RILA: 'Fast or Free' delivery escalating supply chain costs
Nearly 60% of retail supply chain executives believe it isn’t possible to fully recover fulfillment costs, and even more –– 70% –– agree that the cost of fulfilling and delivering online orders erodes gross margins, according to the Seventh Annual State of the Retail Supply Chain report from the Retail Industry Leaders Association, released on Monday.
There’s a growing sense that “fast or free” has given way to “fast and free,” leading 70% of retail supply chain executives surveyed by RILA to say their costs will only continue to rise in the near future, according to the report, which was a joint project of Auburn University's Center for Supply Chain Innovation and RILA, in partnership with logistics research firm DC Velocity.
Supply chain analytics, leveraging blockchain data structures to provide visibility throughout the chain, and fulfillment centers in large urban areas (which have the customer and order density needed for cost-efficient omnichannel retailing) are avenues to more efficient supply chain operations, RILA said.
Retailers’ minimum order value for free shipping has trended downward, noted RILA, with many offering free standard shipping on every order. The likes of Walmart and Best Buy now offer free two-day shipping on orders of $35 or more. “At this day and age, two-day shipping is table stakes, so we don't think we should charge membership for it,” Walmart’s new U.S. e-commerce chief, Jet founder Marc Lore, said in January as the retail giant dismantled its experimental “Shipping Pass” membership in favor of the broader and more inclusive (and more expensive) fast and free option.
This is leading executives to hunt for cost reductions and opportunities to recover expenses, including through subscription plans and fixed-fee membership programs like Amazon Prime — but those opportunities are limited and don’t carry guarantees, according to the report.
Notably, Amazon itself was forced to respond to Walmart’s move, and quickly lowered its own non-Prime free shipping minimum to $35, just a year after raising it to $50. But Amazon’s free shipping outside of Prime, isn’t the faster two-day speed that members enjoy on most items, including many through the Amazon Marketplace. For Amazon, it’s a way to compete with Walmart while also maintaining an advantage for Prime members and tamping down costs.
Walmart may be on to something by focusing on Amazon’s non-Prime customers, who are far less sticky or loyal than Prime members. But while Lore’s comment about membership was widely viewed as a dig at Amazon, Prime does give Amazon the kind of differentiation that is becoming rare relative to balancing customer service and demand with costs. “Ultimately, the marketplace is going to decide what you can monetize and what you can’t,” one executive told RILA. “I think the best case for us is to have the capability to monetize value-added services.”
The top preferred method for monetizing supply chain management, according to the survey, was by far inventory pooling across channels, followed by increased buy online, pickup in store services. Fulfilling orders from vendor locations and charging delivery fees were weighted far lower by the executives. “If we’re able to shave even 1% off our $800 million supply chain costs, that’s eight million bucks,” another executive told RILA. “We’d have to sell a lot of product to put $8 million on the bottom line.”
- Retail Industry Leaders Association Seventh Annual State of the Retail Supply Chain report
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