TRENDLINE

Retail supply chain

 
Courtesy of DHL

NOTE FROM THE EDITOR

Traditional retail supply chains have been disrupted by the rise of new distribution and
fulfillment channels. Delivery times are faster, stores are becoming online fulfillment centers
and many retailers are considering how to pull last-mile delivery in house. These modern
challenges have been layered on top of the already complicated traditional supply chains that
have kept goods moving to brick-and-mortar stores and into consumers' hands for
generations. And that was before a global pandemic complicated both back- and front-end
operations for retailers.

In this collection of features, Retail Dive looks at how the COVID-19 pandemic upended
some trends, and dramatically accelerated others to further disrupt the flow of goods from
manufacturers and suppliers through retailers to consumers. 

The COVID-19 pandemic dealt a harsh hand to the retail industry, first disrupting supply
chains overseas and then by sinking demand for discretionary goods in the U.S. and forcing
stores to temporarily close. Retailers are still dealing with those ramifications, including
complicated decisions around inventory, how to order for an unpredictable future and what to
do with returns as more purchases move online.  

The only thing certain for the moment is that nothing is certain. 

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The strategy behind turning department stores
into warehouses
Rumors circulated about Amazon converting vacant mall space into fulfillment
centers — a move experts say would round out its omnichannel approach.

By: Jen A. Miller

Fulfillment for e-commerce requires three times the warehousing space of traditional

brick-and-mortar store inventory, given the greater variety of SKUs and space-
intensive shipping and parcel operations. With e-commerce growing in the
pandemic, supply chain players are scooping up space where they can find it,
especially if it's close to areas with high population density.

Reports surfaced that Amazon was reportedly in talks with Simon Property Group to
take over mall spaces left vacant by closed department stores, namely those that
once belonged to J.C. Penney and Sears. An anonymous source told The Wall
Street Journal that Amazon would turn these spaces into online fulfillment centers.

Amazon and Simon were tight lipped about if it’s really happening, and why.
"Amazon has a policy of not commenting on rumors or speculation," an Amazon
spokesperson said in an email, and Simon didn't respond to a request for comment.

But experts see multiple reasons for e-tailers such as Amazon to make this move,
from cost savings to an enhancement of the omnichannel experience for consumers.

"You’ve got this deeply discounted floor space in urban areas with huge parking
facilities and customer density all around," said John Impellizzeri, professor of
professional practice in supply chain management at Rutgers Business School. "It
could turn out to be a really brilliant play here, if they can get it at the right price."

Plentiful, cheap and easy-ish to convert

One reason to convert retail space to fulfillment is cost.

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Malls are figuring out what they’re going to be next, as shopping has shifted online
and anchor department stores go out of business. In 2019, 9,548 stores closed,
and Coresight estimates as many as 15,000 could shut this year.

Mall space is cheap, as low as $4 per square foot, said Impellizzeri. Department
store space typically costs closer to $20 per square foot, Alexander Goldfarb, real
estate investment trust analyst at Sandler O’Neill + Partners, told CNBC.
Warehousing space averaged $6.50 per square foot in a 2017 survey.

"You’ve got this deeply discounted floor space in urban areas with huge
parking facilities and customer density all around ... It could turn out to
be a really brilliant play."
 
John Impellizzeri
Professor at Rutgers Business School

Transitioning department stores to fulfillment centers wouldn’t be that difficult,

Impellizzeri said. "Copying and pasting fulfillment centers into floor space is their
core competency."

These spaces aren’t perfectly set up for warehousing, though. Fulfillment and
distribution facilities typically have inbound and outbound bays, but retail stores
usually have just one set, he said.

Department stores with multiple floors may present a challenge, too, said Michael
Brown, partner at Kearney. They "are not that easily accessible through the
automation that Amazon uses for their facilities," he said.

Amazon may also run into zoning laws. "That is reality in many of the suburban
malls, where trucks might not be able to enter during certain hours of the night or
times of the day," Brown said, which isn’t typically an issue for warehouses or
industrial locations.

Shifting logistics to the consumers

Putting fulfillment centers in more places can help make delivery even faster, said
Brown. "Getting closer to the consumer, to be able to expedite delivery from two
days to one day to same day is critical in the evolution of [Amazon's] business
model," he said. "Bankrupt department stores are in that close proximity to the
customer that they can easily get to them."

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An Amazon fulfillment center in Baltimore. Department store and mall spaces could
be converted to warehouse, though zoning laws and trucking bays could present a
challenge.
Yujin Kim / Supply Chain Dive
 

Because this move potentially puts fulfillment centers in so many locations near
consumers, it could also push delivery and reverse logistics onto consumers. If
customers are willing to drive to a fulfillment center to pick up an item because it’s
faster than delivery, or drop off a return because it’s easier than re-boxing an item
and taking it to a UPS store or a post office, that saves the retailer money.

Amazon is saying "let’s get the consumer involved in returns, let them do those last
couple miles of driving rather than outsourcing it to someone that we pay," said
Impellizzeri. "That’s the play, and we think it’s brilliant."

Physical locations round out omnichannel strategy

One thing e-tailers are missing is a physical presence, said Brown.

Creating fulfillment centers all over the U.S. gives Amazon a way to compete with
Target and Walmart, both of which have used stores during the pandemic to execute
omnichannel strategies, such as ship from store and curbside pickup. Amazon can’t
offer curbside pickup if there’s no curb to pick up from.

"Trucks might not be able to enter during certain hours of the night or
times of the day."
 
Michael Brown
Partner at Kearney

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Dan Neiweem, principal and co-founder of Avionos, said this is a natural progression
from Amazon buying Whole Foods. With grocery, "there’s a lot of repeat ordering
and you have a captive market," he said.

The same is true for regular online shoppers, and Amazon’s only weak spot in
offering a complete omnichannel experience has been with physical shopping. "I
think what they’re really looking at is not just shells. I see them actually wanting to
use those locations so you can come in, buy, shop and actually take items off the
shelf," Neiweem said.

Physical locations, such as vacant Sears and J.C. Penney stores, give Amazon a
way to compete with Target and Walmart.
Mike Kalasnik
 

In a way, this move could turn department store spaces back towards their original
functions.

The J.C. Penney and Sears catalog model "allowed consumers to purchase goods
over the phone and then pick them up at the local retail of their choice, which in most
rural communities was essentially just a front counter and a back room storing the
products," Johnathan Foster, principal consultant at Proxima Group wrote in an
email. "If these box-retailers are consumed by Amazon ... the e-commerce giant is
refreshing the model created by J.C. Penney and Sears 30 or 40 years ago."

Article top image credit: Simon Property Group

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4 elements of the next phase of last-mile delivery
The technologies to move retail delivery forward already exist. The next step is fully
weaving last-mile services into the retail landscape.

By: Emma Cosgrove

In 2021, last-mile innovation isn't really a technology play, according to experts. The
technologies to move retail delivery forward already exist and are in use. But the
near-term evolution of the last mile is going to be about how retailers, carriers and
orchestration platforms collaborate to fully weave last-mile services into the retail
landscape so they contribute to, rather than distract from, the overall business of
retail.

"COVID has cleared the decks so that everybody is more focused on: 'We need to
empower our physical location to be much more efficient, to utilize existing assets,
people, product and infrastructure,'" said Bill Thayer, co-CEO of last-mile technology
provider Fillogic, at the National Retail Federation's Chapter One virtual conference.

Thayer, along with executives from Uber, Danone and Tanger Outlet Centers,
discussed four elements driving the future of last-mile innovation for retailers.

1. Connecting the dots between stores and delivery

The relationship between inventory visibility and consumer delivery was undervalued
before the pandemic, according to Thayer. Suddenly, retailers were incentivized
to fulfill orders from shuttered stores with trapped inventory and many did so. The
future of that practice is being sorted out now and inventory visibility is a
determinative factor.

"Stores were never designed to operate like fulfillment locations. That was never
their goal," said Thayer, adding that before COVID, a lack of sophisticated inventory
management between in-store and omnichannel sales was more acceptable. The
volume of non-traditional sales during the pandemic changed that.

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Retailers have prime space in their stores from which to fulfill orders, often delivered
directly to customers, Thayer said. But tacking delivery onto an inventory
management system not intended to handle it can lead to problems — and make
scaling precarious.

Inventory visibility can "connect the dots" between physical infrastructure and last-
mile services, he said. Inventory visibility developed with delivery in mind can make
way for the channel flexibility retailers have sorely needed through the pandemic.

2. Efficiency and density

One order, one delivery simply won't do in the post-COVID world. Retailers and
delivery partners are working out ways to bundle deliveries or encourage consumers
to time or accept their orders in a bundle without their knowledge.

"There are ways that you can actually artificially create more pickup density," said
Erik Logerquist, Uber Direct's business lead. He suggested directing customers to
one of only a few delivery windows throughout the day. "That's a way that we can
see a higher batch rate that creates cost savings for us so we can pass those cost
savings on to retailers," Logerquist said.

Tanger Outlets is working on a plan to do just that with Fillogic. Outdoor shopping
malls like outlets haven't traditionally aggregated logistics services of any kind,
explained Thayer. Fillogic and Tanger are working together to do that batching work
— at least on the post-purchase logistics side of the outlet mall.

"We're rounding up all those retailers together to aggregate the volume to make that
process more efficient, and, of course, getting products and orders into Uber direct
vehicles," Thayer said.

3. Data transparency for retailers, brands and consumers

When the cost-benefit equation of running to the store for an item changed with
pandemic risk, so did the stakes for delivery tracking — highlighting the
inconsistencies in tracking capabilities between last-mile providers.

"Not only do consumers want things on demand. They want to be informed every
step of that journey," Logerquist said. "Traditional carriers have made some
improvements in real-time tracking. But, consumers nowadays are used to seeing
their french fries delivered in real-time on their smartphone. And I think they're really
starting to want that same experience with all the merchandise that they purchase."

"We were a bit blind in terms of last-mile delivery data."

 
Omer Waysman
Danone Director of Global E-commerce and Business Development

Consumers want transparency, but so do brands and retailers, according to Danone

Director of Global E-commerce and Business Development Omer Waysman.
Danone recently realized that in order to optimize its last-mile services, it needed to
be able to see the data for every delivery — something not all partners provide.

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"We were a bit blind in terms of last-mile delivery data ... Obviously, we are able to
do surveys, etc. But the data was with the external partner. And so we were not able
to really follow it and really track it in the best way," Waysman said.

Getting ahold of more data allows Danone to measure consumer satisfaction, which
Waysman said is paramount for a cost-heavy service like last-mile delivery. For a
CPG company like Danone, the financial analysis for Danone's direct-to-consumer
business is relatively complicated, he said.

Danone turned to Bringg to orchestrate its direct-to-consumer last-mile business with

the hope of using a more complete data picture to better understand consumer
behavior pre- and post-purchase – with sustainability and life cycle analysis in mind.

4. Scalability for spikes

If 2020 taught retailers anything, it was that they need to be ready for times of feast
and famine when it comes to sales volume. For the last mile, that means scalable
capacity.

It's no surprise that Uber is a proponent of last-mile services not dependent on fixed
assets — but gig-economy-backed services like Uber have indeed seen an
explosion in the last year for this reason.

"Traditional providers typically have fixed assets, fixed employee bases, which is
really hard to scale and manage spikes in demand," said Logerquist.

For Danone, that scalability is all in the partners retailers and brands choose.

"What was important for us ... is to make sure that the partners we are working with
are agile, flexible and can adapt themselves to every situation in every market,"
Waysman said.

Article top image credit: Courtesy of H-E-B

SPONSORED

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Faster, leaner, scalable: Logistics for the e-
Commerce era

Sponsored content
By GEODIS

To better understand businesses' e-Commerce logistics challenges, GEODIS, in

partnership with Accenture, surveyed large U.S. businesses across nine industries.
From this research, we discovered that most companies believe that reaching their
e-Commerce potential is hamstrung by their logistical capabilities. Additionally, many
organizations noted that as e-Commerce has accelerated, so have their customers’
expectations. Meeting these accelerated demands is easily one of their greatest
roadblocks to achieving optimal growth and profitability. 

Businesses Feel The E-Commerce Pressure

Many shoppers now expect the service they receive online to rival, or exceed, their
in-store experience. As a result, a large percentage of companies are left struggling
to affordably and effectively meet the logistical needs of today's omnichannel
shopper. This has created constant pressure to continually seek out and find ways to
cut costs across the entire supply chain, while simultaneously increasing speed and
adaptability. 

What Customers Want

The circumstances of the COVID-19 pandemic has even further differentiated e-

Commerce winners from losers, based on level of their logistics sophistication.
Because some brands had already invested in their omnichannel e-Logistics,
consumers were quick to dismiss those that were not. When delivery through one
retailer is offered in two days, for example, the five-to-seven-day window at another
is no longer appealing.

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Further, when shipping is free at many retailers, a brand that charges for shipping is
quickly dumped. In fact, shipping cost is the primary reason for cart abandonment in
the U.S. Additionally, an easy return process gives buyers confidence in making a
purchase, whereas a more limited or expensive return process makes one more
reluctant to take a chance on a product they have not touched or tried on.

Mastering The Five Key Logistics Capabilities

To build a flourishing e-Commerce business and maintain a competitive advantage

in the marketplace, organizations seeking to keep up in the ever-evolving e-
Commerce era must learn to master the five main logistics capabilities. While every
e-Commerce supply chain requires immense speed, scalability, and reach, more
than anything, it needs to be consumer-centric. 

That is just what these five capabilities create: a consumer-centric approach to e-

Commerce logistics that works as an extension of your brand; aimed at facilitating
growth, optimizing profits, and building loyalty at every touchpoint through
exceptional customer experience. 

The Path To Success

For all businesses, the goal is the same: to meet the online shopper where they want
to be met, whether it is in-store, via at-home delivery or curbside pickup. It also
means making returns as customized and seamless as possible. The way forward
includes improved e-Commerce logistics partnership to aggressively seek out
continuous improvement opportunities and to provide unobstructed visibility at every
step in your supply chain. 

Change is hard and adapting quickly enough is an even bigger challenge. Those
brands who do integrate these capabilities into omnichannel e-Commerce logistics
solutions will delight consumers, boost brand loyalty, and see sales surge—now and
in the future. Those who do not prioritize these capabilities will find it difficult to
create the kind of seamless shopping and returns experiences that are required to tip
the brand loyalty scales in their favor.

Article top image credit: Permission granted by GEODIS

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Retail suppliers are still under strain — and it
could hurt everyone
Stores are open, but vendors face longer payment terms and financial uncertainty.

By: Ben Unglesbee

The retail supply chain, like the retail industry itself, has gone through a dramatic
period of stress since March 2020.

The early months of the COVID-19 crisis brought ubiquitous order cancellations.

Almost as pervasive were retailers' efforts to push out payments for shipments. In
turn the cash flow crisis in retail hit suppliers just as hard. Businesses furloughed
employees, negotiated with landlords and other vendors, and wondered if they would
be able to stay in business, just as retailers did.

By summer stores had reopened in most areas and orders were coming in — which
is crucial for both retailers and vendors — but suppliers' financial woes persisted. 

The closures brought a liquidity crisis, one that hasn't fully been resolved but has
been eased by the reopening of physical stores. Now the supply chain is trying to
work through potential credit and finance shortfalls that are exacerbated by longer
payment terms, which have become a permanent feature of business for some. 

"The conundrum is, things are getting better, orders are coming through, but the
supply chain is struggling to either finance those orders, or mitigate their credit risk
as they're shipping and extending credit," Vladimir Jelisavcic, manager of Cherokee
Acquisition, a firm that specializes in vendor finance, said in an interview. 

"Ultimately, what we're talking about is long-term destabilization because suppliers

are struggling to make it through today, and their customers, the big retailers, have
changed buying patterns," said RapidRatings Chairman and CEO James Gellert.
"[Retailers] are buying less, they're giving less insight into what they're going to need
going forward, and consumer demand is a giant unknown. And so those suppliers
have the potential to be in a lot of trouble, and that then affects their customers. So
the big retailers are affecting little suppliers, and the little suppliers may in turn affect
the big retailers." 

According to Gellert, his firm's analysis shows that the overall financial health of
retailers' supply chain is deteriorating generally, with downward pressure on
discretionary segments.

'Tomorrow's problem' is happening today

Last May, the industry — retailers and suppliers alike — was singularly focused on
preserving the cash necessary to keep the lights on.

Members of the American Apparel & Footwear Association told its CEO, Stephen
Lamar, "'We're in the middle of this liquidity crisis. We're very worried about whether
we can even stay in business,'" Lamar said in an interview. But even then a few
members approached the organization with concerns about what comes next,

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including whether they would be able to insure future shipments against default
losses. "'Liquidity is today's problem. Tomorrow's problem is going to be credit,'" they
told Lamar. 

Today his phone "is ringing off the hook" as the insurance issue comes to a head
and affects suppliers in the apparel and footwear space. "If this doesn't get fixed,
they're going to go out of business," he said. 

In a white paper from consulting firm Econ One, two economists estimated that
shortfalls in trade credit insurance could — "conservatively" — inhibit supplier output
to the tune of $46 billion. It would inhibit hiring as well, by an estimated 155,000
workers at those firms that rely on trade credit insurance, the majority of which are
relatively small. 

"It's hard to refuse business. That seems irresponsible. But it's scary to
take business at your own risk, because that could be just as
irresponsible."
 
Sandra Betterson
General Manager of Chateau International

That's because the insurance is used to protect suppliers against the risk of
nonpayment on their shipments to buyers, including retailers. Sandra Betterson,
general manager of accessories supplier Chateau International, said that for
suppliers who can't access insurance or risk mitigation services like factoring for
shipments, they have to make the decision whether to refuse to ship at all, or ship
without any safety net and absorb the risk.

"It's hard to refuse business. That seems irresponsible," Betterson said. "But it's
scary to take business at your own risk, because that could be just as irresponsible."

That choice for suppliers could have big ramifications for retailers, as their vendors
choose between providing trade credit (in the form of payment terms) and shipping
goods at all, and at a time when retailers are trying to refresh their inventory after the
closures and prepare for the holiday season. GlobalData called the situation a
"crisis" and "the next threat to apparel supply chains." 

"There is a real danger that this snowballs out of control, halting the supply of goods,
driving up costs and even leading to empty shelves at the very time retailers have
begun to reopen physical stores and customers have started to return,"
GlobalData apparel analyst Leonie Barrie said in a June press release. 

Trade credit insurers have already pulled back after having suffered losses in
bankruptcies across the economy and in light of economic uncertainty ahead.
Providers have cut their coverage levels by an average of 13.8% as of May,
according to the Econ One paper.

"The insurers and the factors have sustained very large and unexpected
losses," Jelisavcic said. "Consequently, they've significantly pulled back." He added,
"The issue is, they're pulling back just as vendors need to ship and need financing
for the holiday season."

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The pullback has created opportunities for those that provide other types of
finance. Cherokee, Jelisavcic's firm, has the advantage of not being a bank and is
not subject to regulations on capital, instead matching nontraditional lenders like
hedge funds with vendors wanting put options, receivable financing and other
services. That allows them to lend where others can't or won't. 

Joel Wolitzer, senior vice president and business development officer with Rosenthal
& Rosenthal, said his firm has more flexibility and can take more credit risk by virtue
of not being a bank and being privately owned. Among the financial services
Rosenthal & Rosenthal provide is factoring, in which a third-party "factor" buys
accounts receivable from vendors, assumes the credit risk and collects the payments
from their customers. "Numerous prospects have come to us, either they had
insurance or were looking at it as an option," Wolitzer said. "Factoring certainly fills
the void."

He also notes, though, that "at some point we run out of capacity" on certain
retailers, and that sometimes vendors' exposure to higher-risk retail buyers is too
large to cover even for a firm with more risk appetite than a bank.

Yet factors have also sustained heavy losses, as insurers have. CIT Group CFO
John Fawcett said his company took a $73 million bankruptcy-related charge-off,
meaning debt that likely can't be recovered, on a single factoring customer in the
retail industry, whom he did not name, according to a Seeking Alpha transcript. CIT
had another $97 million in charge offs in addition to that bankruptcy. 

Lamar said that factoring has become more expensive and some factors are scaling
back for all the same reasons that trade credit insurers are, namely uncertainty and
risk in the market. As Betterson notes, the cost for factoring to vendors can also
increase with the extended terms retailers have asked for, which many smaller
suppliers have little choice but to go along with. 

"Typically, if something fails then something else rushes into the breach," AAFA's
Lamar said. That isn't happening on the scale needed, in Lamar's view. In this case,
he describes a market failure, and his organization has been advocating for a
government response that would backstop credit insurers to help restore the market
and put it on surer footing, as other developed countries have. Lamar and his
members have been talking with lawmakers on the Hill, to positive feedback but with
no bills written up yet that would address the credit insurance shortfalls. 

Cash flow 'mules'

Vendors' financial struggles are broader than shortages of credit insurance and other
forms of risk mitigation. 

They face all the same uncertainties retailers do around consumer demand going
into the end of the year and 2021 with COVID-19 continuing its spread and wreaking
havoc on the broader economy. 

For vendors, in many cases, their liquidity and cash flow positions are hurt by
retailers' pursuit of longer terms. A retailer might get cash in the door when a
customer makes a purchase, but vendors could have to wait for two, three months or
even more before they get paid by retailers for those goods. 

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"Suppliers are getting used as a cash flow mule."
 
Sandra Betterson
General Manager of Chateau International

Meanwhile, Betterson says that many in her field are still pursuing payments for
goods shipped before the COVID-19 crisis even began. At the same time, retailers
are on the hunt for discounts and deals from vendors in their current buying, which in
turn squeezes vendors' margins. 

"Suppliers are getting used as a cash flow mule," Betterson said. 

The disruptions could continue well into the future. According to a study by the U.S.
Fashion Industry Association, more than half of surveyed retailers said that they
expect canceled and postponed orders due to the COVID-19 situation to continue
beyond the second quarter, and 40% said cancellation and postponement would go
on through Q4. 

"The distress is ongoing," Lamar said of the apparel industry broadly. "A lot of it boils
down to the uncertainty."

And that uncertainty is multilayered, from the disease itself, the political response to
it and the economic fallout, as well as distress and bankruptcies in the retail world.

Article top image credit: Getty Images

How Sephora prepped for an e-commerce

onslaught
With its biggest sale of the year last April, the retailer was ready for surging volume
when stores closed that March, SVP for Supply Chain Mike Racer said.

By: Emma Cosgrove

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Sephora has an annual sale event in the spring. Loyal shoppers plan their hauls, and
brands sold by the retailer promote it like Amazon's Prime Day or Nordstrom's
Anniversary Sale. But last year, the sale had a significance in ways brands and
shoppers may never know.

Having the biggest sale of the year in April 2020 meant Sephora's supply chain was
flexed and ready for surging volume when executives temporarily closed all stores in
March, roughly five weeks before the promotion.

When the coronavirus pandemic shifted the majority of retail business online, several
retailers lamented that they can handle that kind of e-commerce volume — the kind
they see in peak season — but only with months of prep.

Sephora's April sales event meant the company was at least somewhat ready for an
online explosion, said the retailer's SVP of Supply Chain Mike Racer at Reuters'
Retail Supply Chain USA virtual summit in August.

"All of our stores have to close ... and all eyes turned on us to be able to deliver,"
Racer said. E-commerce order numbers specific to the beauty retailer are hard to
come by, since Sephora is wrapped up within its parent company LVMH.

"It wasn't perfect admittedly," Racer said, indicating that Sephora was not immune to
the many forces delaying packages during the pandemic. "But we certainly were able
to meet the business need in a way that the client appreciated, and we gained
market share as a result of that which is great."

Warehouse throughput over capacity

Beyond warehouse locations, inventory positioning and automation, Racer said a

common conundrum for operations management is efficiency versus capacity.

"How do you balance the efficiency of a system with the ability to get a lot of stuff
through it?" Racer asked.

"We still have manual facilities, don't get me wrong. But, but we're
relying less and less on them."
 
Mike Racer
SVP of Supply Chain at Sephora

Sephora's annual spring promotion led Racer to improve throughput as a measure of

readiness years before the pandemic. Elevating throughput as a KPI equal with
operational efficiency improved the company's performance during times of expected
and unexpected stress.

LVMH CFO Jean-Jacques Guiony said on a July 2020 earnings call that Sephora's
readiness for the pandemic channel shift offered justification for the investments the
company made through the summer.

Planning inventory to the forecast — not the budget

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Keeping the beauty emporium's head above water despite the onslaught of online
orders wasn't all timing and luck. Racer outlined years of evolution and investment
since he came on board in 2011 — 12 years after Sephora's website launched in
1999.

He pointed out three main areas of investment for the company — network design,
inventory management and what Racer called "a seat at the table."

A well-designed warehouse network helps the retailer keep up delivery speeds even
when carriers are faltering as several did in the spring and early summer. Sephora
has five warehouses in the U.S., making nearly everywhere in the country a two-day
ship zone (in normal shipping conditions).

Within those warehouses, Racer and his team built in flexibility to move product to
the channels where it would be most productive.

"We've developed tools and systems that allow us to move zip codes around on the
fly. Move inventory between retail and [e-commerce fulfillment] buildings because we
decided early on we wanted to commingle those buildings," Racer said. And though
the company still does plenty of manual fulfillment, automation is gaining share of the
process.

"We've proven that the payback is pretty massive. Our ability to get stuff out, get it
out quickly, get it out accurately has been a game-changer for us in both of those
arenas. Now we still have manual facilities, don't get me wrong. But, but we're
relying less and less on them as we build new and more automated [facilities],"
Racer said.

Sephora has five warehouses in the U.S., including this one in Maryland, making
nearly everywhere in the country a two-day ship zone. 
Courtesy of Sephora
 

Optimizing the inventory for e-commerce was more of a cultural shift than a
technological fix for the retailer — one Racer said he had to fight for.

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"Everybody's trying to manage inventory based on the budget. And you can't
manage a budget inventory when sales are growing 30% or 20% ... and your budget
was planned at 10%. So we had to shift the culture of the company," Racer said.

Aligning inventory with sales forecasts led to a more forward-looking mindset, he

said, which made a significant difference in the company's stockouts.

"Our out-of-stocks are industry-leading, or at least close to that, because we're

always looking ahead," Racer said.

Article top image credit: Sephora

Suppliers feel retail's pain, too

As retailers canceled orders and held payments, their vendors were stretched for
cash, making hard decisions and worried about what might come next.

By: Ben Unglesbee

It was as though a memo went out to the entire retail world. 

Retailers big and small, healthy and distressed, issued a chorus of letters and phone
calls to their suppliers in the spring, canceling shipments and asking for longer
payment terms. 

"Every single one of our retail partners over the course of the last six weeks has
come to [us] for help," Sandra Betterson, general manager of accessories supplier
Chateau International, said in an interview in April last year. "Every single retailer
that had product going out in March, April, May, June has either canceled their
orders or put every single thing on hold."

Along with the cancelations, retailers on 30-day payment terms asked to pay in 90

days. Those on 90-day terms, asked for another 90 days. Some who already were
late on payments asked to have until June, and then to pay in installments, Betterson
said.  

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With much of the retail world shuttered in response to the COVID-19 pandemic for
most of the spring and early summer of 2020, retailers spread their pain up and
down the chain. Many furloughed employees, cut management salaries and skipped
rent. 

And they squeezed their suppliers, too. Pulse Ratings documented more than 40
retailers that postponed payments to retailers during the early weeks of the
pandemic. Dennis Cantalupo, CEO of Pulse Ratings, noted in an interview that the
number of retailers that pressed for more favorable payment terms was likely even
bigger than the list his firm compiled.

While large retailers issued press releases about how they were responding to and
affected by the pandemic, their suppliers — many of them still suffering from last
year's tariff wars — endured much of the same turmoil behind the scenes.

Some felt as though their relationship with retailers was only going one way during
that moment, with retailers dictating the new terms of the pandemic world. Retailers
had much of the leverage. And at a time when there was no cash going into the
system and nowhere for their products to go, suppliers didn't necessarily have the
budget or even see the point in legal fights when contracts were broken.

A frozen system

First came the canceled orders. Purchase orders were nixed as discretionary
retailers across the country collectively closed tens of thousands of stores. 

"The first week of the quarantine saw a wave of uncertainty take hold of the retail
markets," David Wander, an attorney who chairs Davidoff Hutcher & Citron's
bankruptcy and creditors rights practice, told Retail Dive in an email. "In the second
week, the system completely froze, with large retailers such as Macy's canceling
purchase orders across the board and furloughing almost all employees."

Wander added that vendor clients in India and Bangladesh "were in a state of shock,
with multi-million dollar purchase orders being canceled by one retailer after the
next."

Another supplier Retail Dive spoke with, who asked not to be named out of fear of
damaging customer relationships, said that "every retailer and their brother was
picking up the phone wanting to cancel" orders after store closures. For suppliers
generally, products tied to canceled orders were everywhere along the supply chain:
in warehouses, ports, on the water, on trucks on their way to retailers.

Betterson said that litigating canceled orders wouldn't be worth the effort and
expense for many suppliers, as did others Retail Dive spoke with.

"It furthers the point that the suppliers are really looking at this as a partnership,"
Cantalupo said. "They understand the world we're living in and they're being
reasonable."

'No recourse'

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Last April, top executives at Stage Stores — a retailer already struggling with liquidity
strains before the pandemic hit — told its supplier base it would require
concessions on payment terms from them as the retailer tried to avoid bankruptcy. (It
would later file for Chapter 11 on May 11.)

Stage Stores was just one of dozens, if not more, of retailers at the time making
similar demands or requests, or demands thinly veiled as requests.

As with cancelations, there is little smaller suppliers can do when retailers ask for
longer payment terms. "We have no recourse to go to but for our retailers to pay us,"
Betterson said.

And there again, suppliers understood the pandemic situation was dire and the
circumstances extraordinary. Jay Foreman, CEO of toy maker BasicFun!, said where
his company had receivables that they were being asked for extended terms for they
were granting them when they could. "How can you pay us if you have goods sitting
in a closed store?"

For suppliers that didn't like the terms, they had few if any options with much of the
retail world shut down outside of grocers and mass merchants — the Walmarts and
Targets of the world — that stayed open throughout the pandemic's early days as
essential retailers. But that is a limited market, and getting products in those stores
has always been competitive.

"It's always a negotiation, and the suppliers realize that and they're pushing back
where they can," Cantalupo said. During the pandmic, he said, "what's the sense of
pushing back? No one's buying goods from you. You can't force someone to pay
you. They're gonna pay you when they pay you."

Cantalupo added that suppliers were hoping to have more leverage once physical
retail reopened. And noted that retailers had to be mindful of supplier relationships
and not alienating their suppliers for when doors were open again. "There might not
be unlimited merchandise to go around."

Making cuts 

As part of the retail ecosystem, suppliers went through many of the same challenges
as retailers. Revenue dropped off or disappeared, making cash a scarce resource.
When things did start to reopen, there wasn't a widespread return to retailing as
usual with hot spots across the U.S. continuing to affect operations. And so
companies are making all the same tough decisions as retailers.

"We have furloughed employees. We have terminated employees. We have cut

salaries to employees. All three," Betterson said. Other suppliers Retail Dive spoke
with furloughed or laid off employees as well early on. 

Suppliers also filed insurance claims, or tried to, and some applied to federal
stimulus funds and Small Business Administration programs. Like retailers, they also
negotiated with landlords and other creditors. Foreman said his company was paying
50% of its rent in the early days of the pandemic and asked for forbearance where
possible. 

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But while everyone suffered from a cash flow dearth, it wasn't and isn't necessarily
felt in the same ways or in the same measures across the ecosystem.

Betterson said the vendor side got "the hardest part of the stick" in many
respects. "We have the goods. We have the open invoice. We have the same
expectation to pay our rent, the same expectation to pay our suppliers, the same
expectation to pay our employees."

She added: "And when doors open for the retailers, there should be, hopefully, an
immediate cash flow from their consumer. But they have that money — they have it
and they're holding it back from us. They have time to use those funds."

A lost quarter

And also like the retailers they serve, suppliers had to try to understand when
business as usual will resume and what comes next.

Wander said that last spring retail and vendor negotiations anticipated at least some
manner of reopening in the summer — which has happened in many regions. As
part of that some purchase orders were restored and discounts were negotiated. 

The big uncertainty is what the future holds, how it could impact stores and how
consumers will react. For some, the second quarter was written off, and the focus
shifted to back-to-school and holiday. Though uncertainty hangs over both those
periods now, too. 

Betterson said her company had product set to ship last spring for the Easter
holiday. "What do I do with a bunny rabbit Critter Crew handbag tomorrow?" she
said.

For Foreman and his company, the pandemic's timing landed, mercifully, in one the
slowest periods of the year for toy sales, after many of his retail customers had
already paid off their bills from holiday shipments. Had it hit in August, with holiday
shipments out, it could have been disastrous for toy suppliers, and plenty of others. 

Still, Foreman said he watches the news carefully and was concerned about what
happens if stores remain closed for an extended period, the pandemic recurs in
another large wave or if consumer spending remains depressed after stores
reopen. He also worried about some retailers financially on the edge.

"You have to think about if they're going to open," he said. 

Article top image credit: Getty Images

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COVID-19 changed the stakes for e-commerce.
Do fulfillment networks need to change too?
The pandemic that cratered demand for discretionary goods and upped screen time
has changed the risk calculus for online operations.

By: Emma Cosgrove

Before the U.S. detected its first known case of COVID-19, e-commerce was at best
a growth opportunity and at worst, a thorn in the side of many retailers.

At 16% of total retail sales in 2019, some retailers had become "disillusioned" with
the cost of online sales compared to the overall margin contribution, according to
CBRE managing director Joe Dunlap. But a pandemic that drove consumers around
the world into their homes, cratered demand for discretionary goods and upped
screen time changed the math.

The imperative for e-commerce has never been stronger, with large swaths of retail
stores closed to slow the spread of COVID-19 and some state reopening plans
mandating omnichannel strategies. E-commerce is now an essential insurance
policy — a way to keep sales from stopping entirely. But the usual data e-commerce
logisticians use to craft fulfillment networks are losing relevance in the current
circumstances.

"Optimally locating your facilities is difficult," Dunlap told sister publication Supply
Chain Dive, because demand may shift around the country as local restrictions
change. "Trying to understand geographic demand from a distribution perspective is
crazy right now," he said.

Warehouses close for many reasons in the time of coronavirus. In some cases, local
authorities order them to cease operations. One Manhattan Associates client closed
its warehouse (which shipped products deemed essential) amid media pressure to
do so, Vice President for Professional Services Heather Mahan said.

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Collocating fulfillment capacity with historical demand or population centers may no
longer be a winning strategy in the near- to medium-term.

"We've had 11 years of a bull market here. Everything's been go go go, go forward,
go fast," Steve Denton, CEO of UPS-backed on-demand warehousing company
Ware2Go, said. According to Denton, it's time for some "preventative maintenance"
for e-commerce logistics networks. But in the long term, how ready should retailers
be for a disruption the size of this first wave of COVID-19? And what does a de-
risked e-commerce logistics network look like post-pandemic? 

"We've known about pandemics for long time. We haven't understood their effect on
our business and haven't really done much to plan for them," Dunlap said. "I think
going forward because of the likely wave two, wave three of COVID-19 and the next
pandemic, people will probably build these into their business plans going forward."

Simple and mighty is mighty no more

The correct number of warehouses in the decade of e-commerce growth before the
coronavirus was as few as possible, while meeting service goals. 

"Ten years ago, two DCs for your network was a pretty common answer. If you put
something shifted towards the West Coast and something shifted towards the East
Coast, you can get to 80% of the volume on a one-day truckload type basis. And
that's pretty efficient," Russ Kushner, senior engagement director at Manhattan
Associates, said.

Amazon's two-day and then one-day Prime service made fulfillment speed a

paramount competitive advantage in e-commerce and required more warehouses to
achieve faster deliveries while maintaining margins.

"Brands need to get crafty right now to survive and thrive long past our
current circumstances."
 
Tim Hinckley
Chief Commercial Officer, Radial

For any shippers unconvinced or somehow immune to the need for speed, the
coronavirus introduced new motivations for a more complex fulfillment network.

"Single DC operations … they can look really good on paper when you're managing
inventory carrying costs and a workforce and a variety of things. But somebody gets
tested COVID-19 positive and boom, you're done for a while," Glenn Gooding,
president of iDrive Logistics, said.

In the most simplistic terms possible, the more fulfillment options within a network,
the less the risk the network will lose core fulfillment capacity. To compensate for
that risk, unit economics may have to suffer in the near-term if they haven't already,
said Gooding.

Some retailers, particularly essential retailers seeing holiday-levels of revenue during

the pandemic, may be able to invest in new assets in the near term. Others,

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especially nonessential businesses, may seek out fulfillment contingencies within
existing assets.

Some retailers, most prominently Target, discovered before the pandemic that store
networks can offer fulfillment optimization opportunities too if digital infrastructure
and tools are in place to route orders to them. When non-essential retailers had to
close their doors, more retailers warmed to the idea — DSW and Levi's quickly got
into gear.

"Brands need to get crafty right now to survive and thrive long past our current
circumstances. One method we've seen especially useful is the use of stores as
mini-fulfillment centers," Radial Chief Commercial Officer Tim Hinckley said.

One of Manhattan Associates' clients vowed to stage a hardware kit for e-commerce
shipping in every store in a fleet of hundreds going forward, just in case, Mahan said.
While store fulfillment is a good option, she said, shipping from hundreds of stores
may be overkill.

This may be a case, she said, where the clients' desire for uninterrupted operations
superseded cost-benefit analysis. "I think pick 10% of my stores … to operate from if
I have to," she said. Having the costs of such a shift modeled out before a crisis hits,
along with operational readiness, is a big part of preparedness too. Getting stores
ready to ship e-commerce orders can be pretty quick — up and running in a matter
of days — said Mahan, but only if inventory visibility is complete and fidelity is high.

Is in-sourcing on the way out?

Ship-from-store is a helpful contingency in times of extreme disruption, but it doesn't

replace a well-designed logistics network for all shippers — especially those without
hundreds of stores to deputize for fulfillment. For shippers who decide a wholesale
network change is a best-case scenario for the future, COVID-19 presents a
quandary unlike any disaster in modern retail operations. Even the largest hurricanes
have discreet areas of impact. The coronavirus abides by no such borders.

Fulfillment shifts are especially difficult for asset-heavy operators, and for the better
part of the last decade, retailers have been slowly taking e-commerce fulfillment in
hand.

"So many companies actually initially outsourced their e-commerce fulfillment, but it
added costs and many of them realized that and you moved mountains and earth to
bring it back in house," Dunlap said.

Ironically, those who've built immense in-sourced networks may lack the financial
flexibility to diversify, Daniel Binder, partner at Columbus Consulting, said.

The fixed nature of owned or leased fulfillment assets amid constant change may
send this trend in the opposite direction, according to Matthew White, strategist at
iDrive Logistics. "I think that that sense of insecurity among companies who are
running their own distribution warehouses will stick and it will create a trend that
favors outsourced," he said.

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Kushner added that though the lowest cost option for warehousing operations or
logistics will often be to stick with one provider, either in-sourced or a single third
party, having multiple partners to call on in a crisis is a plus.

Determining if the added cost of redundancy is worthwhile, Dunlap said, is a matter

of costing out the potential disruption that could come from not doing so. Today, the
costs of single-sourcing supply chain services may be all too apparent to those
struggling with closed fulfillment assets.

"So many companies actually initially outsourced their e-commerce

fulfillment, but it added costs and many of them realized that and you
moved mountains and earth to bring it back in house."
 
Joe Dunlap
Managing Director, CBRE

On-demand warehousing players like Ware2Go, Flowspace and Flexe claim to add
flexibility through redundancy to e-commerce fulfillment with about two weeks of
setup time compared to months, on average, to start up with a new third-party
logistics provider.

These providers offer dozens of warehouses and pay-as-you-go schemes. Paying

only for the space shippers use may also be a plus in times of wildly swinging
demand, Flowspace CEO Ben Eachus said. "Renting or leasing your own
warehouse space has typically been a relatively small part of someone's overall
fulfillment spend. But when volume is so volatile as it is now, it actually becomes
significant," he said.

"This whole situation feels like Black Friday or Cyber Monday, but it was a surprise. If
you look at what happens to supply chains during peak, that's exactly what folks do
— they pop up distribution in a parking lot … just enough to be able to hold more
inventory for that store. So [on-demand warehousing] is absolutely viable, but that
lead time to get those types of applications set up is typically longer than just turning
on a store," said Mahan.

Interest in Flowspace from potential clients in the early days of the pandemic was
motivated by cost savings just as much as operational assurances, according to its
CEO. "I think they're evaluating. It is obviously a very big decision to terminate a
lease or something like that, but I think there's definitely interest in what other
alternatives could look like," Eachus said.

True omnichannel is a necessity

No matter the changes shippers decide are needed to de-risk e-commerce logistics
as the U.S. rides the COVID-19 roller coaster, two things need to be in place before
anything else: liquidity and inventory.

Many e-commerce companies now won't be able to afford changes (other than
shrinking) to their logistics networks. In all cases, but especially those with cash flow
troubles, working with existing assets and ensuring optimum flexibility is key.

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"One of those long-term things is to have that global visibility to inventory so that
your entire network — whether it's a large distribution center or a store — they're all
enabled as potential inventory fulfillment points," said Kushner.

Ware2Go's Denton spoke of this type of omnichannel fulfillment flexibility like a

switch that retailers should be ready to turn on even if it doesn't operate every day.
He also said retailers may only be able to achieve the ultimate level of fulfillment
flexibility for the top 30 or so SKUs.

And it's not just a question of being able to ship from any network asset, Dunlap
explained. The goal is to be ready to ship any item, any format, from nearly
anywhere.

The barriers to doing so can be physical — related to inventory, training and supplies
— or digital, relating to warehouse management software.

Warehouses need to be ready ship one item or 10 pallets, Dunlap said, "I still think
that there are very few companies that are able to do that."

Article top image credit: Maersk

After COVID-19, is curbside delivery here to

stay?
The need for contactless fulfillment is spurring retailers of all sizes and categories to
pursue new pickup options that could last.

By: Caroline Jansen

After temporarily shutting their doors for months last year, many nonessential
retailers devised plans mapping out how they would reopen. For some, this meant a
phased approach, which included reducing store hours, limiting store traffic,
implementing additional cleaning procedures and utilizing fulfillment services like
curbside pickup. Though the latter has been around for years, the pandemic created
a surge in demand, from both retailers and consumers alike. 

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In a report from July 2019, Coresight Research said mass merchants were among
the most popular retailers to offer buy online, pickup in-store services. Of the
consumers surveyed that were already using buy online, pick up in-store (BOPIS),
about 50% said they did so at Walmart in the past year and 34% said Target.
Consumers at the time said they used the service to avoid shipping costs (64%), get
their goods faster (37%) or to access promotional offers or discounts (36%).

But with the onset of COVID-19, many consumers and retailers are using it to avoid
contact within stores, or where mandates forced nonessential businesses to
temporarily shutter, to serve as a fulfillment option for online orders.

Bed Bath & Beyond accelerated its rollout of BOPIS and contactless, curbside

delivery. The home retailer said last April that it converted around 25% of its stores in
the U.S. and Canada into regional fulfillment centers "almost doubling its digital
fulfillment capacity" to support a rise in online sales, with plans to expand the service
to at least 200 additional stores. Bed Bath & Beyond newly introduced curbside
pickup at its Harmon banner during the pandemic. 

Players like Dick's Sporting Goods and Hudson's Bay also leaned into the service
more than ever, but retail giants aren't the only ones touting the option. Smaller
companies like b8ta and Casper launched curbside pickup during the pandemic as
they transitioned to opening their stores gradually.

The integration of the service is answering a need from consumers. Adobe Analytics
recently found that buy online, pickup in-store orders surged 208% in April from the
year-ago period. A CommerceHub report emailed to Retail Dive also found that 59%
of consumers are more likely to use curbside pickup following the coronavirus
outbreak. And even when the pandemic subsides, 75% of consumers that
subscribed to multiple delivery services, like Amazon Prime, said they would likely
continue to opt for curbside delivery. 

The discussion forum on RetailWire asked its BrainTrust panel of retail experts the
following questions:

 Has curbside pickup become a bigger opportunity amid the pandemic or do

you see it as a temporary solution for most retailers? 
 What hurdles may the expansion of curbside pickup face?

Here are seven of the most insightful comments from the discussion. Comments
have been edited by Retail Dive for length and clarity.

A win-win for retailers and consumers, alike

Neil Saunders, Managing Director, GlobalData: This is undoubtedly one of the trends
that will stick post-virus. It is a win-win for consumers and retailers. From the
shopper point of view, it is convenient and quick; from the retailer point of view, it is
more cost-effective than delivering to home.

Target already had great success with its drive-up proposition before the crisis hit.
More retailers now see those same benefits and will develop their own permanent
propositions.

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There is a hurdle of managing the volume at peak times, something even Target
sometimes struggles with. You also need to have a suitable area for pickup to
happen – preferably not right in front of the store entrance where customers are
going in and out. Walmart has created separate areas for pickup which works well.

Curbside creates a higher level of convenience for shoppers

Ken Morris, Industry Thought Leader: Buy online and pickup at curb (BOPAC) is
something consumers have fully embraced and will expect in the future. The service
provides a higher level of convenience to the customer, the transaction can remain
contactless; adding a level of safety many customers will expect and require.
Retailers need to streamline the process with the use of beacons or license plate
recognition, the customer experience can be streamlined to improve efficiency and
eliminate customer wait times for BOPIS and BOPAC. Perhaps the store of the
future is really an automated pick, pack and pickup facility leveraging micro-
fulfillment instead of traditional point of sale.

The service is now a 'must have'

Lee Peterson, EVP Thought Leadership, Marketing, WD Partners: We did a study

five years ago on BOPIS and we were shocked at the strength of the results. You
can just multiply that by 10 now. It's no longer a "nice to have." Pickup at store
(where the retailer puts the goods in the trunk, by the way) is now a "must have."

Curbside misses out on the discovery aspect of a physical store

Bob Phibbs, President/CEO, The Retail Doctor: When the government closes your
store to browsing and requires only curbside delivery, I think it is safe to say this is
why the uptick was so swift. To assume everyone will be doing this at a mall or major
store misses the fundamental reason brick-and-mortar can be more profitable —
discovery. If stores are reduced to nothing more than warehouses, it simply isn't
sustainable or a competitive advantage. The merchandisers, salespeople, and the
rest of staff can juice sales a heck of a lot more than people driving up like an A&W.

The service is here to stay after COVID-19 subsides

Camille Schuster, President, Global Collaborations, Inc.: Curbside pickup is much

more convenient for the consumer than having to go into the store for pickup,
especially if there are a number of bags. For those who like shopping online or are
really short on time, curbside pickup is a very desirable option. It is not for everyone
because some consumers still want to shop in the store and some will want delivery
to their home. However, curbside pickup is even more desirable for those fearing
theft of packages left at the door. I say the option of curbside pickup is here to stay.

The pandemic accelerated what was likely already going to

happen

Gene Detroyer, Professor, International Business, Guizhou University of Finance &

Economics; Executive Director, Global Commerce Education: Curbside pickup has
always been a big opportunity. The difference is that the opportunity was going to
evolve slowly. Perhaps maximizing in the next five to 10 years.

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The pandemic situation has accelerated that quickly. While there will be a drop-off
after the pandemic slows, the levels will stay very high. It will not surprise me if the
post-pandemic levels are double that of the pre-pandemic levels.

As people are forced to try new things that they never imagined trying, they discover
the positives in many of these new behaviors. In this case, the positives are large
and focus on trends that customers value most these days — time and convenience.

Potential drop off in impulse purchases

Kevin Graff, President, Graff Retail: Retailers should be careful about "pushing"
curbside pickup as an option. Some customers may like it, but the drop off in impulse
sales makes this likely just another part of the race to the bottom. The brand
experience, discovery, personal connection and more all disappear. Curbside pickup
turns the store into just a warehouse. It may be a bedfellow retailers need to live with
… but don't cozy up to it too much.

Article top image credit: Permission granted by Roadie, Heather Hughes

The implications of shipping direct to consumer

On top of high costs, fast and free delivery expectations, and returns, brands also
put customer retention at risk by forfeiting control over the last mile.

By: Caroline Jansen

The coronavirus pandemic gave direct-to-consumer brands a boost at a time when

many in retail were hit hard. As consumers were advised to limit the number of trips
to physical stores, many sought out online retailers more than ever before.

"Given the lockdown and COVID, more and more people are using online ordering
and expecting to receive the shipment," said Morris Cohen, a professor of
manufacturing and logistics at the University of Pennsylvania's Wharton School of
Business and the co-director for the Fishman-Davidson Center for Service and
Operations Management. "Going to a store to pick something up is less attractive."

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However, the influx in customers shopping for goods online and discovering DTC
brands also highlighted existing problems, primarily when it comes to shipping.
Direct-to-consumer brands already had to handle shipping nearly every good sold to
customers, but when nonessential retailers were forced to shutter stores at the
beginning of the pandemic and shift their focus to also selling online, the increased
demand strained the system.

According to a 2020 report from Narvar, 36% of consumers experienced substantial

shipping delays during the pandemic. The report also found that the average time
between order placement and delivery handoff more than doubled from 1.9 days in
February to 4.3 days in April. And even Amazon wasn't immune from experiencing
disruptions that caused it to scale back its one-day delivery promises, limit
assortment and postpone its annual Prime Day event typically held in July.

The e-commerce first trend, and subsequent supply chain pressure, doesn't appear
to be subsiding. "Shipping companies are really, really facing big challenges to make
deliveries for this holiday," Ken Fenyo, president of Research & Advisory at
Coresight Research, said. "If you're not a big player, you may just be shut out. You
may not be able to get your products to the consumer in time for the holiday because
they just don't have the capacity. If you're smaller, you're not going to be one of the
ones they clear room for."

But even prior to the shipping headaches brought on by the pandemic, DTC brands
faced their own struggles.

The pressure to offer fast and free delivery

Amazon has fueled consumer expectations for fast delivery and to do it at no cost to
the consumer. In fact, according to a Scalefast report from early March 2020, 43% of
consumers said they would choose to shop with Amazon over a direct-to-consumer
brand because the e-commerce giant offers cheaper or free shipping, while 36%
preferred Amazon because it ships faster.

"Consumers dislike paying for shipping. They're not very tolerant of delays or lack of
information," Fenyo said. 

But for direct-to-consumer companies that are operating at a fraction of Amazon's

size, meeting those expectations can be challenging.

"I know for a fact that some of them have regret," Santiago Gallino, a professor of
operations, information and decisions at University of Pennsylvania's Wharton
School of Business, said. Some direct-to-consumer brands have been "starting with
some very generous policies in terms of delivery and returns because it's a great tool
to acquire a customer. But then as you grow, it can become very costly to maintain
and to keep that promise."

"If you're selling fashion apparel, you may end up with three, four
shippings every couple of months to the same customer. I think that in
that case, the shipping, and the returns especially, have a big impact on
the whole operation."
 
Santiago Gallino

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Professor of operations, information and decisions, University of Pennsylvania's
Wharton School of Business

Direct-to-consumer brands, at their size, can't compete with a behemoth like Amazon
on free 24- or 48-hour delivery, according to Michael Felice, a principal in the
consumer practice of Kearney. "Push that back ... and maybe reinvest 10% to 20%
into consumer experience and building the brand, which will also build that
repeatability of the purchase and the overall customer loyalty," he said.

Aside from increasingly difficult expectations around delivery, brands also have to
consider other logistical hurdles when they're operating almost entirely online.
Gallino said it comes down to two things when considering the costs companies
grapple with when shipping their products: the size of the product and the frequency
of shipments.

A company like Casper may have a harder time with the former because "delivering
a mattress — it's bulky, it's big, it's scary." But it's also important to note, mattresses
are a fairly infrequent purchase, so volume is less of an issue for them than it is for
those selling in other categories online. When considering an apparel retailer like
Bonobos, though, the products "are usually not so heavy, but [there are] a lot more
shippings," Gallino said. "If you're selling fashion apparel, you may end up with three,
four shippings every couple of months to the same customer. I think that in that case,
the shipping, and the returns especially, have a big impact on the whole operation."

Handling returns

There's a level of uncertainty buying products online when the consumer can't touch
and feel the product before purchasing, increasing the likelihood of
returns. According to Narvar, 62% of consumers reported bracketing this year —
buying multiple versions of the same item to try on and see which one works best —
representing a 50% increase in just three years. 

"Shipping is expensive," Fenyo said. "It's prone to delays that you can't necessarily
control, and your returns become a very big headache because not only are you
paying for the shipping on the way out, assuming you're offering free shipping ... you
have to pay for it on the way back as well."

Casper, for example, offers free shipping and returns, and will actually send
someone into your home to pick up larger items, like its mattresses. According to its
policy, returned mattresses and other large products will be recycled or donated to a
local charity, though some localities require the brand to dispose of the bed, making
return mitigation especially dire to prevent wasted product. However, Casper accepts
returns of smaller items like dog beds, bedding and pillows to most of its brick-and-
mortar locations.

And while brands tend to open physical locations to serve as a marketing tool in
acquiring customers, they certainly help make consumers feel more confident in their
purchases, Gallino said. But even more, they serve as an access point for the
customer to pick up and return goods, helping to mitigate costs.

Coresight anticipates that more physical stores will serve as "mini fulfillment
centers," particularly in areas that are densely populated, CEO Deborah Weinswig
said in a recent report emailed to Retail Dive.
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Some brands have also formed partnerships with traditional retailers, for example
Quip and Versed have formed partnerships with Target. However, "depending on the
end product value, many of these [shipping] costs are preferable to margin loss via a
retail partner," John Carey, managing director in the technology practice of AArete,
said in an email.

Another strategy brands can adopt to help prevent returns from the start is ensuring
product pages are well detailed and investing in tech to provide greater clarity.
Furniture brand Burrow incorporated an augmented reality feature on its website so
consumers could see what products would look like in their own homes, while
Glossier added images of what its makeup shades would look like on various skin
tones to its product pages.

Of course, it's impossible to do away with 100% of returns, Felice said, "but trying to
mitigate them with order accuracy and creating a real augmented feel for the
consumer is important."

The problems with last mile

A large purchase like a sofa is delivered and set up inside the home, so a poor
delivery experience can really make or break a customer's perception of a brand. A
majority of brands outsource their last-mile to third parties, which allows the brand
itself to focus on other areas of growing the business, but it may introduce new
problems.

"Most of these companies, when they reach a certain scale, they use third-party
vendors that provide this service for them," Gallino said. "Then they can focus on
their strength — that is developing the brand, thinking about new products,
answering questions and helping support customers. They are not focused or
worried about their fulfillment, managing returns and so on and so forth."

But that also places control of the last-mile experience into those third parties, which
may not have a vested interest in creating lasting bonds with the customer. Anything
that goes wrong in the experience — not showing up on time, tracking mud in the
home or damaging the product — the customer will associate with the brand itself.
And for an investment piece like a sofa — a purchase made somewhat infrequently
— it's particularly important for brands to form lasting bonds and retain customers.

A bad delivery experience is "basically throwing away all the effort that has been
made in acquiring the customer. Making the customer have a great experience
online and then losing that momentum with the customer at the moment of the
delivery," Gallino said. 

Article, an online furniture and home decor brand, in January 2019 launched an in-
house delivery service in order to have more control over the end-to-end customer
experience. The brand cited the complexity of delivering large items, often resulting
in a poor delivery experience for the consumer, as the reason why it brought last-
mile delivery in house. When it launched, Article said negative feedback had gone
down as much as 83% in areas where the service was deployed. 

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"Article's high-value product and the extensive range of furniture it offers make it
more attractive to incorporate an end-to-end service, extending all the way to the
customer's front door," Carey said. 

Brands employing last-mile delivery personnel also allows them to have a physical
touchpoint with customers if they don't operate offline. And, in the case of Article, the
delivery trucks driving around cities serve as an additional marketing channel. "When
direct-to-consumer brands lack street presence in the form of stores, you could think
of their trucks as street presence in the form of mobile billboards," Carey said.

But taking on the responsibility of handling last-mile can introduce new obstacles,
including limiting a brand's ability to enter new markets both domestically and
internationally, Carey added. Making delivery a key focus of the business also poses
the risk of "taking your eye off customer acquisition, engagement, community,
loyalty," Felice said.

And for the categories that ship smaller goods that don't require setup upon arrival,
the benefits of an in-house delivery service may not outweigh the costs involved.
Instead, those brands should focus on other aspects of improving the customer
experience, including packaging and how a brand presents its products when
someone from its team isn't handing the package to you.

"Not losing track of the experience with the customer post-purchase to delivery, I
think is critical in owning that excitement when they open [the package]," Felice said.

Article top image credit: Photo illustration by Danielle Ternes/Retail Dive; photograph
by NYS444, carlosalvarez, kyoshino, Topae, Scovad and AaronAmat via Getty
Images

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