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Home » The rising relevance of brick-and-mortar stores

The rising relevance of brick-and-mortar stores

August 18, 2015
Kristin Wall and Belinda Griffin-Cryan
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For the past five years, the growth of online sales has significantly outpaced that of comparable-store sales for brick-and-mortar stores, a trend that is anticipated to continue. The difference is significant: According to the U.S. Census Bureau, in 2014, e-commerce grew at a rate of 14 percent versus only 2 percent for traditional retail outlets.1

This continuing growth is making it challenging for retailers to effectively manage their supply chains to profitably fulfill orders. Specifically, the increase in e-commerce transactions is forcing them to manage smaller, more frequent orders, thereby shifting the focus of retail distribution centers from pallet picking for store replenishment to single-item picking for orders shipped directly to a customer's home. This effect is compounded by the rising expectations of consumers who want their orders delivered quickly, which often requires retailers to do more work in less time. To help them meet these and other challenges associated with fulfilling e-commerce orders, retailers are adopting a variety of strategies and technologies.

Article Figures
[Figure 1] Fulfillment methods used by leading retailers
[Figure 1] Fulfillment methods used by leading retailers Enlarge this image

Store-based fulfillment
One way many retailers are beginning to address these challenges is by fulfilling a subset of orders through their stores. Deloitte recently surveyed over 60 leading retailers to determine which methods they are using to fill e-commerce orders. The results, outlined in the report Retail Omni-Channel Survey, 2015 and detailed in Figure 1, show that a significant number of retailers either already offer or plan to offer consumer-direct fulfillment methods through their stores, including "pickup in store" (94 percent), "ship to store for pickup" (91 percent), and "ship from store" (82 percent).

Retailers are realizing significant benefits from these store-based fulfillment techniques. For example, by leveraging inventory across the enterprise, they may be in a position to improve margins and revenue. This allows them, for instance, to fulfill online orders using inventory that would otherwise be marked down, and thus reduce the impact of an imperfect demand forecast. In the case of constrained inventory, sales associates in the store are able to "save the sale" by tapping into inventory in other stores and having product shipped directly to customers.

Another potential benefit of store-based fulfillment is the additional capacity that brick-and-mortar stores provide. Many retailers' distribution centers are operating at maximum capacity due to large volumes of e-commerce orders, especially during peak seasons. By leveraging their stores as storage and delivery locations, some retailers have been able to defer investing capital in building additional distribution centers.

Finally, because stores may be located closer to the customer than distribution centers, store fulfillment may allow faster order-to-delivery times. Deloitte's survey, for example, found that the average time to fulfill an e-commerce order from order placement to customer delivery through a store was three and a half days versus four days through a distribution center. Delivery speed is a critical factor in online purchasing decisions, and customers increasingly are willing to pay more for premium fulfillment services such as same-day delivery. The quicker delivery times that store-based fulfillment can offer enables retailers to compete based on time without having to pay for expedited shipping services.

Capacity growth and delivery alternatives
In many respects, the continued growth of e-commerce is likely to depend on goods consistently arriving on consumers' doorsteps on time and at the right price. That may partly explain why the two largest national parcel delivery companies still account for the majority of the volume of e-commerce deliveries: They have a reputation for reliability, and there is a concern among shippers that diversification of the carriers they use would negatively affect their negotiated volume discounts. In response, these two carriers are investing heavily in keeping up with demand. One of these companies alone spent over US $1 billion in 2014 to expand its ground capability, much of that intended to meet e-commerce demand.

At the same time, customers' expectations that shipping charges for e-commerce orders should be minimal to nonexistent have driven many top retailers to offer some variation on "free shipping." But increases in shipping costs due to growing parcel volumes coupled with the largest parcel carriers' new dimensional weight freight-pricing formulas are causing these companies to explore alternative delivery options. In particular, many retailers are looking at using regional players for certain deliveries rather than simply defaulting to the traditional big carriers. Package consolidators, which utilize their own network and then hand off packages to the U.S. Postal Service for last-mile deliveries, are also filling the gap. The national parcel carriers' reliability advantage is also shrinking as tracking software becomes more pervasive and packages are scanned more times as they go through the shipping process.

Finally, some retailers are beginning to shift from a common carrier model to a hybrid model that includes a private fleet component. In a highly publicized move, one large online retailer took the step of launching its own fleet in selected cities. If this model is seen as working effectively, many other e-commerce retailers may follow suit. This trend is supported by findings from Deloitte's Retail Omni-channel Survey, which show that 30 percent of retailers already employ some form of owned fleet, with an additional 12 percent planning to add this capability in the next two years.

Technology implications
In order to effectively capitalize on these trends, retailers are investing in new capabilities, many of them based on technologies that are designed to improve how supply chain data are collected, analyzed, and shared within and beyond the enterprise. Here are four that are emerging as "building blocks" that enable effective management of e-commerce logistics and distribution:

  • Item-level radio frequency identification (RFID). It is inherently more difficult to manage inventory accuracy at stores than at distribution centers. Still, when retailers accept an online order, they need to be confident that the merchandise will be available in the designated store for pickup or to ship from the store to the customer. This is important because retailers want to avoid the expense associated with having to send split shipments, which result when, due to inventory inaccuracies, an item that is supposed to comprise part of a multi-item order cannot be located at the intended shipping or pickup location. To help solve this problem and better track inventory within the store, many retailers are starting to implement item-level RFID, especially for categories like shoes where inventory is commonly split between the front of the store and the backroom.
  • Collaborative inventory planning. Fulfilling orders from stores adds complexity to retailers' historical challenge of having the right product in the right store at the right time. Direct-to-store and especially direct-to-customer drop-ship deliveries, which enable retailers to offer a broader range of merchandise, have become increasingly beneficial. To help manage these activities, many retailers have started jointly planning inventory deployments with key vendors. They are able to do this by using collaborative inventory planning platforms that give all parties real-time or near real-time access to planning information, such as current inventory levels, expected demand, and expected shipments.
  • Distributed order management. To leverage inventory and capacity, retailers need a system that has visibility to inventory across the enterprise as well as to orders from multiple selling channels. Distributed order management (DOM) solutions can provide intelligent sourcing engines to determine the best fulfillment location for an order based on a broad set of parameters, including inventory availability, capacity, and potential margin. As the number of fulfillment points grows, configurable business rules are required to prioritize inventory and determine how those orders should be fulfilled while taking into account customer promise date, order type, and margin targets.
  • Transportation management system (TMS) integration. With shipping costs often accounting for one of the top three expenses for most e-commerce retailers, the ability to leverage shipping decisions across the organization, including from stores, will likely have a direct impact on the bottom line. To be most effective, transportation management systems must be integrated with order management capabilities to ensure that both inventory and transportation costs are considered together when making fulfillment decisions. Additionally, these systems should potentially enhance the ability to provide proof of delivery and better tracking information corresponding with the product shipped from the store.
  • Adapt now to store-based fulfillment
    From a supply chain perspective, one of the most important trends in e-commerce today is the shift toward store-based fulfillment. While this shift often provides many advantages for retailers that sell online, including lower inventory requirements, lower costs, and better customer service, store-based fulfillment is complex to execute. For many retailers it is resulting in a significant business transformation—affecting everything from how they physically ship products to the technology required to manage order fulfillment processes. These changes are drastic and take time to fully implement. Retailers that adapt to this trend now will likely be in a better position to profitably serve their online and in-store customers while remaining relevant in a fast-changing, competitive retail environment.

    Note:
    1. U.S. Census Bureau

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Kristin Wall is a Senior Consultant at Deloitte Consulting LLP.
Belinda Griffin-Cryan is a Specialist Leader, Strategy & Operations at Deloitte Consulting LLP.
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