In Point of Sale episode 8, BMO Senior Retail and Ecommerce Analyst Simeon Siegel, while detailing his admiration for off-price retailers, said, “The off-price business convinced shoppers to be their employees.” For the chance at discounted products, the customer supplies much of the labor necessary for an order to reach its destination. The same holds true for retailers in general, but especially for off-prices (think TJMaxx, Ross, even to a lesser extent Costco) where product isn’t carefully curated, but rather hastily thrown around in many cases. The customer performs most stages of fulfillment: pick, pack and ship.
For most of modern retail’s life, the industry has been able to leverage plentiful labor at zero cost. But during the pandemic, the steady flow of labor halted just as demand poured in. Online shopping growth that was expected to take years occurred in months, and in response, retailers ramped up various fulfillment options to meet customers’ shifting preferences. BOPIS, curbside pickup and ship-from-store became staples of every retailer’s omnichannel strategy. But in all those options, consumers shifted labor they used to perform on to retailers.
If the triple-digit online sales and BOPIS growth rates from behemoths like Walmart, Target, Home Depot and Best Buy didn’t convince you the omnichannel future that recently seemed years away is already upon us, I don’t know what will. In a list of “imperatives” for the retail industry in 2021 and beyond, the Retail Industry Leaders Association ranked “become omnipotent on omnichannel” as the No. 1 need. The imperatives were born out of a survey conducted by RILA and McKinsey & Co. that found two-thirds of retail executives believe the growth of omnichannel and online shopping was the most significant trend affecting the industry, and its greatest challenge.
During the 2020 holiday season in the U.S., the proportion of online sales supported by physical stores rose to 37%, up from 32% in 2019, according to GlobalData. Picking up online orders from stores, either BOPIS or curbside, grew by 103% last year, while retailers shipping orders from stores grew by 80%. Although online sales growth went into warp speed last year, the U.S. remains well behind other Western nations when it comes to digital penetration. The growth of e-commerce and demands by consumers for seamless omnichannel experiences are here to stay. According to McKinsey consumer response research, consumers expect to continue making more purchases online after the pandemic than before it began. E-commerce is projected to reach 25%-40% of sales across categories after the pandemic abates, with a twofold or greater increase for sports and leisure and home improvement segments.
At Dick’s Sporting Goods, BOPIS and curbside sales grew by 250% year-over-year, powering 57% online sales growth for full-year 2020. In the company’s Q4 earnings call, CEO Lauren Hobart said the store network accounted for 90% of all sales and fulfilled 70% of online orders via BOPIS, curbside and ship-from-store channels. Dick’s rapidly launched curbside last March at the onset of the pandemic, and Hobart noted it helped improve the profitability of the retailer’s online channel overall and that the company expected it to be a big part of its offer going forward.
In the same episode mentioned previously, when discussing ship-from-store, Siegel noted, “This is a topic where anyone who ignores it, ignores it at their peril, but it doesn’t mean that everyone should embrace it.”
Meaning, retailers can’t ignore ship-from-store altogether; rather, each must examine its own network attributes (store locations, store footprint, foot traffic), and decide if it’s a lucrative endeavor. Siegel found parallels between ship-from-store and e-commerce, saying, “Anyone who ignored e-commerce entirely watched e-commerce pass them by and they were not equipped for it. Companies that watched e-commerce and made a conscious decision about where they wanted to play in that scenario is a different story.” The off-pricers are the best example of companies that explored e-commerce through flash sale sites, white-label sites and websites of their own, but ultimately understood their value (profit) lies in stores, where they can offload fulfillment costs to treasure-hunting customers. Off-price retailers like TJMaxx, Ross and Burlington are revered retailers, and each operates with next to no online sales, but not because they disregarded it.
Retailers must ask themselves: Do we fully optimize our store(s) for online fulfillment in a (pseudo) dark store format? Or do we use it to fulfill orders if there’s overflow? We don’t know the answer to that right now. Retailers are in experimentation mode. And there’s no one broad stroke that can be painted, because the direction each retailer goes will be dependent on its own network attributes, namely store locations, store size and foot traffic. Nor is it that binary — Target is beautifully executing an omnichannel strategy that is somewhere between those two extremes in that its stores fulfill the vast majority of online sales and they’re not fully optimized for fulfillment (yet). Target still has hundreds of thousands of personal shoppers roaming around fulfilling orders that Kroger, Walmart and Amazon are trying to automate, but it has found a way to make the economics work better than anyone else so far.
In its Q4 earnings call, Target CEO Brian Cornell said, “It’s cheaper to ship a box a shorter distance from a local store after it’s ridden our supply chain rails all the way to that store. Same-day fulfillment economics look a lot like store economics to us.” I don’t believe Cornell could have been referring to ship-from-store (more later), but even if he’s just speaking on BOPIS and curbside, it’s impressive. But it’s not all that surprising given Target’s last five years of relentless omnichannel efforts focused on leveraging its most significant advantage over Amazon: its dense store network.
I’d venture to say Target is an outlier in regard to fulfillment costs. Sajal Kohli, senior partner with McKinsey and one of the RILA report’s authors, said in an interview, “Online sales are remarkably less profitable than a store sale. … You have to invest in capability to have better margin structure.” And Target’s done just that dating back to shrewd acquisitions of Shipt, Deliv and Grand Junction to build out its e-commerce infrastructure, and being early to the BOPIS game. In 2019, pick up accounted for just 24% of total digital sales, yet same-day pickup services brought fulfillment cost per unit down 25% for Target in 2019.
How less profitable we talkin’? According to estimates from AlixPartners, the profit margin on a $100 sweater, for example, is significantly less for BOPIS and curbside vs. fulfillment from a distribution center. And, as you can imagine, the most costly and least profitable is ship-from-store, in which the worst of both worlds collide.
This is why I find it hard to believe Cornell could have been speaking of ship-from-store operations when stating Target’s same-day fulfillment economics looks a lot like its store economics. In a ship-from-store scenario, a product must be:
— Shipped from DC to store.
— Processed and shelved in store.
— Picked by personal shopper (incremental labor costs begin here).
— Packed in staging area.
— Delivered to customer.
As Gene Detroyer, a professor of finance and economics at Guizhou University, wrote, “Store fulfillment is a Rube Goldberg machine.” A pointed take, but you understand his thought process — it’s a lot of steps. But more and more retailers plan to leverage the complex fulfillment method over the next few years as the delivery speed arms race picks back up (took a lil breather with COVID and all; even Amazon wasn’t hitting delivery targets).
The vast majority of consumers — over 90% — see two to three days as the baseline, and 30% expect same-day delivery, according to a March McKinsey report. In response, retailers are setting ambitious targets for delivery times that will require significant investments to propel their supply chain fulfillment capabilities. More than 75% of the specialty retail supply chain leaders in McKinsey’s sample have made two-day delivery a priority, and 42% hope to offer same-day delivery by 2022. Meeting these goals will require trimming at least two to three days from today’s delivery times.
The only way to offer same-day delivery for most retailers/regions? Ship-from-store, the most expensive method. According to the same McKinsey report, when the pandemic limited in-store shopping, 44% of stores served partially or fully as fulfillment centers. By 2022, survey respondents expect that number to jump to 57%, with stores focused primarily on providing BOPIS and ship-from-store services.
Despite the growing demand for digital experiences, brick-and-mortar stores aren’t going anywhere. They will, however, be restructured, reformatted and rethought to better support omnichannel retail strategies. Retailers are beginning to think about how to service a market through a network of stores, rather than as a bunch of independent stores. Different stores will play different roles, but with retail executives expecting more than half of all stores to be geared toward online fulfillment, it’s easy to see the wave of dark stores ahead.
Retailers must identify the unique value of every store based on internal thresholds for foot traffic and store locations. The best retailers are starting to think how to leverage a network of stores to optimize both in-store and digital channels in a given market. The role of the store is blurring, and retailers are rethinking networks. While they do, I’d encourage them to find ways to shift some labor costs back onto shoppers, specifically delivery. 2020 was a year of rapid expansion, but 2021 is a year of optimization, and well-run retailers will soon identify inefficiencies, iterate and improve their fulfillment strategies. I believe one of those improvements will come in the form of more ship-from-store, but mainly more ship-from-dark-store as retailers realize the unnecessary complexity of the method and seek to transform more stores into localized fulfillment centers.
Last thing. When Walmart does it to a 200,000-square-foot Supercenter in Dallas, are we still calling it a dark store? Because it’s bigger than all 11 Amazon Fresh DCs they’ve built over the past 18 months to expand same-day, two-hour and one-hour grocery delivery. More on this soon.
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