The Rebound of Retail

Frederic Zielinski, general manager, Swisslog Middle East, writes about changing consumer habits and the response from the e-commerce and logistics industries

In an increasingly digitally-driven world and with the huge rise in e-commerce over the past decade, most people would assume that physical retailers have felt a negative impact and a reduction in sales. However, as the Chinese government reports a 10% growth in physical retail in China for 2015, high street retailers are also leveraging traffic from their online stores to their offline stores. Recognising the value of high street retail, some pure-play e-commerce businesses are even partnering with physical retailers they were once in competition with to increase overall sales without the need of a logistics service for the final mile.

Consumer habits are changing too, with a recent survey conducted by McKinsey showing that even in the most popular e-commerce categories, only around 10% of Chinese consumers stay online throughout the whole customer journey. For example, customers for consumer electronics tend to visit a physical store to seek advice and get a chance to see the product first-hand before purchasing – a key factor contributing to the mid-life crisis of e-commerce and the rebound of retail.

In the same survey, findings showed the majority of consumers see shopping as a way to spend time with family and friends, and many mall developers are capitalising on this by investing in large entertainment areas that include restaurants, playgrounds and cinemas. The same entertainment experience is not offered online, as it cuts out the need to travel to a mall to purchase items. Rebounding physical retailers are becoming wise to this, and adjusting their strategies to offer a unique experience that cannot be replicated online.

This has obviously had an impact on e-commerce; although it has strong growth, the findings of a recent report show that in some countries, the e-commerce market is starting to hit a plateau. In India, e-commerce sales saw an 11% growth in 2015, compared with a growth of around 30% in the previous year. If these consumer habits are replicated in other parts of the world, pure e-commerce players may be facing challenges in the future. In addition to that, most e-commerce companies are finding it hard to turn profits, having accumulated losses over years, aiming for scale to reduce logistics cost per unit. Such unsustainable business practices will eventually drive some of the pure players out of business; those that previously ate from physical retailer’s slice of the pie.

Click&Collect – Bringing Two Retail Worlds Together

Roland Martin, Swisslog’s Industry Segment Leader in E-commerce and Omni-Channel believes the market stabilisation is due to retailers providing better online services, like click-and-collect, and e-commerce companies failing to charge for the real logistics costs.

Says Roland: “Many online retailers are putting themselves out of pocket by only charging a minimal amount, if anything, for delivery and ultimately failing to provide a good service. Returns, for instance, are very often not taken into consideration, resulting in a logistics cost of around $50 per order returned. Due to this, it is now becoming increasingly popular for high street retailers to reduce the logistics costs coming from their online orders by influencing their customers to collect their goods in-store. In addition, once these customers are in store, they are prone to impromptu purchases providing retailers an opportunity to up- and cross-sell.

“Similarly, some e-commerce marketplaces, such as Taobao and Tmall from Alibaba, are now seeking partnerships with retailers and local convenience stores to set up ‘click and collect’ services. The aim of this is to reduce the cost associated with delivering to customers’ homes straight from distribution centres and ultimately provide a better customer experience.”

Alibaba has also been using this method as a technique to educate new online shoppers to encourage more purchases. Roland continues: “New collection points have been set up in rural areas of China, which avoids costly last-mile delivery as well as advertising the service and products to potential new customers at the same time.”

E-Commerce: Impacts and Consequences on Logistics

E-commerce companies have had an impact on warehousing because where goods were usually wrapped on a pallet and sent to a store before being presented on shelves, items now need to be packaged individually and in higher frequency before being shipped directly to the customer. Due to the shifting customer demand, many retailers are trying to better utilise their existing infrastructure to give shoppers the ability to be in constant contact with a company through multiple avenues (omni-channel). This will also overcome the issues related to consumers becoming accustomed to paying as little as possible for delivery to their door by providing a more efficient customer journey and logistics service.

Some companies have separate warehouses to manage items of different sizes, and some have separate facilities to handle B2C and B2B requests. Roland explains how this can become complex when an order for several different item types comes in, or if a B2B warehouse has to deal directly with the customer.

“Customers may not understand the complexity behind their order and what processes are involved to pick, pack and consolidate the items. It may take several hours and additional cost for items within a single order to be brought together before they can be distributed. Due to this, some B2C retailers have purposely ensured their website isn’t user-friendly because they aren’t ready to fulfil single orders yet. They are protecting themselves from harm to their retail channel caused by bad customer satisfaction.”

Roland believes that retailers need to operate a robust e-commerce website in order to provide a seamless omni-channel experience. It also means making all inventory available to all customers, wherever they shop.

Therefore, warehouse operations need to take the omni-channel requirements into account, if they store and deliver from separate B2B and B2C warehouse or combine both channels in one warehouse. It is also critical to have a state-of-the-art Warehouse Management Software in order to check product availability in real-time to replenish stores and provide track-and-trace to online shoppers.

“In order for omni-channel operations to be able to handle various channels, they will require more coordination, separate zoning and consolidation. They will need facilities for the storage and picking of small and bulky, fast and slow moving items for B2C e-commerce orders, as well as the storage and picking of cases from pallets for B2B store delivery. In addition, B2C e-commerce requires value adding zones (e.g. for gift-wrapping) and the integration of returns handling. In case a marketplace also sells groceries and fresh foods, warehousing gets even more challenging as different temperature zones need to be established.

“Although warehousing operations get more complex when more channels are introduced, robotic applications can now handle the storing and picking of pieces and cartons, making warehouses more productive and shoppers happier. These applications also provide the required flexibility since they are moveable to wherever picking is needed, easily set-up and can work hand-in-hand with warehouse staff. The WMS act like the conductor of an orchestra and is key to ensure a smooth coordination of all the activities. Moreover, an advanced WMS is capable of interpreting customer and operational data to make delivery more efficient (forecasting) and the system more reliable (preventive maintenance).”

One ‘Commerce’ Industry

Roland concludes: “While there’s no doubt that e-commerce has seen explosive growth in recent years and is here to stay, the vast majority of retail consumption in China continues to be done in stores, and more than half of retail growth last year came from offline transactions.

“Pure play e-tailers and physical retailers should take advantage of this and work together rather than being direct competitors. The industry could benefit from the continued investment in a customer experience that offers multiple channels for contact such as physical stores, webpages, social media, live webchats, mobile apps and telephone communication.”

If this business model is adopted across the whole industry, the retail and e-commerce worlds will converge and form one commerce industry that shares all channels of trade and communication. Leveraging each other’s infrastructure such as warehousing is another means of making logistics more efficient. Finally, robotic applications and advanced warehouse management software that orchestrate omni-channel activities for faster and more accurate delivery while reducing operating expenses will ultimately benefit commerce and customers.