The Veil Has Been Lifted

You never know who’s swimming naked until the tide goes out. – Warren Buffett

Up until a couple of years ago, growth in online sales has been relatively slow and steady overall, with click & collect being the fastest growing channel. This put brick & mortar retailers somewhat back in the driver’s seat versus the pure online players like Amazon.

While brick & mortar retailers have struggled with execution in their online businesses, it represented a relatively small fraction of their sales. Most of their revenue came from foot traffic in their stores and retailers made steady progress investing in and nurturing their online businesses, with plans to grow those channels gradually over many years.

The COVID-19 pandemic changed all of that. Different retailers were affected in different ways depending on what they sell and where they do business, but many retailers needed to shift to nearly 100% online fulfillment for an extended period of time virtually overnight.

According to McKinsey, e-commerce experienced 10 years’ worth of growth in 90 days at the onset of the pandemic.



Responding to such a massive, unforeseen event in such a short period of time caused unavoidable stress in terms of store operations, staffing and variability in demand and supply, but make no mistake – a great deal of the pain was self inflicted.

You see, for years (decades really), customers have been subsidizing retailers for their poor stock management. When a customer in the aisle finds a gap where the product they wanted should be, about one third of the time the retailer loses the sale. But two thirds of the time, a customer will either switch to a similar product that is in stock or come back and buy it later, preserving the sale for the retailer.

This behaviour has been well documented in numerous studies on retail out-of-stocks, but it was all too easy for retailers to tell themselves “Yes, well maybe those retailers who participated in the studies angered their customers and lost sales, but not us. We’re special.”

Without the ability to definitively capture the absence of a sale that would have otherwise occurred in transaction history, many retailers could console themselves in the belief that the findings of those studies were academic and theoretical – the problem was surely not that bad.

Then the pandemic hit and many retailers were forced to conduct virtually all of their business online. And they got caught with their pants fully down.

The standard approach for fulfilling a click & collect order goes something like this:

  • A customer submits an online order for pickup at a store of his/her choosing
  • A check is performed against the store’s inventory balance to make sure that there is sufficient stock at the selected store to fill it
  • If sufficient stock exists, the order is assigned to the store for picking
  • The store picks the order and the customer is notified when they can pick it up

Makes perfect sense, but it only works if the stock records are reasonably accurate and the store knows where the stock is.

Based on discussions with our clients who routinely measured their online order fill rate (with reason codes for failures) during the pandemic, an employee in the store who is given a pick list (that has already been checked against the store stock balance before being issued) runs into an empty shelf up to 20% of the time when they attempt to pick the order.

(Sidebar: There REALLY needs to be a formal study on this)

To be clear, this was happening before the pandemic hit, but when online sales only represent 5-10% of your overall business, it’s easier to just sweep it under the rug and wait for it to become more pressing before doing anything about it. It becomes significantly more problematic when your stores are dealing with nearly 100% online sales volume for weeks or months at a time.

So, given that; a) an online customer isn’t in the store to make an “in the moment” decision to bail you out and; b) it’s not possible to undo years of neglect with regard to store stock management in a few days, what choices are left?

Actually, there are several. From a cost and customer service standpoint, none of them are good:

  • Take a margin hit by automatically substituting a more expensive version of what the customer ordered (if it’s in stock) in the hopes that the customer will appreciate it (which they may not)
  • Waste more of your time (and your customer’s) contacting them to find out if they really really wanted the item or if they would be willing to take a substitute.
  • Delay the order and/or incur significant additional cost having the out-of-stock item(s) rush delivered from the DC or another store who does have the out-of-stock item on hand.
  • Cancel the customer’s order altogether after exhaustively searching for the item(s) and coming up empty.

Hell, maybe the pandemic (or something like it) won’t repeat itself anytime soon and we can all go back to business as usual and deal with store stock management “at some later date”.

But what would be the downside of tackling it now?

The E-Commerce Secret Weapon

All the secrets of the world worth knowing are hiding in plain sight. – Robin Sloan

TopSecret

The end is nigh! If you still have physical stores with inventory, staff and cash registers, you’re a dinosaur and Amazon is coming to kill you! The future is online!

Okay, the rhetoric hasn’t been quite that sensational, but it wasn’t so long ago that ‘experts’ were on the verge of predicting the demise of retail as we know it.

As people (eventually) came to their senses on this, a new reality began to emerge, hidden in plain sight. It turns out that the decades of investments retailers made in their physical store footprint may not have been a complete waste of money after all. In fact, it’s actually a key competitive advantage that may result in Amazon playing some ‘catch up’ of their own in the not too distant future.

To be sure, the ‘buy online, delivery to home’ channel pioneered by Amazon represented a significant shift in how people buy goods. If you didn’t mind a bit of a wait and some extra delivery costs, you could shop without ever having to leave the house.

Over time, new products and services were added to build density, reduce shipping costs to customers and decrease delivery times for many in stock items. This could only happen cost effectively by positioning inventory closer to customers… kinda like what ‘NARs’ (‘non Amazon retailers’ – trademark pending) have been doing for decades.

For customers, that means brick and mortar retailers with an online presence can offer far more shopping and delivery options than Amazon (at least for now).

Click and Collect (or Buy Online, Pick Up in Store)

One way to look at click and collect is that it’s ‘not quite as convenient as home delivery’. In reality, click and collect isn’t necessarily a ‘convenience compromise’ in the mind of every customer – many (including yours truly) consider it to be a different (and more cost effective) kind of convenience.

This option allows customers to reserve their stock in advance and have store staff traverse the aisles on their behalf. And when customers get to the store to pick up their online order, they have the additional option to grab a few last minute or forgotten items. Or maybe they just want curbside pickup so they can get the items loaded directly into their trunk without even having to park.

And for customers who truly view click and collect as a convenience compromise vis-a-vis home delivery, Walmart now allows them to trade in some of their convenience for savings by giving them a discount for choosing click and collect over home delivery.

Third Party Personal Shoppers

This is a relatively new phenomenon, but companies like Instacart have been partnering with retailers to take orders online, shop local stores and home deliver to customers, offering cool features like chatting so that the personal shoppers can make real time decisions with the customers for substitutions or to take advantage of in store promotions.

Home Delivery from Stores

Because retailers already have inventory geographically close to customers, they have the ability to take advantage of cheaper modes of transit (i.e. ground vs air) to deliver in a 2 day time window.

But they also have the opportunity to make delivery promises in hours rather than days in their more densely populated markets, through the use of local couriers or even their own store employees.

Will all of these delivery options (plus a few others that haven’t been dreamed up yet) be popular and/or profitable? Click and collect seems like a done deal – time will tell for the others.

The point here is that these options are only available to retailers who have a retail store network in place. Far from being outmoded or passe, the ‘brick and mortar’ store network is becoming a critical linchpin in meeting customers’ online shopping expectations.

You never would have imagined it a few years ago, but the popularity of online retailing has actually served to enhance the importance of the old fashioned brick and mortar retail store rather than to diminish it. And as such, planning the supply chain from the store level back using Flowcasting becomes even more critical to a retailer’s success than ever.