Retail in transformation
In the last year, we have witnessed the acceleration of the e-commerce and digital commerce trends, with a 3-month evolution equivalent to what could be expected in 3 years. To stay relevant, retailers have adapted their business models to this new ecosystem, in which the fastest service, at the lowest cost and most convenient for the customer will determine the winner at decision-making point.
This transformation occurred across all segments of the retail sector. From food to Home & DIY, to digital marketplaces, all have seen a steep growth in their online traffic and felt the consequent impact on the supply chain.
Food retailer Tesco has doubled its online order processing capacity by hiring more staff for picking and shipping tasks, delivering 1,500 orders a week during peak demand. In the same segment, Walmart saw a 79% growth in e-commerce sales. To meet this demand, they adapted their network of shops, implemented new technologies and formed partnerships that boosted online expansion. For 2021, they have planned an investment of $14bn to increase supply chain capacity and automation. In the UK, as e-commerce services with in-store pick-up or home delivery have increased, retailers such as B&Q and Ikea are now testing smaller store formats that allow them to reach more consumers with a smaller footprint.
Amazon and Alibaba, given their well-established market position, have benefited significantly from the online shopping trend. Amazon capitalised on its organisational agility and was able to adapt its business model quickly. In the future, Amazon will continue to plan for different scenarios in preparation for future supply chain disruptions.
Customers won’t downgrade their expectations
Admittedly, e-commerce was accelerated by the pandemic, but new consumer preferences are expected to last in the post-pandemic years too. These continued preferences are associated with the definitive adoption of new hybrid working formats by companies, which has an impact on routines and consequently on consumption patterns. On the other hand, after experiencing fast, convenient and omnichannel shopping journeys, consumers are not expected to downgrade by returning to time-consuming, expensive, and limited services.
If ensuring product availability in-store is something that most retailers have already mastered, pursuing this while simultaneously delivering a quality service for online orders brings new challenges. This should be a concern for retailers, as 42% of online channel consumers say that speed and service reliability are the most important factors when it comes to the shopping experience.
Re-sizing the supply chain
The rising demands for an experience of excellence, the new mix of services available, and the consequent change in the cost of doing business prompt the need to re-evaluate supply chains, using a customer-centric approach. Retailers are looking for supply solutions that meet customer expectations while offering low operational costs and high flexibility. It is now necessary to make informed decisions on stock location, manual or automated picking, delivery routes, services provided, or even vehicle fleets.
The temptation for retailers is to create a new dedicated supply chain optimised for the online channel. This will certainly lead to local optimum solutions. Nevertheless, to truly gain in profitability and speed, retailers must attempt to interconnect their current operation with new channels, by capitalising on synergies and building a hybrid supply chain.
If previously stocks and order processing were synonyms of large warehouses, the paradigm is now different. Micro-fulfillment emerges as an alternative for processing low-value orders with complex picking. This can be achieved through in-store or back store picking, small central hubs, or dark stores. All these solutions aim to deliver a fast service at a reduced cost.
To resize the network of operations to cater for various channels while ensuring profitability, retailers must re-evaluate the entire supply chain:
- Analyse the existing value chain and understand where it could serve e-commerce consumers. The choice of the supply strategy for online orders has to be supported by data regarding the volume of orders, the average number of items per order, the capillarity of existing infrastructures and the delivery models intended to be provided. Integrating the supply of this new channel with pre-existing infrastructures such as distribution centres, cross-docking points and shops, is the key to capitalise on synergies.
- Reduce the number of stoppages in the value chain between the producer and the consumer. A lean, short value chain increases the margin of the products transacted, reduces the likelihood of stockouts and shortens Lead Times. Additionally, a shorter supply chain is less vulnerable to disruptions in the market and suffers less from the bullwhip effect effects caused by demand.
- Relocate inventory and rethink shops. The analysis of pre-existing infrastructures and the reuse of spaces will provide opportunities to bring stocks closer to the end consumer. This approach will result in gains concerning last-mile delivery cost, delivery time and service level. Shops may become smaller and optimised if we rethink their role in the phygital buying journey.
- Redesign delivery routes. The transition from transporting large volumes of stock to transporting them in small parcels for the end consumer should be gradual and well-integrated. Fleet needs are now different, and greater frequency and capillarity is required. In this context, synergistic hybrid solutions between the two transport models should be considered.
Despite the online channel becoming more prominent, 90% of purchases are still completed (collected or paid for) in a physical shop. Consumers who use multiple shopping channels are the ones who bring the most turnover to retailers, spending 10% more than the single-channel customer. If retailers are to benefit from the potential of these segments, they have to set up operating networks that deliver an excellent service level, regardless of the channel. The retailers' omnichannel profitability depends on the agility and robustness of the logistics network implemented.
Immediate and agile adaptation to consumer dynamism to maintain operability should be a priority for retailers. But these consumption changes must also be approached from a medium- to long-term perspective, and business strategies must be realigned accordingly to ensure sustainable growth.