Online channels are predicted to account for 25 per cent of retail activity by 2009, and this year’s Christmas market could be worth €51 billion. But far from signalling the death of older retail models, online is just one more channel to add to an already complex mix. Supply Chain Standard’s September Roundtable, supported by Sterling UK, explored the implications.
Dr Phil Streatfield of Woolworths (see panel for affiliations) recalled that ”When I came into retailing, there was a simplistic model: stuff either goes through the store, or direct to the home. The world at the moment isn’t quite like that – business wants an online presence with a transactional web-site where you can order home delivery or to pick-up in-store. The store itself may offer a broader range than is actually available in-stock. We’ve introduced a catalogue for the world of people who want to use the catalogue to order for collection in-store. There may be call-centres involved. All these things have become part of the customer experience because the technology is there to facilitate them in-store.
”But there’s a challenge to maintaining the integrity of the ranges. How we got the data in the back office to run demand into DCs, support online and catalogue shopping, and the 800 stores of different sizes and therefore different ranges?”
Chairman Nick Allen noted research that suggested 47 per cent of customers believe if a product isn’t available online it won”t be in the stores either. Does the online channel risk letting down the core brand? Streatfield said ”However a customer interacts with the business is going to influence perceptions. The more routes, the more opportunities for failure.
Shopping in-store, there is no ‘contract’ of availability; online there is. There’s a different feel – if you don”t get the fulfilment right, you can lose the whole customer relationship”.
Richard Houlton of Clarks recalled experience with previous employer B&Q. ”When we relaunched diy.com, of 40,000 skus, only 15,000 were online. Customers assumed they were seeing the full range online, so we were losing customers from the stores. But if you put the whole range online, consumers assume your availability is dismal! And why are they online? Are they trying to transact, or are they researching? In truth they go back and forth unpredictably. The trick is to allow for it and present something that allows transactions by whatever method they want. Channels shouldn”t be unique – the sites and stores should support each other”. David Hogg of Sterling suggested that the proper phrase was not ‘multi-channel’ but ‘cross-channel’, offering a continuity of customer experience.
Streatfield suggested there are evolutionary problems. ‘A project team has a germ of an idea -“this looks like an interesting space”. The germ builds into a bit of an online business, but the ranges aren’t quite the same, the buyers aren’t necessarily the same. It has a life of it’s own on a somewhat different mission.
‘Then you start looking in the backroom for efficiencies and ask “how do you bring these things together?” The roles you created to get online things going are conflicting with your core business. Which sheds should you be using, who”s doing the buying, how do we deliver on promise… as things grow, how do you get an integrated company?’
Markus Leopoldseder of McKinsey said that this is a specific case of a general situation: in grocery retail, there is a tension between pure food-service and the wider retail models, or there is competition between online and home TV channels, not to mention the complexities of internationalisation and global sourcing. ”Organisational questions have to be seen in the context of that complexity”. Streatfield commented that ”When you start you never think it”s going to be as complex as it is. Multi channel retailing? – best not to think too much about it!”
Pricing is another issue, said Allen. The market expectation is that online ”ought” to be cheaper – but how many retailers really know the costs of their different routes to market? Houlton suggested that with two different price structures ”Eventually the consumer won”t be happy, but he does expect online value. My personal view is that online pricing has to be the same as in the physical presence – but you can do different things online”.
Cannibalise someone else
Mark O”Bornick of Analytiqa uttered the dreaded word ”cannibalisation”. That’s fine, said Streatfield ”as long as it cannibalises someone else. In the retail space, you almost have to have online presence; you have to invest in some capability. But there”s a challenge. The big multiples in UK retail are all about supply chain efficiency – out of town sheds where the customer does the picking, packing and shipping. We”ve gone from the boy on the delivery bike and the corner shop, to big box retail – and suddenly we are returning to the equivalent of the boy on the bike, but the customer doesn”t want to pay. So somehow we have to absorb the costs in our margins and still provide excellent service”. Who, he asked, is actually making a profit in the pure online space? Amazon? But look at the scale they have to operate at.
Leopoldseder said companies have to know the end to end costs of all their channels, and that might mean you have to charge for home delivery. Houlton said it is no good looking at one channel in isolation – you have to look across the multiple channels. ”The nirvana of supply chains is to rationalise the range, but commercially the need is to expand the range. You won’t reconcile those by looking at the economics of one channel alone”.
David Hogg suggested that a lot depended on the underlying ethos of the retailer. He cited a German retailer that says ”We won’t have online: we are a premium retailer with a personal service”. Contrast the consumer electronics model – online and store, very much cross-channel, and linking the processes is very much the driver of the consumer experience and optimum service – in other words they are’t just sales channels. Even in one channel, said Houlton, there can be different ”touch points” but you need to offer one single experience.
”Differentiation has to be acknowledged”, said Leopoldseder, and there are different opportunities per channel. ”Online can be much more demand-shaping – you never put your non-available stock on the front page, you use the page to shape demand.
”All retailers still struggle with supply chain transparency, yet the customer wants a reliable experience and is very upset by non-arrival”. So, perhaps we should have different people, with different mindsets, managing different channels?
Ronald Teijken of Sterling mentioned a Dutch study of how people ”look” for a product online or in a physical store, and a Manhattan-based online only retailer (of fresh salmon and the like) where they have really thought about how the consumer looks for the product and what they want to see: not just the product itself but extra information, such as recipes.
The biggest sin, noted Allen, is non-availability. Online there is always the doubt as to whether something is in stock, whereas at least in a shop you can see the item isn’t there. Hogg noted that ”one of the biggest online retailers in Britain” launched its business on a relatively simple supply chain premise, using wholesalers rather than thousands of individual suppliers. The wholesaler sets aside specific stock, and the process technology was based on emails and manual processes. ”It was very simple to launch – but if a business becomes successful, then things have to change or service levels will plummet”.
Houlton said there was no technological problem ”but very few retailers have good enough data to manage [online channels] properly. Streatfield also noted the need for real-time rather than batch processing. ”If things aren”t in sync, you run the risk of disconnects causing failed deliveries”.
Another question he said, was ”How far do you trust your practices? Are you really going to run to the last sku? Do your DCs run to that level of accuracy? We have to run things a whole lot more accurately”, to which Leopoldseder responded that the different lead-times and so on across channels might imply the desirability of separate master data files.
Warren Dow of Pilkington”s was coming at the problems from a slightly different perspective, in that his company ”has multiple channels to customers [eg retailers, developers, contractors] rather than consumers. Traditionally we”ve supplied the likes of B&Q through DCs, but we’re getting more requests for direct delivery: B&Q have special order stock that is on view in the store but supplied direct to the customer by us. Of course there”s a discussion on cost – but the retailer view is that it”s on the shoulders of the supplier”.
Dow felt that availability of product was less of an issue online than in-store. ”Online, the customer has In a store, an empty shelf is disappointing. But if you go online, make an order, probably pay for it, and it doesn’t turn up as said, disappointment turns to outragealready assumed a certain time lapse, which allows the retailer greater flexibility. In a sense, transacting online implies that the need wasn”t that urgent”.
But Houlton strongly disagreed. ”If a customer goes into a store, an empty shelf is disappointing. But if you go online, make an order, probably pay for it, and it doesn’t turn up as scheduled, disappointment turns to outrage!” Streatfield agreed on this key difference. ”A Tesco store may just lose that sale to a local competitor; but an online customer is going to expect compensation”.
And as Mark O”Bornick noted ”Everyone has had a bad experience [with fulfilment] – my wife’s shoes weren’t ”delivered”, they were thrown over the garden gate. And the experience doesn’t stop with the receipt of goods – 20, even 40 per cent of fashion goods are sent back: the customer orders three sizes or colours and sends two back”.
That was relevant to Houlton, whose company is in the early stages of setting up an online presence. A Clarks unique selling point is fitting of shoes – so the model they are looking for involves ordering online but fitting and collecting in-store.
Final delivery of online orders is clearly problematic. O”Bornick noted that the 3PLs have come to see home delivery as a large-risk business – ”they can so easily damage both their own and their customer”s brand”. Margins are notoriously low, many manufacturers and retailers don”t see the service provision as up to scratch yet, and it may be that creating premium rates for delivery is the way forward”.
And delivery is only half the equation – Hogg noted that installation, and removal of old (especially electronic/electrical) goods is more and more important. But Houlton pointed out that this is raising the barriers to entry ever higher. ”There are very limited opportunities for new two-man carrier/installers. That is not that anyone is doing it well, but that most of the major retailers are already tied up with long-term contracts”. Pressure on the individual delivery/installation personnel can be intense, noted Leopoldseder. He also knows models where the LSP will arrange (for an additional fee) a return visit to, for example, recover returns.
Hogg suggested that research shows a strong preference for managing the returns process through the store environment, but as Streatfield said ”That gets interesting. How do you handle this?” Customers may be taking back goods to a store that doesn’t normally handle that line, so they can”t just put it back on the shelf. How do you handle repayments? And how do you measure costs and performance, if the income has arrived online, but the repayment and rehandling appears against the physical store? Houlton pointed out, though, that the problem already exists off-line. ”Buy at any store, return to any store” is a commonplace in retail, even across multiple formats.
So where does that leave us? Hogg said that most retail companies have ”sort of come to terms with multi-channels, the challenges of cross-channels, but they are typically working on small budgets, with ad-hoc systems not completely thought through, and “things kind of hang together”. It really would be worthwhile investing in some sort of process technology, not just isolated programs”.
Meet the panelists
Nick allen (chair) editor Supply Chain Standard
”47 per cent of customers believe if a product isn”t available online it won”t be in the stores. Does the online channel risk letting down the core brand?”
Markus Leopoldseder SCM Practice Manager, Europe, McKinsey & Co
”Companies have to know the end to end costs of all their channels, and that might mean you have to charge for home delivery”
Richard Houlton Head of Multi Channel Retail, Clarks International
”Online pricing has to be the same as in the physical presence – but you can do different things online”
Dr Phil Streatfield Commercial Supply Chain and IT Director, Woolworths plc
”Shopping in-store, there is no “contract” of availability; online there is. There”s a different feel”
Warren Dow Group Supply Chain Director, Pilkington”s Tiles
”Traditionally we”ve supplied the likes of B&Q through DCs, but we”re getting more requests for direct delivery”
Mark O”Bornick Director of Analytiqa
”Twenty to forty per cent of fashion goods are sent back: the customer orders three sizes or colours and sends two back”
David Hogg Retail Industry Marketing EMEA, Sterling UK
”Most retail companies have sort of come to terms with the challenges of cross-channels, but they are typically working with ad-hoc systems”
Ronald Teijken Manufacturing Industry Marketing EMEA, Sterling UK
”Some retailers understand how consumers look for goods: not just the product itself but extra information, ie recepies”