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March 15, 2019 • Volume 33


The future of e-Commerce fulfillment: locally sourced inventory

I’ve spent the last two weeks travelling to conferences and had an opportunity to dive deeply into logistics at both.  RILA, the Retail Industry Leaders Association focuses on retailers’ complete supply chains, including on the last mile.  Shoptalk covers e-commerce much more broadly, but did invest a lot of stage time on last mile logistics.  I got to see many videos of delivery robots, which gets surprisingly boring after a while.  I get that it’s impressive that a robot can go over sand, through puddles and up steps to my front door, but how many videos of slow-moving robots can one be expected to watch? Next year, I’d like to see the UPS drone fight the FedEx robot. 


Brick and mortar retailers on the upswing


Coming from these events, I left with the impression that brick and mortar retailers are beginning to see the momentum swing in in their direction after years of comparable store sales decreases, store closings, and bankruptcies.  Grocery, especially, feels promising for brick and mortar, with Ocado’s highly mechanized warehouses coming soon and clear signs that Amazon’s acquisition of Whole Foods is not going to catapult Amazon to the top of the US food retail industry [in fact, Amazon is now talking about an entirely new ‘ground up’ grocery concept].  Yes, Kroger’s stock is taking it on the chin because of expenses associated with e-commerce, but those expenses are necessary to compete as consumers increasingly expect a strong e-commerce grocery offering.  Kroger reported that its sales were up 59 percent in 2018.  We have them ranked as the third biggest online grocer in the US, behind Walmart Grocery and Instacart [although one can argue that Instacart is a fulfillment player, not a grocery].


I was disappointed, though, to see that retailers, generally, weren’t talking more about click & carry and instead seem to be spending a lot of time talking about last mile delivery solutions (robots and autonomous vehicles, especially).  Click & carry, apparently, is only considered sexy by the CFO, who doesn’t get to go to conferences in Orlando and Vegas.


What the future of delivery has in store


The other thing that struck me, at both RILA and Shoptalk, was the fact that brick and mortar retailers are thinking more and more about the enabling systems and technologies that allow them to turn their stores into distribution centers for online orders.  Ahold uses the term ‘micro- fulfillment centers’ to describe small-ish, automated picking facilities for online orders. Check out the video in the link above to see the technology that Ahold is using with its partner, Takeoff Technologies.


I was particularly impressed by a presentation at RILA by Aldo, the Canadian footwear brand, and its vendor Celect that talked about using real time inventory and machine learning to create a spoke-based online order fulfillment system – fulfillment from stores.  By the end of 2019, Aldo plans to fulfill all of its online orders from stores.  They identify stores that have too much inventory of particular items and fulfill online orders from those stores.  It’s a decentralized model that is highly dependent on accurate real-time inventory views, well trained employees, and stores that feel compensated for their efforts.


The advantages of fulfilling stores are clear:  Stores become more productive, inventory turns faster, and packages have to travel shorter distances to reach the consumer, which opens up opportunities for cheaper shipping, faster delivery, or both. 


The challenges, though, are significant: Inventory has to be accurate, store employees need to be able to balance serving customers in store while keeping on top of their online order fulfillment responsibilities.  Fulfilling an order or two a day will be easily managed. It gets hard when stores need to fulfill dozens of orders a day.  Retailers will need to invest in tools that will allow online orders to be packed as efficiently as possible in a relatively small space. I don’t believe that a store can be as efficient as a mechanized fulfillment center on a unit basis.  The hope is that improved inventory leverage and proximity to the consumer can make up for the loss in efficiency per order.


For another example, look at the chart below, which tracks Rakuten Intelligence data on the average distance travelled by packages shipped by Target.com.  We can see that as Target was transitioning to shipping more orders from stores, the average package distance travelled dropped from 799 miles to 322 miles.

It is not clear that locally sourced inventory is the future of e-commerce logistics. Automation is making centralized fulfillment centers more efficient, but shipping costs for retailers are only going up and consumers expect free shipping (92 percent of online orders in 2018 had free shipping, up slightly from 2017).  I don’t believe that there will be a single fulfillment model that will dominate in the future.  The most successful Operations heads will employ a wide array of tricks, but I do believe that all retailers with stores will come to embrace the idea of distributed fulfillment in some capacity.  


Sometimes the best innovations aren’t of the technological variety


The more prominent front in the world of distributed inventory is, of course, click & carry (or BOPIS, click and collect – whatever term you prefer).  Click & carry has been marching along, representing an increasingly large share of online orders from brick and mortar retailers.  This is great news for retailers, who can save significant sums on last mile fulfillment when the consumer is willing to huff it to the store to pick up their order.  We looked at click & carry as a percentage of sales for the biggest online retailers with significant store bases (Walmart, Target, Best Buy, Kohl’s, Nordstrom, Old Navy, Home Depot, Costco and Apple).  In 2018, 27 percent of order volume (in dollars) for these retailers picked up in-store, up from 22 percent in 2017.  Walmart, with the aggressive expansion of Walmart Grocery, has led this, but Walmart is not alone. 


The chart below is an interesting illustration of the benefits of click & carry for shoppers eager to get their items quickly.  The blue bars show Amazon.com sales by week during the Holiday 2018 period.  The yellow line shows click & carry as a percent of sales for the top online brick and mortar retailers.  In the week of December 17th through 23rd , when Amazon’s sales started to slow down as consumers worried that packages might not arrive in time for Christmas, we see click & carry as a percent of sales spike for brick and mortar retailers, from 29 percent of sales the previous week to 44 percent of sales.

I’ll share more insights from a presentation that I gave at Shoptalk in the weeks to come, including a cool scatter chart that will cause some retailers to question whether they necessarily need to compete with Amazon’s fulfillment machine to compete effectively. 


Stay tuned.

About Ken

Ken Cassar is vice president, principal analyst at Rakuten Intelligence, where he looks at trends in the e-commerce industry armed with Rakuten Intelligence's robust set of online sales data.

Ken brings a rich online retail background to Rakuten Intelligence. Most recently, Ken was SVP, Media Analytic Solutions at Nielsen, where he developed several innovative digital commerce measurement and advertising effectiveness solutions. Prior to Nielsen, Ken was an analyst at Jupiter Research, where he was an early thought leader, trusted adviser, and media source on e-commerce. His prescient outlook on fledgling e-commerce industry was a key contributor to Jupiter’s dominance as a digital media zeitgeist at the dawn of the Internet.

Ken has an MBA and Bachelors Degree in Political Science from the University of Connecticut. Ken aspires to stay technologically ahead of his teenage children, as evidenced by his ‘Gadget Geek’ Rakuten Intelligence's profile. He also has the appropriate jacket for every occasion.