The 2014 holiday season was a frenzy of retailers trying to offer the best deals and promotions as competition was more fierce than ever. As part of offering the greatest deals, there was increasing pressure on retailers to offer fast and/or free shipping as seen through promotions from Target, L.L. Bean and Nordstrom this past holiday season.
However, last year, Amazon spent approximately $6.64 billion on shipping while only receiving about $3.1 billion in payments for shipping, which raised concerns over how offering free or cheap shipping can become a significant cost.
Retailers must examine the costs vs. the gains of offering free shipping. Nothing is free, and at some point, profit margins need to be evaluated. The good news is that studies reveal that consumers will take action for free shipping. For example, shoppers will add more items to the cart to qualify for free shipping. In this case, the cost of free shipping becomes offset by higher average order values.
Cost isn’t the only challenge, though. Speed plays a critical role, too. Many retailers are offering two-day, overnight and even same-day shipping services. Amazon’s utilization of taxi and bike services in New York, and Google Express’ expansion into Boston, Chicago and Washington D.C. are excellent examples of this. While this model makes sense for niche retailers in dense urban areas with a large population, in other cases, same-day shipping doesn’t always pay out.
On the other hand, omnichannel fulfillment—using your stores to supplement your distribution network—provides consumers with convenience and better experiences, while increasing retailer sales. In-store pickup is a great option for same-day fulfillment, plus it’s free to the consumer. Another option is ship from store, and depending on the store’s proximity to the customer, it can often result in next-day delivery.
So what is the optimal network design? This depends on several factors, such as: business goals, store footprint, customer base and geographic locations.
As retailers grow their e-commerce business, a regional distribution model can accomplish getting orders to customers within two days. This, in addition to leveraging omnichannel options with store inventory, can expose a brand’s entire retail inventory to online customers.
Though the total cost of fulfillment is lower from a distribution center, it can be difficult for any retailer to perfectly forecast inventory planning, so adding omnichannel fulfillment options can help to eliminate out-of-stock scenarios and increase e-commerce revenue.
The expectation for fast and free shipping will continue to stand. Consumers will demand more choices and convenience.
Whether it’s picking up the item the same day from in-store inventory, having all packages dropped off at the same time rather than on separate days, using ship to store to avoid fees, picking up from a lock box, etc., omnichannel is a necessity for retailers to compete with the big-box retailers.
Although e-commerce is growing rapidly, the majority of retail sales continue to be in brick-and-mortar storefronts. Leveraging store networks increases product availability, and provides consumer convenience and fast fulfillment. Omnichannel went from a nice to have to a need to have in order for retailers to stay competitive.