E-commerce grew 20% for Costco in fiscal 2015—20 times faster than store sales.
Retailers find a number of ways to get items to shoppers’ doors quicker and, in some cases, less expensively.
Getting closer to the customer used to mean understanding shoppers better. But merchants today are using the phrase more literally. They want to fulfill orders as close geographically to consumers as they can to shorten delivery times and reduce costs.
"If I can ship it out of a store that's closer to them, I can be more efficient in terms of transit costs and transit time," says Milton Pappas, president of e-commerce at the Jones Group Inc., which own brands such as Nine West, Jones New York, Easy Spirit and Rachel Roy. Jones Group uses technology from VendorNet, a unit of eBay Enterprise, to help manage the merchant's online order fulfillment from its distribution center and some of its Nine West and Jones New York stores.
The cost of shipping is a constant thorn in the side of online retailers and shoppers. Consumers hate paying for shipping: 76% of consumers say a free shipping option at checkout is important and 54% say they've abandoned an online purchase because shipping fees made the total purchase price too expensive, according to a 2013 survey from comScore Inc. and UPS Inc. With major shipping carriers raising average costs about 5% a year, e-retailers are under pressure to accommodate shoppers' expectations while still making an acceptable profit on the goods sold. That market leader Amazon.com Inc.'s continuous investment in its fulfillment and delivery network enables the e-retailer to deliver fast, even same-day in many major markets, is also forcing e-retailers to find solutions that deliver goods quickly and at an acceptable cost.
Retailers are trying numerous ways to manage costs while improving delivery to consumers. Jones Group is one of about 25% of the 159 retail chains ranked in the Internet Retailer 2014 Top 500 Guide that use their stores as pickup or shipping points for web orders. Other retailers are spreading their inventory out to position goods closer to customer-dense areas and reduce the distance—and thus the cost—of delivery. In fact, 86 of the 500 leading online retailers in North America have at least three distribution centers for shipping online orders, according to Internet Retailer's Top500Guide.com. Still others are eschewing traditional carriers in favor of new and novel courier services.
Wal-Mart Stores Inc., which is America's largest retailer by store sales and the fourth-largest in terms of online sales, increased its delivery speed for online orders by 15% and lowered its delivery costs by 10% from 2011 to 2013 by reengineering its fulfillment approach. Supported by algorithms devised by its @WalmartLabs Silicon Valley e-commerce innovation team, the retailer's 4,200 U.S. stores and 130 store distribution centers work in concert to deliver goods ordered online to stores where customers come to pick them up. Online shoppers who opt for in-store pickup of their web orders don't have to pay for shipping, so the goal is to "get as many items as possible to customers in a shorter period of time at the lowest possible cost," says Neil Ashe, Wal-Mart's global e-commerce chief.
Wal-Mart trucks can bring goods from a distribution center to the store nearest the customer, for example, if the algorithm determines that's the cheapest way to get it there. The retailer also uses FedEx to get products ordered online delivered to stores. Between one-third and one-half of orders placed on Walmart.com are picked up at Wal-Mart stores, a spokesman says.
Wal-Mart says a "handful" of its stores also serve as outbound fulfillment centers for online orders, with products being shipped to other stores or directly to consumers' homes, and the majority of these orders are delivered in two days or less. Existing store associates are trained at how to fulfill web orders from stores, a spokesman says, so the cost savings generated by fulfilling from stores outweighs the additional operational costs sustained at the store level.
The Wal-Mart model makes sense, says Forrester Research Inc. e-commerce analyst Sucharita Mulpuru, who encourages chain retailers that sell online to exploit the location advantage stores have over web-only retailers by offering site-to-store shipping. That's because shipping carriers charge less to ship to commercial addresses than they do to residential addresses, and by shipping to stores retail chains can save on fulfillment costs while also drawing consumers into their stores. "Freight costs and free shipping are the Achilles' heel of e-commerce," she says.
Freight costs can easily eat into a merchant's profits, says David Sabot, president of CheapHumidors.com. That's why the online cigar accessories retailer renegotiates his shipping rates with carriers about twice a year, or whenever the carriers announce a rate hike. "You have to try to negotiate your rates a little bit better," he says, adding that rising rates also compelled him to look at delivery alternatives. CheapHumidors.com, for example, now uses FedEx SmartPost, a service that provides 80% of the transit using the FedEx system and then the U.S. Postal Service for the last mile of delivery, for many deliveries. Sabot says using SmartPost saves him about 20% to 30% versus having the carrier make the final delivery.
Web-only beauty products retailer DermStore.com took another tack. Recognizing its competition includes retail chains that sell the same products—including its parent company Target Corp., which acquired DermStore last year but operates it as a subsidiary—it wanted to offer speedier service at a cost-efficient price. "We compete with retailers who have a bricks-and-mortar presence and can not only ship fast and free, but also offer pickup and return in store. Customers are expecting and demanding better service," says Vanessa Ballentine, vice president of operations at DermStore.
DermStore's orders primarily ship via the U.S. Postal Service, which means consumers can receive their orders on Saturday without DermStore paying a premium for it, like the $16 fee UPS charges for Saturday delivery. DermStore ships most orders through fulfillment and logistics vendor Newgistics Inc., warehousing its products across the vendor's network of distribution centers. Ballentine says that by moving from its own warehouse to Newgistics' network it was able to cut the time elapsed from order to handoff to USPS from 48 hours to the same day for many orders.