Time for a reality check

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As online sales continue to grow so may retail losses on each order. Big data and a change in consumer attitudes to the services they want might just ease the pressure on carriers.

Penelope Ody

Penelope Ody

A survey last month (September) by CSC, largely focused on retail use of in-store technology and customers’ perceptions of it, came up with the somewhat surprising figure that of the 150 UK retailers questioned, the average split between in-store and online sales was 47:53. Obviously some of that 53 per cent includes click-and-collect orders, but if the figures are at all typical then they suggests that those extensive and expensive high street estates may be contributing less than half to a retailer’s turnover.

It is thus not surprising to find that many leading retailers are in the throes of re-evaluating how they manage that burgeoning Internet business. During the summer Tesco moved the goalposts for online orders raising the minimum spend from £25 to £40, while John Lewis implemented a £2 charge for click-and-collect orders less than £30. Such tactics, from the leaders, will probably be followed by many others and reflect a growing realisation that – for omni-channel retailers at least – online orders can be far less profitable than store trade and might just be contributing to the declining profits that so many have reported.

Significantly, another survey, this time from JDA Software, found that only 19 per cent of omni-channel retailers claimed to be fulfilling online orders profitably. As Dan Murphy, partner with consultants Kurt Salmon commented: “Over the past few years I’ve worked with many retailers and none of them is making money on home delivery. Pure plays have an entirely different cost base so they can make profits, but traditional retailers have always depended on the customer to fulfil that last mile – i.e. take the goods home with them – so their cost to serve is entirely different.”

Logistics & Supply Chain

This article first appeared in Logistics & Supply Chain, Autumn 2015.

As John Lewis’ action suggests, even allowing customers to go that last mile, by collecting their orders, comes at a cost – and despite all sorts of clever IT, very few retailers actually have the capability to calculate that cost on a per order basis. Plenty of data they may have, but not enough of it – or the right tools – to deliver the necessary granularity to work out the profitability (or lack of it) for each order. Small wonder, then, that supply chain software specialists such as JDA and Manhattan Associates are promoting big data solutions that can calculate total cost to serve, match profitability to customer history or optimise inventory management with such developments as “destination driven demand” which ensures that products are stored in the right place to meet predicted orders as economically as possible.


Such tactics may help end the “one-size-fits-all” approach to delivery charges for online orders as well as the curious anomalies found in price lists: using the Collect+ service from John Lewis, for example, costs £3.50 regardless of the order size, while home delivery for orders costing more than £50 is free.

Even these sums bear little relation to the actual price involved of, say, transporting a small one kilo parcel containing a lightweight garment compared with a 75 kilo television. A few minutes checking the online delivery charge calculators from leading logistics companies very soon demonstrates that prices quoted for small parcels can vary from under £7 to more that £15 while very large consignments can be costed at £100 and more. Clearly retailers with carrier contracts are not paying these prices, but they are certainly paying rather more than their customers are being charged.

Received wisdom suggests that major retailers tend to drive a hard bargain, but there is a limit to how much they can push logistics prices down. As most consumers know only too well, service levels fall when delivery drivers are put under severe time pressures: we’ve probably all encountered drivers who dump goods somewhere near the doorstep, ring the bell and instantly leave (or as one persistently did here, dump the parcel just inside the garden gate and never come near the doorbell).

The JDA survey also found that shoppers in general prefer convenience to speed, so the possibility of delivery to a local pick-up point is a more attractive option than premium “same-day” or “within 2-hour” services. This, at least, is good news for carriers and their drivers who should be able to make one daily bulk drop instead of multiple attempts to deliver to absent householders. It also suggests that – like those paying over the odds at John Lewis for Collect+ – customers might just be willing to pay a realistic price for a service that they really value.

Long ago when Tesco launched its home delivery service, competitors calculated that each order would cost £25 to fulfil and the model was thus unsustainable. Supply techniques may have improved and costs may have fallen, but with online orders exceeding store-bought items, no retailer can afford to be potentially losing money on more than half their sales. Of course, John Lewis, may simply be implementing that £2 charge for quite another reason: to act as a deterrent to using click-and-collect and so reduce all those Saturday morning queues at the customer collection point.

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