Where do you fit in?

The highs and lows of e-commerce shopping and fulfillment in the United States were on full display during the 2013 holiday season. Consumers hoping to avoid the congestion and chaos in brick-and-mortar stores increased their online purchases to US $69.2 billion for the fourth quarter of 2013, up 15.7 percent compared with the same period in 2012, according to U.S. Bureau of the Census figures. That growth in online sales, together with a surge in last-minute orders and an unusually short shopping season, made it difficult for U.S. shippers and the top two parcel carriers, UPS and FedEx, to fulfill e-commerce orders. Consumer outrage over late shipments forced a number of retailers, including Amazon and Kohl's, to respond by offering refunds and other financial concessions to affected customers.

While the events of the 2013 holiday season are now history, the challenges facing retailers and shippers are not over. In the high-growth, constantly changing e-commerce environment, every touch-point—from shopping, to purchasing, to fulfillment—presents an opportunity to either create a truly customer-centric experience or to cause customer dissatisfaction.

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[Figure 1] The new e-commerce landscape Enlarge this image

Keeping up with the consumer
To succeed in e-commerce fulfillment, retailers must find ways to meet consumers' increasingly high expectations. Online buyers desire a retail experience that combines the simplicity and security of online shopping with the ease and familiarity of in-store interaction. They expect their orders to be delivered within one to two days, and they want free or discounted shipping.

Consumers also demand a flexible store policy that allows for various combinations of purchases and returns, in-store or from home. Increasingly, they expect a unified and personalized shopping experience provided through a retailer's online/mobile app or by a knowledgeable in-store associate.

Developing the capabilities that are necessary to execute a desirable e-commerce strategy will require retailers to reassess and optimize their current services and operations. This will be challenging in an environment where changing consumer preferences continually alter business models. And it will only get harder as omnichannel expectations continue to rise and retailers are pushed to offer additional products and services, both online and in-store.

Innovation despite constraints
Retailers are continuing to innovate in response to market demand, but they're doing so within the bounds of several constraints. The biggest, perhaps, involves shipping capacity. The problems with shipping reliability in 2013, for instance, caused many to wonder whether capacity issues will persist as e-commerce continues to grow. It seems likely that the large retailers will continue to stretch parcel carriers' capacity during peak periods, forcing other retailers to develop alternative strategies. Additionally, recently announced plans by FedEx and UPS to institute volumetric pricing for all ground parcel shipments have major implications for retailers. Volumetric pricing is a response to the increase in e-commerce shipments—the lower ratios of package weight to package dimensions mean less cargo is carried in the same amount of space. Carriers hope that in response to their new rate policies, shippers will optimize their packaging and shipping practices by paying more attention to efficiency and weight.

Meanwhile, Amazon, the largest e-commerce entity in the United States, is rapidly and boldly developing a host of new services that are designed to improve its customers' experiences and give the company greater ownership of its supply chain. To limit its dependence on carriers, for instance, Amazon is developing an in-house fulfillment service that includes a private fleet that will handle some of its same-day and expedited shipments. In addition, it is piloting warehousing and logistics partnerships with manufacturers to reduce the cost and time required to get products to its customers. Amazon is also looking to utilize regional carriers in some areas and the U.S. Postal Service for less populated markets and Sunday deliveries. All of these moves circumvent much of the national footprints of UPS and FedEx.

While Amazon may have price and distribution advantages in online commerce, traditional brick-and-mortar retailers are seeking a competitive edge by developing capabilities that leverage their storefronts and online presence to create truly omnichannel experiences. In the white paper Are You Ready? How to Create an Always-On, Always-Open Shopping Experience, Capgemini Consulting identified four key capabilities that retailers must possess if they are to effectively compete in this increasingly important area:

• Inventory visibility—systems and processes to accurately track and manage inventory in their networks
• Web-ready products—improved information about products and services sold online, and reduced time and labor required for retailers to bring items to market
• Predictive customer analytics—information utilized to anticipate customers' needs based on past behaviors, in an effort to enhance the continuity of the omnichannel experience
• Fulfillment strategy—revision of processes, modernization of technologies, and updating of physical infrastructure to support the omnichannel experience

Retailers that are investing in their supply chains to support these four capabilities are making it possible to provide omnichannel experiences for their customers. With these capabilities in place, they are achieving increased sales through alternate channels, improvements in productivity and inventory accuracy, reduced shrinkage, and faster fulfillment of customer demand.

The new e-commerce landscape
A new e-commerce landscape is emerging as a result of the trends and developments mentioned above. Within this environment, retailers, online leaders, shipping leaders, regional carriers, and the U.S. Postal Service can all succeed by occupying different niches (summarized in Figure 1).

First, retailers should focus on developing omnichannel capabilities as a means of competing against Amazon, which has advantages in price, fulfillment capability, and speed. Meanwhile, online leaders, such as Amazon and Wal-Mart, will continue to leverage their size to invest in capabilities that allow them to lead the market on price and speed. On the shipping side, leaders such as FedEx and UPS should continue to invest in infrastructure and e-commerce-specific capabilities. If, however, Amazon develops transportation and delivery capability for itself, it will likely look to offer that as a service and could become a major competitor to the parcel carriers. Regional carriers and logistics service providers should consider partnerships with larger retailers and online leaders, build capabilities in niche markets, and examine methods for shipping products with specialized shipping needs (such as beverages, for example). And finally, the U.S. Postal Service should try to capitalize on its "last mile" scale and capability, positioning itself as an asset that can support other carriers and retailers that want to increase their delivery reach.

Companies seeking to navigate this emerging e-commerce landscape would be wise to determine whether or not their existing facilities can support the increasing consumer demand for omnichannel fulfillment. They should also understand what supplemental warehousing and fulfillment capacity and capabilities will be needed, and how retail models that allow for in-store pickup and return of online orders will need to be supported by warehousing and fulfillment operations. Both retailers and carriers should evaluate increased partnership with 3PL providers and other supply chain specialists to ensure they possess the capabilities required to handle expedited fulfillment and satisfy increasingly complex customer demands. Evaluating these areas will allow retailers and carriers to determine their strategic options, current operational readiness, and whether investment in new infrastructure will be needed to support their e-commerce business.