Running in place: Retailers struggle to keep up with customer expectations

Dive Brief:

Fulfillment costs often consume 70% of a product's order value, according to a new study by EKN Research and Radial.
The study also notes at least 55% of customers shop via multiple channels such as online and through mobile apps, while roughly 40% of retailers say fulfillment costs are a major challenge.
In addition, roughly 67% of retail CEOs note that fulfillment costs have recently increased. A full 37% state that the lack of alignment in inventory order and supply chain operations drive up costs.

Dive Insight:

Continually rising expectations on the part of consumers are costing retailers big money in fulfillment fees, which is eroding their profits and taking valuable time away from areas in which they excel, or could be excelling, John Byrde, General Manager of Omnichannel Technology at Radial told Supply Chain Dive.

They're also competing with Amazon, which operates on a model in which a gradually shrinking loss on fulfillment is considered a success. In fact, a GeekWire analysis recently revealed Amazon lost $7.2 billion in fulfillment fees in 2016, though the company allegedly earned $2.4 billion of that loss back thanks to cloud computing services sales. That still leaves a loss of $4.8 billion, far more than most retailers can stomach.

So how can retailers keep up? Byrde suggests relying on a 3PL, which can often work out better shipping terms due to multiple accounts. "To succeed at omnichannel sales, a retailer has to calculate the sweet spot between what it charges for an item versus what it costs to ship that same item to the consumer. It's a difficult process," he noted. "Charge too much, and someone else will offer a better deal. Charge too little, and there goes your profit."

A 3PL generally offers more locations from which to ship, which further eases costs, since there's likely a closer D.C. to the customer than the retailer can offer, Byrde says. Packaging options also make a difference: though there's savings to be had in bulk purchasing, an array of sizes and materials further reduces price.

Despite brick and mortar's current nosedive, Byrde believes it's merely a matter of market correction. "In the 80s, 90s and 00s, there was so much expansion," he said. "Brick and mortar isn't going away — it's adjusting. Think about the difference between buying something online versus in store. The majority of purchases are still made in person." This bears out, as according to the U.S. Census Bureau, only 8.5% of retail sales were made online in Q1 2017.

Ultimately, most retailers will work it out, Byrde said. "They'll adjust," he concluded. "They're struggling now, but in time, they'll work out the proper formula." More importantly, however, retailers need to focus on defining themselves. "They need to take a step back and consider what they want to show as unique about their offering. That's how they'll sell themselves."