Retail Executive

JAN-FEB 2018

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accuracy is poor, and even if it's not, consumers in the store have an annoying habit of "interfering," increas- ing search and pick times and lowering fill rates. Final- ly, the savings on shipping costs for shorter shipping distances provided by the traditional delivery networks are relatively modest, so the end-to-end cost for ship- from-store is likely quite similar to a centrally fulfilled item that has been shipped much further. Nevertheless, we believe retailers must solve these problems. As same-day delivery becomes common- place, they simply have no choice but to leverage their full network. Without leveraging the stores, Amazon will beat them on "speed-to-consumer" every time. Solving these problems will require close collabora- tion between retailers, delivery networks, and technol- ogy providers. Retailers must lean-out their in-store pick-and-pack operations (including being willing to al- locate adequate footprint within the store, position in- ventory appropriately, etc.). Technology providers must work with retailers to solve the inventory management challenges (perhaps leveraging emerging AI, sensor, and RFID technology for better forecasts, inventory/ product tracking, etc.). And delivery companies need to design delivery solutions able to reliably provide short- range, same-day service at lower costs, likely leveraging crowd-sourced resources. But the first step is to recognize the reality: Many re- tailers will soon be competing with the Fulfillment Cen- ter Next Door — a facility that provides extensive assort- ment to local consumers, incredibly fast at ever-lower cost. Daunting indeed. R ment that make up a significantly larger proportion of the sales. These SKUs will likely be housed in invento- ry at the local FC, about 15 miles away. Amazon's algo- rithms will then sequence the picking of these orders such that the neighborhood's morning shopping (and in fact yesterday afternoon's) flows off the packing line together and into the back of a Flex driver's mini-van. Once loaded, the driver heads out on their route and is making deliveries within say 20 minutes or less. Do you see what happened there? Amazon just made a same-day delivery simply because it was cheaper than any other option. Amazon's scale will shortly allow them to deliver truly on Jeff Bezos' mantra of "lower costs, faster." Amazon is already doing this for some part of its assortment in some cities, but we anticipate that this system will be widely available within the next two to three years; otherwise, why would they have built out the fulfillment center network so close to the end customer? STORES ARE THE ANSWER Retailers need to respond to this "mass consump- tion" same-day threat, but not with the niche, pre- mium-priced services they are mostly using now. If retailers fail to respond, then they will lose volume to same-day-capable retailers (starting with Amazon it- self) since, all else equal, consumers will always choose the most convenient option. Retailers could respond by building out their own dense networks of fulfillment centers, positioning in- ventory closer to the consumer, speeding delivery, etc. However, our analysis indicates that at nearly all com- peting retailers' current e-commerce scale, to do so would require substantially more inventory to be held across the system as a whole, driving much higher fixed costs and rendering the end-to-end network prohibi- tively costly. Note that the option of listing products on and leveraging their fulfillment network is economically unattractive for the same reason — the amount of inventory required to meet your service goals (i.e., fill rate, shipping time/cost etc.) will drive storage rental fees to unacceptable levels. The solution for traditional retailers is to leverage the merchandise inventory and fixed costs already de- ployed in the market; in other words, the stores. Ship- from-store has been talked about for some time, but adoption to date has been spotty. We believe that the relative lack of enthusiasm among retailers stems from three main reasons. First, the direct costs of an in-store pick-and-pack operation are indeed higher than those of a large-scale fulfillment center, and the sometimes clumsy process is abhorrent to store managers incen- tivized on store sales and labor budgets. Second, inven- tory management is a challenge: Many stores' inventory 1 PwC Strategy& estimates, represents volume sold by and/or fulfilled by Amazon 2 PwC Strategy& estimates, assumes $1.70 base "fare" plus $0.95 per mile and $0.20 per minute, varying somewhat depending on the market 3 PwC Strategy& estimates DFW MSA comprises around 2.5 million house- holds, spread over ~9,300 square miles As same-day delivery becomes commonplace, they simply have no choice but to leverage their full network. Without leveraging the stores, Amazon will beat them on 'speed-to-consumer' every time. RETAILEXECUTIVE.COM JANUARY/FEBRUARY 2018 37

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