24


Future of Retail — Omnichannel


issue 03


So how do we balance the value versus the cost of being omnichannel? With the balance of power now tilted in favour of the customer, the solution isn’t as simple as sacrificing service to reduce costs – retailers need to look at their operations to establish the problem areas and identify the opportunities to improve processes and create efficiencies.


while selling is the primary objective of apparel retail it’s not the only barometer of success. Looking at the current state of the market, apparel


sales are up – with online driving the majority of growth year-on-year. However, with the development of online comes new processes, new infrastructure and new costs that erode its original value. Analysis from OC&C Strategy Consultants found that the average operating profits of the top 10 multichannel retailers have more than halved since 2011. In addition to discounts and rising wages, margins are being squeezed by the higher cost- to-serve the omnichannel shopper.


EXAMINING OMNICHANNEL UNDER THE LIGHT OF COST-TO-SERVE Cost-to-serve captures the operational costs that build up as a product moves through the supply chain to get to the customer. Due to the complexity and level of variation in how a product now gets from point A to point B, it comes as no surprise that it’s more expensive being omnichannel. More direct to customer shipments are part and parcel


of the omnichannel offer, increasing the freight and labour costs required to handle single unit shipments. And, with more online shipments come more returns. Recent research from GS1 UK found that the average returns rate for apparel bought online is 38%, compared to the store where only 10% of purchases make the return journey. As competitor activity increasingly cements “free shipping and returns” into the online service offer, retailers end up absorbing the cost of the outbound and return delivery. Retailers are also offering more variety in channel and fulfilment methods impacting their ability to leverage cost efficiencies by driving volume through any single process. But it’s not all bad news. Shopping across digital channels enables retailers to map the customer journey


and build a stronger relationship with them, supported by data. With the right systems, it can allow retailers to maximise their full inventory to serve any customer, minimising out of stock situations and increasing inventory productivity. Omnichannel can also drive footfall back into stores either through click-and-collect fulfilment, geolocation technology to find product nearby or as the starting point for browsing. So how do we balance the value versus the cost


of being omnichannel? Customers have embraced ecommerce and as competitor activity raises the bar on service levels, customer demands that were once only within the power of Amazon to execute, have now become the expected standard. With the balance of power now tilted in favour of the customer, the solution isn’t as simple as sacrificing service to reduce costs – retailers need to look at their operations to establish the problem areas and identify the opportunities to improve processes and create efficiencies. The first step in achieving this, is to understand your cost-to-serve.


ASSESSING THE FUTURE COST OF OMNICHANNEL If we consider where the industry is heading, it reinforces the need to address these costs head on and identify what we need to do now to ensure sustainability of the omnichannel offer. Forecasts from Mintel predict that apparel online retail


will drive an average growth rate of 13% year-on-year until 2020 – outpacing the total market average of 4%. This will mean higher sales but also higher costs. But how much higher? Working with LCP Consulting and Cranfield School of Management, GS1 UK have developed a cost- to-serve ready reckoner formulated from industry cost data to assess the impact on the market. As online sales increase, operational costs will also


increase as a percentage of total sales. The following table examines the potential impact*:


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