The Logistical Challenge to e-Commerce Growth

Question: What does not excite a consumer to purchase a product at an online retailer instead of at a physical retail store?

Answer: Several reasons. Starting with the idea that consumers still prefer to view/feel the products they buy to technical challenges such as fear of fraud in using credit card for payments. Most of these and other challenges have been tacked by online retailers through better pricing, greater assortment, ease of researching and ordering products and the move towards safer financial transactions.

Given this new world that has evolved over the past 3-4 years, the bigger question is how else online retailers can grow their clout in a largely changing world. According to an emarketer analyst, US retail e-commerce sales will reach $146B in 2008, up 14.3% from the previous year. However, the growth rates of online sales will steadily decline over the years. The indication in the report is that the online retail channel is maturing.

I feel that apart from several other important challenges that e-retail needs to tackle, there is one reason why customers tend to purchase offline than go online. It is the time taken to deliver the product as a function of the cost incurred to receive the product. This I believe is the biggest logistical challenge that e-retailers should find an answer for.

Question: So, how bad is it?
Answer: I tried to answer this question by doing some research on the net and came across a very good article that talks exactly about the challenge I was talking about. In an article in cnnmoney.com titled “Consumers say no to high shipping fees”, it shows that about 43% of consumers abandon a shopping cart citing high shipping fees as a reason. It also indicates that when consumers compare online and offline prices, savings is realized in the shipping fees.

Question: So, what are online retailers doing to tackle this issue?

Answer: Many online retailers such as Amazon.com are using programs such as “Super Saver” shipping and “Amazon Prime” to tackle this challenge. Wal-Mart also came up with an answer through the Site-to-Store program. Having personally studied and worked on changes to the Site-to-Store program while working at Walmart.com, I have experienced the growth potential of such cross-channel initiatives, although I feel that the program could have been well thought out and executed better in some areas. But yes, I do feel that multi-channel retailers have greater scope for innovation in tacking this challenge than pure play online retailers. The reason being that, they can offer a different shipping mechanism as compared to a standard ship-to-home option to the consumer.

Question: How can we define this challenge?

Answer: I feel that like every economic or statistical model, it can be mathematically defined by an equation.

Loosely defined, the equation could look like:
Consumer’s online purchase decision = fn(time to deliver, cost to deliver, price, availability)

There is a strong correlation between the “time to deliver” and the “cost to deliver” variables due to the challenge posed by the carrier companies that retailers use for shipping products. As is obvious, carrier companies attach a cost directly to the speed of delivery of the package, which either the retailer has to absorb or pass on to the consumer. In the future, online retailers may consider this as a single large strategic challenge that they need to effectively confront.

Question: How can an online retailer work on this challenge?
Answer: This is obviously a tough question to answer, especially for a pure play online retailer. Store retailers with an online component can still gain efficiencies by introducing multi-channel options like store pickup and online divisions leveraging the partnerships built with carriers by the store network.
Pure play online retailers such as Amazon can still leverage scale of operations for better deals with carriers. However, it still turns out to be an expensive affair given the rising costs of gas and the inability for carriers to effectively mitigate them. But, I believe there is a solution.

The solution lies in what Wal-Mart has done with its suppliers over the years and continues to do today with its sustainability initiatives. Partnering with carriers to remove costs out of the system will be the way to go. Easier said than done given that Carriers like UPS and Fedex already have exceptional processes in place to squeeze costs out of the system. But there is scope for more efficiencies in the process if retailers can use historical analysis to predict ways in which consumers place their orders and the shipping methods they employ. If this is shared in advance with their carrier partners, the carriers in turn can plan their trips to the retailer’s distribution centers and network the trips to the consumers location. To be continued in a later post…

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