Online sales growth has been tremendous and shows no sign of slowing down. However, neither do consumers' expectations of delivery services. The 'last mile' offering is transforming delivery models. The result? Complex supply chains and greater costs. Discover how to address them.
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Continuous online growth
Today’s customer is expecting to buy anything, anytime and anywhere. In the age of the ‘empowered customer’, digital enablement allows for seamless shopping, unparalleled transparency in product offerings, and instant reviews via social media.
Addressing the needs of the ‘empowered customer’, e-commerce sales will make up for 15 percent of total retail sales in 2020, driven by four major areas of growth.
- Existing retailers and e-tailers: despite an already strong foothold in online presence, online sales of existing players are expected to further grow by 10-15 percent in Europe and by 35 percent in China by 2020. Walmart witnessed its online sales grow by 63 percent in the first quarter of 2017, while Ahold-Delhaize is looking to grow from its current €2.8 billion online sales to €5 billion by 2020.
- Marketplaces: marketplaces are expected to contribute to 40 percent of all e-commerce sales in 2020. The leading players are huge: the total value of goods transacted on the Alibaba Group platforms exceeded $466 billion last year, with over 407 million active users. In the US, Amazon is bigger than the number 2 to 12 online retailers combined. On Google Shopping, there are already over 1 billion products, where -paid - consumer products and prices are linked to Google search results.
- Direct to customer: brands are increasingly looking to sell directly to consumers, bypassing the existing retail channels and turning to online options. For example, Nike plans for its direct-to-consumer sales to more than double in the next five years, FMCG companies aim to increase their direct-to-consumer sales; Nestlé experienced an 18 percent growth in this area in 2016 and Mondelez is looking to reach $1 billion by 2020 — 10 times the $100 million its direct-to-consumer sales is currently worth.
- New business models, such as subscription models. Unilever acquired the Dollar Shave Club for $1 billion in 2016, which now has 3 million customers and over $240 million worth of sales. Various subscription models have emerged around recipe kits (e.g. Gaze, HelloFresh); Gousto is one of the United Kingdom’s leading recipe kit companies, delivering more than 1 million meals every month. Other subscription models include toys (Pley) and health and beauty care (The Honest Company).
Regardless of the business model, the common denominator of these developments is that the product is delivered to the customer. This is reflected by the high growth rate in the parcel delivery market and has helped various postal companies to offset the losses of the declining traditional mail business. Next to the traditional parcel deliveries, new delivery options models are rapidly emerging, whether this is the revival of bike-couriers, uber-like platforms or drones, or for instance Walmart’s attempt to mobilize store workers to deliver online orders when driving back home.
Challenges in last-mile deliveries
Today’s empowered customer expects a seamless experience in buying, receiving, paying and returning. This has resulted in the interlinked challenges of higher cost levels, increasing service requirements and growing supply chain complexity.
Increasing service requirements
As part of the seamless shopping experience, customers expect convenience and speed. This isn’t limited to free and fast shipping, but also involves the ability to control delivery options and track the status of the order real-time.
Delivery times have shortened over the years. Next-day delivery has become the norm and, as a result, the willingness to pay for standard deliveries has significantly decreased. Although product availability is key, the offered delivery options are increasingly crucial in the conversion rate and make the difference in whether you press 'cancel' or 'confirm' in placing an order.
Research on the shopping habits of the Millennials and Gen Z indicates that specifically these generations are looking to schedule their deliveries and preferably get their order the same day. Next to this, customers expect to be able to track their order, and to immediately be notified if something goes wrong. Today’s number one customer service question is: ‘where is my order?’ Naturally, this has a great impact on the workload of customer service departments.
Furthermore, customers have become more vocal in their feedback and attach more value to reviews. Negative delivery and/or return experiences rank high in reviews, expose the service quality and reflect on the overall offering – even when executed by third-parties.
Growing supply chain complexity
Increased service requirements have led to more offered delivery options and models. Whereas one delivery option used to be the norm, usually delivered from one fulfillment location (typically a dedicated e-com distribution center), nowadays we see at least three delivery options (standard delivery, express delivery and pick-up), with multiple fulfillment locations (e-com distribution centers, directly from suppliers and from stores).
Online channels are regarded as an opportunity to have ‘endless’ aisles of products. The logistical implications are often overlooked and warehouses soon fill up with slow moving stock. In an attempt to counter this effect, direct shipments and cross-docking options have been developed.
Dynamic and tailored combinations need to be developed to meet specific customer and business requirements . Orders bought online to be picked up in-store are likely to come from the most nearby available store, whereas long-tail or endless-aisle assortment is generally temporarily stored at a central warehouse or cross-docked. The rise of these options has a significant impact on the supply chain complexity. Involvement of a growing number of supply chain partners has amplified this complexity.
Higher cost levels
A large number of companies struggle with the increasing last mile costs. Michael Kors’ CEO John Idol expressed concern when announcing the company’s results: “[...]When the consumer requires free delivery, free return, wonderful packaging, plus there's a new trend that people are buying multiple sizes of things to try them out at home and then return them, that all is a negative headwind for us”. Even when looking at the results of Amazon, whose logistics capabilities are highly regarded, the growth in costs has been consistently higher than the growth in sales over the last five years.
Whereas the logistics costs of a traditional value chain are between 3 and 6 percent, the logistics costs of an e-commerce value chain are between 10 and 25 percent. Traditionally, these costs have been higher for the following reasons.
Increased service requirements and greater supply chain complexity will lead to higher cost levels for e-commerce logistics. However, the impact of the last mile will not be identical for every company. The strain imposed on the supply chain might bear varying weights at different parts of the supply chain. The challenge is to seek guidance in discovering at which stage your company is most affected; only then you can take appropriate action.