of store traffic post-pandemic and the continued fulfillment of digital orders.”
Often regarded as a leader in same-day services, Target saw 18 percent of 2020 sales coming through digital, with store fulfillment rising to 85 percent in the fourth quarter of 2020 from 80 percent in Q1. The company increased its drive-up option to stores over the past year. “The step-change is not as large as other retailers over the past year given Target was an industry-leader in embracing the store as hub model prior to the pandemic, but Target indicated that same-day services continue to grow faster than overall digital in the first quarter of 2021,” McShane said.
In comparison, Walmart saw digital represent 12 percent of sales last year. Store fulfillment rose to 50 percent in 2020’s fourth quarter, up from 25 percent in Q1. BOPIS and curbside represented the majority of the demand as the company focused on those options given its store base, according to the Goldman report.