Feeding The Beast: How Fulfillment Costs Are Impacting The Bottom Line And Physical Stores

Influencing Shopping Habits

Fast and free returns have driven explosive growth in e-Commerce with the promise of unlimited convenience and no-hassle shopping for today’s consumer. Just order everything you could possibly want and return any and everything you don’t, no questions asked. This unbridled flexibility mixed with a flourish of technology keeps customers on their couches and out of stores. In this brave new shopping world, Amazon especially has become the juggernaut, casting a long shadow over retailers across the spectrum.

Too Much Of A Good Thing?

Retail today is approaching yet another crossroads, where ultimately even Amazon must look at the rising fulfillment costs and shrinking margins of their e-Commerce business model. The e-Commerce giant reported rocky Q3 2016 earnings, largely driven by increasing fulfillment costs that haven’t been offset by purchases.

The fact is that even with the challenges faced by rising fulfillment costs, Amazon simply doesn’t play by the same rules as the rest of the retailers due to the explosive growth of their Amazon Web Services division and extremely popular Prime Subscription service. Unlike most retailers, Amazon’s diversified business, especially the profitable Amazon Web Services, can help offset the e-Commerce business deficits.

This underscores a larger question for the rest of retail: Is the fast, free and unlimited fulfillment model sustainable? If it isn’t, what is the solution?

It should come as no surprise that if Amazon is feeling pressure from fulfillment costs, then other pure players are getting squeezed just as hard if not harder. A good example of this is the steady downward spiral of the flash sales retailers. At the height of the flash sales boom countless retail start-ups raised millions.

In recent years, the flash sales model has all but imploded, highlighted by Hudson Group’s acquisition of Gilt for a fraction of the flash sales retailer’s once billion-dollar valuation. What is killing the flash sales model? Shrinking margins, high customer acquisition costs, and you guessed it — rising fulfillment costs.

To solve part of the problem some retailers are looking to implement subscription loyalty services modeled on Amazon Prime. Walmart launched their unlimited, free two-day shipping and return offering, ShippingPass, targeted at competing with Amazon’s Prime service and July’s Prime Day shopping event. Walmart isn’t the only retailer rolling out paid loyalty programs targeted at driving increased sales to offset fulfillment costs.

Nearly half of U.S. households have a subscription to Amazon Prime, so to scale their own programs, retailers will need to co-exist with Amazon Prime. It remains to be seen how many households will find utility in multiple subscriptions across many retailers. However, one indicator is that Prime has already caused many families to drop some or all of their Wholesale Club subscriptions, a fact that does not bode well for Prime competitors.

What Is A Brick And Mortar Retailer To Do?

The latest generation of retail start-ups are looking back to the physical store as the base of their retail operations. According to the Wall Street Journal, leading retail disrupters Warby Parker and Bonobos see brick-and-mortar as a very important part of their future, viewing the physical store as a place to experience things instead of a place just to buy things. The two companies are planning aggressive store rollouts in the coming years.

Bonobos and Warby Parker aren’t alone. According to digital intelligence firm L2, two thirds of venture backed startups raised money recently with the specific intent of opening or expanding their physical presence. According to the L2 Intelligence Report titled Death of Pureplay Retail, pure play e-Commerce simply isn’t sustainable as a retail model, as customer acquisition and fulfillment costs are simply too high to support long term growth.

The success of supposed pure play “superstars” is instead due to advantages in their business model, not their fulfillment model. For example, Dollar Shave Club’s resounding success is due to a massive market opportunity available in cutting into the massive margins that razor monolith Gillette once enjoyed — not because Dollar Shave Club is an e-Commerce pure play, or pure play e-Commerce is inherently great.

As pure play venture-backed startups move into the world of brick-and-mortar, what lessons can those retailers with already established physical store presences learn to avoid the pitfalls of unsustainable fulfillment costs? And importantly, how can these retailers leverage the store assets they already have?

• Invest in the Store Experience. Customers, especially Millennials, are all about the experience in-store. Investing in creating a meaningful store experience will pay dividends for retailers. Hosting events and leveraging the store associate to drive value results in higher average order value, greater lift and increased brand loyalty.

• Consider incentivizing in store shopping. Today’s consumer is highly deal-driven, a trend that has continued well into the economic recovery. In fact, one of the top reasons customers utilize in-store fulfillment options is to save on the cost of shipping. Retailers should consider further incentivizing these customers, as the reduced shipping and return costs, as well as the higher lifetime value of these customers, make it worthwhile to extend exclusive and locally targeted offers to win these customers.

• Encourage Reserve/Buy Online Pick Up In Store and Buy Online Return to Store over e-Commerce. Simply looking at stores as fulfillment centers is short sighted and overlooks the inherent value of your stores. Driving customers to the store with the intent to purchase and pick up items sets the stage for upsell and lift opportunities. On the other end of the spectrum, encouraging in-store returns can save costs on return shipping, but retailers can also further reduce reverse logistics costs by implementing tools to allow stores to easily remarket returns in store and online.

With the above points in mind, brick-and-mortar stores serve as a cornerstone to build brand relationships, all the while providing a perfect destination to merge a retailer’s physical and digital channels. By delivering a highly connected and unified experience between the store and online, retailers can move away from unsustainable, race-to-the-bottom fulfillment practices. At the same time, by incorporating the influence of the physical store into the e-Commerce experience, retailers can bring increasing context to the online shopping experience, ultimately realizing both greater conversion online and greater foot traffic in-store. 

Sandeep Bhanote is CEO of Radius8, a recently launched software platform focused on leveraging digital channels and behavioral data to drive local store traffic. Prior to founding Radius8, Bhanote was the founder and CEO of Global Bay Mobile Technologies, a pioneer in delivering transactional mobile solutions to emerging omnichannel and brick-and-mortar retailers. Global Bay was acquired by VeriFone in 2011 and subsequently became part of enterprise omnichannel leader Manhattan Associates in 2014, and serves as the basis for their in-store omnichannel offerings.