Delivery is a challenge for retailers. There are lots of customers that will only buy if delivery is free. And then there are those that will pay extra to get their goods faster. But how much and how fast? Malory Davies investigates.
Much of the demand for online shopping has been price-based. With no store to worry about, online retailers can offer lower prices than their high street competitors. However, there is a growing market for ultra-fast delivery services – even though they can command a hefty premium.
The rise of services like Shutl highlights the fact that there are customers out there willing and able to pay a premium for instant gratification. Research by JDA shows that while 64 per cent of shoppers think cost is more important that convenience, almost a third (32 per cent) said that they would be prepared to pay a premium for the immediacy and convenience of same day delivery – that is within two hours.
And 54 per cent said they would chose a retailer that offers same day delivery over one that offers standard delivery.
Lee Gill, JDA’s vice president of retail EMEA says: “The continued growth in online shopping will bring further pressure on retailers’ fulfilment capabilities as they scramble to scale their operations to meet record levels of demand. The future also promises to be more complex, as both consumers and the competition force a contraction in order-to-delivery windows from days to hours and even minutes. It is the new retail battleground, where fulfilment excellence will succeed, as digital and physical supply chain operations converge and customer service is balanced with an eye on profitability.”
Of course, defining what constitutes “ultra-fast” is an issue. Michael Kliger, European managing director at eBay Enterprise, the provider of omni-channel solutions, says: “Express generally means guaranteed next-day delivery; ‘ultra-fast’ takes that one step further, giving customers the ability to place an order over breakfast and take delivery of it at lunchtime. Ultra-fast delivery won’t be something that every customer will want every time, but retailers will increasingly need to provide the option to maintain parity with competitors, and customers tend to be willing to pay a premium for ultra- fast services when they need to.
“This could be ideal for customers ordering an outfit on Friday afternoon that they urgently need for the weekend, for example, whereas earlier in the week they might have been happy to use next-day delivery or click- and-collect to pick up from the store in their lunch break.”
Kliger highlights the fact that the development of ultra- fast delivery models plays to customers’ growing expectations of convenience. “They want the goods they order to arrive at the time and place that best suits them, and expect retailers to offer a range of options to cater for the demands of different situations.”
Angela O’Connell, strategy and marketing director at MetaPack, argues that ultra-fast delivery signals a move in the market to try and increase the certainty of delivery.
“While time critical deliveries (forgotten birthdays and ripped suits) will always have a limited niche, ultra-fast is a way to guarantee delivery. Many retailers still face difficulty in predicting and guaranteeing delivery time slots, especially to anything less than AM or PM. With ultra-fast delivery consumers are able to get items in the right timeframe, even if they don’t need them immediately. The certainty of delivery is much higher in a shorter time window, however for the vast majority of customers it would seem the ability to specify a date and time for a delivery would be much more useful.
“The success of this model has been proved with grocery deliveries and the challenge now is to adopt supply chain and carrier networks to operate efficiently while being able to offer date and time window services.”
And Patrick Gallagher, chief executive officer of CitySprint, warns: “Delivery is often the deciding factor between a sale and a dropped basket, so retailers need to be moulding their distribution models around needs of their customers or face losing revenues. In fact, recent statistics from the IMRG suggest that 39 per cent of UK consumers avoid ordering online when no convenient delivery option is available.
“Ultra-fast delivery represents one step in that equation. It’s a new promise between retailers and consumers that increases accountability and reduces ambiguity, encouraging shoppers to put more faith in delivery services. But while time can sometimes be of the essence, retailers must remember that speed is only part of the equation.”
“For example, evening and weekend deliveries could be more convenient for some of the working population. Similarly, locker or safe box collections may be a more practical solution for others. Rather than focus purely on speed, it’s important that retailers offer a flexible suite of delivery solutions and allow customers to choose the most convenient option for their needs,” says Gallagher.
However, Roger Sumner Rivers, managing director of ParcelHero, argues for some caution in projecting growth. “In 2014 1.6 per cent of all UK deliveries were sent on a timed delivery service, only a small increase of 0.2 per cent on 2013 figures,” he says.
O’Connell says: “As it stands today it would represent a very niche part of the market, although within major metropolitan areas the numbers will be higher, as typically there are more time poor consumers. Market share would unlikely exceed fie per cent for a given retailer.”
Price premium
One of the challenges is pitching the price at a level that will be acceptable to customers at the same time as covering costs. Sumner Rivers reckons customers are prepared to pay a premium of double the normal transport costs, or more. “Of course it very much depends on the reason they need the product and how badly they need it.”
And O’Connell says: “For the critical deliveries (forgotten birthdays, etc) the premium will be high and could sit comfortably around £15, similar to same day florist services. However, this price point would be unpalatable for the service normally and would have to be around the £5 mark to make an impact.
“The fact still remains that consumers have been conditioned to expect delivery for free and it is not seen, in their eyes, as something that should be paid for. The introduction of Sunday delivery services has shown that some retailers are not willing to charge more and have priced it as the same as a nominated day delivery. However, retailers have told MetaPack that even though they have placed a premium on the delivery, they expect, over time as consumers become more comfortable with Sunday deliveries, the price to become equalised.”
Gallagher points out that the price of delivery, particularly premium services, can create friction between retailers and consumers. “But it’s important that they are willing to compromise. Just as distribution networks need to find ways to optimise their offering, retailers should think about how they can use delivery as a strategic lever to attract higher average basket values or to retain and acquire new clients, instead of considering it as a necessary evil.
“Flexible, scalable delivery services offer an opportunity for long-term growth and increased sales that shouldn’t be ignored. Ultimately, customers will go where delivery is offered on their terms, both convenience and cost. Retailers must be prepared to adapt to demands or risk losing market share,” says Gallagher.
There have been concerns that ultra-fast services could sacrifice reliability in exchange for outright speed. But there doesn’t have to be a trade-off, says Kliger. “Ship-from-Store is one fulfilment model that we have been implementing for retailers recently; it optimises a retailer’s inventory by using their physical stores as mini distribution centres. This model, combined with a 90- minute courier, is one way of guaranteeing a more reliable ultra-fast service than is possible from a central DC.”
More reliable
And Sumner Rivers argues that services are actually more reliable as the goods may be delivered on dedicated vehicles, or special vehicles used exclusively for urgent deliveries. “Furthermore the goods are normally handled differently and isolated from normal express traffic either on the vehicle or at the depot, leaving less room for error.”
Having accurate stock inventory in all locations, stores and warehouses, as well as having the physical infrastructure in place to be able to provide this type of service to a large portion of the population, says O’Connell. “It will take significant investment for retailers to be able to offer the same level of service as they do for ‘standard’ deliveries.
“The delivery experience is crucial and retailers will not want to tamper with that unless they are 100 per cent confident it will work.”
Europa highlights the importance of having the right warehouse organisation to support the delivery system. It highlights its work with e-business Naked Wines. It receives and stores goods for Naked Wines at its bonded site in Northampton.
Consumers order wines online before 17:00 and they receive their selection of wines at home the following day. To meet growing demand there has been a radical re-engineering of warehouse and administration processes and a completely new warehouse layout design.
Changes included: new capital equipment, increasing the number of cases built per day from 700 to 1,400; a purpose built mezzanine to re-position picker activity; and a bespoke warehouse management system to segregate orders by case size. These changes meant that last year, Europa sent over 650,000 consignments.
Statistics
What customers want
- The majority of consumers (57 per cent) would be willing to pay between £1 and £5 for a same day delivery. • 40 per cent said they would chose a retailer that offers same day delivery over one that offers free delivery.
- Groceries (40 per cent), Electrical & Entertainments (36 per cent) and Clothing and Footwear (31 per cent) were the retail segments consumers were most likely to pay a premium for immediacy and convenience. Source: JDA Customer Pulse Report 2014.
Economics
The only option?
Ultra-fast delivery is only one of the options that companies are looking at to meet the customer demands.
Roger Sumner Rivers argues that ultra- convenient will be a bigger growth market than ultra-fast. “Solutions such as drop boxes at places convenient for customers including underground stations and other major thoroughfares, and drop-off and collection points including retailers with early morning and late night opening hours will deliver the biggest growth over the next few years, and be the biggest competitor to ultra-fast.
“Looking into the more distant future, there may even be a potential model for carriers to provide a fulfilment model, storing, picking and packing orders for the most commonly ordered, high volume products stocked by retailers. Those specific products that customers want ultra-fast.
“This would enable customers of those retailers to order the goods right up to 5am (or even later) and have them delivered at no extra cost, and although the retailer would have the additional fulfilment cost to pay the carrier, this
would be somewhat offset by their own in- house reduced fulfilment costs, and the reduced cost of delivering in bulk to each depot.”
Angela O’Connell offers another scenario: “Consolidated deliveries, where all of my parcels arrive at the same time from multiple retailers, is an area of interest. Services such as this would require new levels of collaboration across the carriers and retailers and could be an excellent service for the same time poor consumers that ultra-fast deliveries would compete with.”
Originally appeared in Supply Chain Standard, September 2014
