Sales have grown extremely rapidly online and show no signs of slowing down. The consumer’s expectations regarding the delivery service, however, have remained unchanged. The ‘last mile’ offering is changing delivery models. As a result? Complex supply chains and increased costs. Learn how to address these issues.
Online sales continue to grow.
Customers expect to purchase anything, anywhere, at any time. In this era of the empowered consumer, digital enablement allows for seamless shopping, unprecedented transparency in product offerings, and instant customer reviews via social media.
To meet the needs of the ’empowered customer,’ e-commerce will account for 15 percent of all retail sales in 2020. There are four key areas of growth in e-commerce.
- E-tailers and retailers already in the market: despite a strong foothold online, online sales are expected to grow by 10-15 percent in Europe and by 35 percent in China by 2020. Ahold-Delhaize anticipates that its online sales will grow from its current €2.8 billion in the first quarter of 2017 to €5 billion by 2020, as Walmart witnessed a growth of 63 percent in the first quarter.
- Marketplaces are projected to account for 40 percent of e-commerce sales by 2020. As a result, the leading players are extremely large: last year, Alibaba Group platforms transacted over $466 billion in goods, with 407 million active customers. It is estimated that Amazon is larger in the United States than the next two to twelve online retailers combined. Google Shopping currently offers over 1 billion products, with -paid-consumer products and prices linked to Google search results.
- Brands are increasingly turning to the internet in order to sell directly to consumers, bypassing the existing retail channels and taking advantage of online options. According to Nike, direct-to-consumer sales will more than double in the next five years. Other FMCG companies aim to increase their direct-to-consumer sales. Nestlé, for example, saw an 18 percent increase in this area in 2016 and Mondelez aims to reach $1 billion by 2020 – ten times its current direct-to-consumer sales.
- Subscription business models are also becoming more prevalent. Dollar Shave Club, acquired by Unilever for $1 billion in 2016, now has over 3 million customers and exceeds $240 million in annual sales. Many subscription models have emerged around recipe kits (e.g. Gaze, HelloFresh). Gousto is one of the UK’s leading recipe kit companies, delivering more than 1 million meals each month. Other subscription-based models include toys (Pley) and cosmetics (The Honest Company).
All of these developments have the common denominator of delivering the product to the customer, regardless of the business model. In addition to this, the high growth rate in the parcel delivery market has enabled different postal companies to offset the losses of the declining traditional mail business. Next to the traditional parcel delivery model, new options for delivery are rapidly emerging, from the revival of bicycle couriers, uber-like platforms, and drones, to Walmart’s attempt to mobilize store employees to drive home to deliver orders placed online.
Last mile delivery challenges
Consumers today expect a seamless experience that includes purchasing, receiving, paying, and returning. In response, this has resulted in the interlinked challenges of increased costs, increased service requirements, and a more complex supply chain.
Increasing expectations for service
Consumers expect convenience and speed during their seamless shopping experience. This is not limited to free shipping and fast delivery but also includes the ability to control delivery options and track the status of the order in real-time.
We have reduced delivery times over the past few years. Next-day delivery has become the rule rather than the exception, resulting in a significant decrease in the willingness to pay for standard deliveries. Even though product availability is critically important, the offered delivery options are increasingly crucial to the conversion rate and determine whether you will cancel or confirm your order.
According to studies conducted on the shopping habits of Millennials and Gen Z, these generations prefer to schedule their deliveries and receive their orders within a 24-hour period. Additionally, customers expect to be able to track their orders and to be notified as soon as something goes wrong. The most common question asked of customer service departments today is, ‘where is my order?’ This has a significant impact on the workload of customer service departments.
Additionally, customers have become more vocal in their feedback and attach greater significance to reviews. It is common that negative delivery and/or return experiences rank highly in reviews, expose poor service quality and reflect negatively on the overall offering – even when performed by a third party.
Increasing complexity of supply chains.
Increasing service requirements have led to more options for delivery and models for delivery. It used to be the norm to have one delivery option, delivered usually from one fulfillment location (typically an e-commerce fulfillment center), however nowadays, there are at least three options (standard delivery, express delivery, and pick-up), delivered from multiple fulfillment locations (e-commerce fulfillment centers, suppliers, and retail stores).
It is believed that online channels offer ‘endless’ aisles of products. Logistics are often overlooked, and warehouses quickly fill up with slow-moving stock. We have developed direct shipping and cross-docking options in order to counteract this effect.
In order to meet the specific needs of customers and businesses, dynamic and tailored combinations must be developed. If an order is placed online to be picked up in-store, it is likely to be delivered to the most nearby store, whereas long-tail or endless aisle assortment is generally temporarily stored in a central warehouse or cross-docked. There is a significant impact of these options on the complexity of the supply chain. The involvement of an increasing number of supply chain partners has exacerbated this complexity.
Costs are going up.
Many companies face increasing costs associated with last mile delivery. Michael Kors CEO John Idol expressed concern in announcing the company’s results: “as consumer expectations grow, people expect free delivery, free returns, beautiful packaging, and they are buying multiple sizes to try out at home and then return them, that’s a downward trend for us”. Moreover, even in Amazon’s case, whose logistics capabilities are highly regarded, the growth in costs has consistently exceeded the growth in sales over the last five years.
Logistics costs in a traditional value chain range from 3 to 6 percent, but logistics costs in an e-commerce value chain range from 10 to 25 percent. These costs have traditionally been higher due to the following reasons.
Increasing service requirements and greater supply chain complexity will result in higher logistics costs for e-commerce. However, the impact of the last mile will not be the same for every organization. The strain imposed on the supply chain may vary depending on the position it occupies in the chain. The challenge is to seek guidance to determine at which stage your organization is most affected so that you can take appropriate action.