February 3, 2014, 11:19 AM

Exclusive survey results on fulfillment and delivery

Online shoppers increasingly want not just free but also fast shipping, e-retailers say.

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Vitacost.com Inc. owns one distribution center in North Carolina and leases another one in Las Vegas. The web-only health products retailer, whose web sales increased 27% in 2012 to $331 million, is working to make sure it doesn't need to invest in another warehouse anytime soon.

Productivity improvements in those two centers decreased the e-retailer's per-order fulfillment costs by 7% year over year in the nine months ended Sept. 30, 2013, says Greg Dahlstrom, director of global logistics for the e-retailer, which is No. 87 in the Internet Retailer 2013 Top 500 Guide. He says he expects more productivity improvements will allow Vitacost.com to decrease its costs further in 2014.

Vitacost has also started using regional carriers for some deliveries, which the e-retailer says has helped reduce shipping costs while making sure items reach customers as quickly as possible. After all, consumers' expectations are high when it comes to delivery, thanks in part to Amazon.com Inc.'s Prime program and smaller competitors such as ShopRunner that are training consumers to expect deliveries within two days at the most. Moving forward, newer—and even speedier—programs from eBay Inc., Google Inc. and Amazon seek to take same-day deliveries mainstream.

"Customers want free shipping and they want it fast," Dahlstrom says. Vitacost offers free shipping on orders of at least $49 and encourages early-bird shopping by promising delivery within one to four days for orders placed by 1 p.m. on weekdays. "This is obviously a challenge for many e-commerce companies. The biggest challenge for us is controlling shipping costs while avoiding the need to add fulfillment centers in order to speed up the order cycle."

Vitacost's experiences stand as an example of what other e-retailers are going through as they try to keep up with consumer expectations for shipments while also keeping fulfillment costs in check, according to results of Internet Retailer's inaugural survey of e-commerce fulfillment and delivery practices. The survey, conducted online in early January, attracted 245 responses. The results underscore the challenges e-retailers face in getting their products to customers and suggest how web merchants will invest to improve their fulfillment and delivery capabilities in the near future.

Here are some highlights from the survey:

  • 20.4% of respondents said they expect to build or lease a dedicated e-commerce fulfillment center within the next two years. Such merchants would join the likes of Macy's Inc., Belk Inc. and American Eagle Outfitters Inc., which have recently announced plans to build additional facilities or, in Belk's case, significantly invest in expanding an existing one. 51.7% of respondents already own or lease such warehouses. Web-only retailer ShoeMetro.com is an example of such a retailer: "We are looking to add space to support rapid business growth," says vice president Jason Stuempfig. The retailer aims to increase its fulfillment space by up to 60% in 2014, he says.
  • Some e-retailers, like Vitacost, are finding ways to cut fulfillment and delivery expenses. Fulfillment expenses per order in 2013 decreased by as much as 10% for 8.1% of respondents. A further 3.2% reported even larger decreases—in some cases, more than 20%. Still, 40.4% of respondents said their costs increased up to 10% within the past year.
  • 20.4% of respondents said they plan to start shipping orders the same day customers place them in the coming year. 5.7% will add premium, "white-glove" services, which typically involve delivery workers not only carrying products into customers' homes, but setting them up.
  • Product returns will gain attention from e-retailers this year: 17.6% of respondents said they want to add free returns to their delivery-and- fulfillment menu.

Most of the survey responses—51.7%—came from web-only merchants, with 13.9% coming from retail chains. The remainder came from consumer-brand manufacturers (14.7%), business-to-business e-commerce operators (14.3%) and catalogers (5.5%). Responses were anonymous, although some respondents left comments that reinforced the findings.

In 2014, e-retailers and delivery carriers will have to address the cracks in their systems that emerged during the 2013 holiday sales season. A surge in online orders in the final days leading up to Christmas overwhelmed the ability of some retailers and delivery services to get items to consumers by Dec. 25. Nearly a third, 32%, of the top 25 North American e-retailers by sales didn't get all orders under the tree by Christmas Eve, even though consumers placed the orders before the merchants' stated cutoff dates, according to a study by StellaService Inc., which monitors e-retailers' service levels.

Analysts say a combination of e-retailers offering later order cutoff dates and bad weather overburdened delivery services, which weren't prepared for the late-season surge in package volume. 43.4% of respondents to the Internet Retailer survey had Christmas-season delivery cutoff deadlines between Dec. 17 and Dec. 20. UPS says the volume of air packages in its system in the final days before Christmas exceeded its capacity and some shipments were delayed. It declined further comment.

Those problems could lead to changes in 2014.

"There will almost inevitably be surge pricing [from the shipping carriers] for the days leading up to the holidays," says Sucharita Mulpuru, an e-commerce analyst for Forrester Research Inc. She estimates that up to 90% of holiday orders arrived on time. "[Shipping carriers] can't reasonably invest in too much more for just those few days. They need to incentivize retailers to change behavior. The shippers should have charged higher rates a long time ago." That could mean e-retailers will have to absorb at least some of those shipping costs to not alienate consumers who want free and quick shipping, she adds.

Free shipping, though, still entices consumers more than quick delivery, according to Internet Retailer's survey. 67.7% of respondents said their customers are more interested in free shipping than fast deliveries. Even so, only 6.3% of respondents reported offering free shipping on all orders.

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