Making the Most of Online Retailing and Omni Channel When Recovering Sales and Profitability After Covid

15th October 2020

Introduction

The Covid-19 pandemic has wreaked havoc on retailing world wide. It will continue to do so for several years to come, though it may do so in different forms to past experience.

Some retailer segments have done well during the pandemic and witnessed growth in sales and, in some cases, improved gross margins due to less need for promotional markdowns. Other segments have not done so well.

Almost all retailers saw large percentage increases in online sales and a new wave of consumers has got used to shopping online. A percentage of the increase may return to brick and mortar stores but a lot of it will not. Indeed, in the run up to Christmas, it is likely that online will grow its share of sales even further given the way the level of Covid infections is rising again.

In countries where online did really well, large numbers of stores may close, perhaps up to 25% of the total store numbers. Of course, it won’t be evenly spread and some of those stores will be taken up by those companies fortunate enough to be expanding.

So far, much of the response to the pandemic has been to focus on Covid related safety precautions in stores and supply chains, to help make consumers feel safe shopping again. While this has been an essential investment, it does nothing but remind consumers of how dangerous the virus is and how safe online shopping looks in comparison

The growth of online sales is both a blessing and a curse. It’s a blessing because retailers can continue to sell during lockdowns or other restrictions in customer freedom of movement and while large segments of customers are keen to avoid visiting stores. It’s a curse because online sales are mostly less profitable than sales made in stores. So growing online sales at the expense of stores reduces net profit! Surprisingly, not many retailers understand this. Getting consumers back in stores is essential to the survival and long term prosperity of many retailers and the companies in their supply chains.

However, online shopping is now so popular that most retailers have no choice but to trade online and hence part of their strategy for recovering sales and profitability and positioning their businesses for long term prosperity is to understand how to do it in the most profitable way they can. That is the subject of this article.

First let’s review some of the cost factors and how they differ between online and brick and mortar.

The table above explains why online retailing is proportionately less profitable than store based retailing. So how can you make online retailing more profitable? The table below gives one set of factors.

Click and collect was the fastest growing element of online sales before the start of the Covid pandemic trending towards 40% and sometimes 50% of online sales. During lockdown it stopped completely because all non-essential stores were closed. Now stores are open again it has not yet regained its former share of online sales. This is something to address as the table above shows that it reduces costs.

During lockdown, some retailers were able to offer BOPAC. In this situation the customer orders online. Store staff or warehouse staff, depending on circumstances, pick the order and send the customer an email saying when the order will be ready to collect, say 2pm on Tuesday. Customers pay when they order. The customer visits the store from that time onwards at their convenience. They park at the store entrance area and in some cases at a special reserved parking area in a shopping mall car park. Store staff ask for their order number when they arrive and bring the order out to their car maintaining social distancing. Now stores are open again those retailers offering BOPAC have continued to offer the service and customers continue to use it. In some cases, having put the ordered goods in their car, they then park the car and pop into the store anyway. This may sound strange, but what they are doing is minimizing their time in the store and their indoor exposure.

If you can do BOPIS or BOPAC, it’s a good strategy for getting people into the store and overcoming their fears. And, you can fulfil the order from store stock if you have good visibility of store inventory reducing the cost of online orders.

Most retailers that offer BOPIS pick the order at the ecommerce warehouse and ship the stock to the store ready for the customer to collect. They do this because they can’t rely on the accuracy of their store stock records at SKU level, so they pick and ship the order to avoid letting the customer down. The goods go on the same truck as the regular store replenishment, so it is not as expensive as delivering to customer homes. Some grocers in the US will only do BOPIS but mostly they use the third option and fulfil from store stock, because their volume of sales allows them to carry higher in store inventories. This is the cheapest of the three options, but you do have to trust your store stock records. A few retailers use RFID to help guarantee their service level and this trend will grow.

Retailers using hand held terminals in the DC and also for receiving in store, can eliminate virtually all the picking cost as well. They do this by adding the BOPIS order quantities to the normal store replenishment order. The goods are picked in the normal way and shipped as part of the replenishment shipment. At the destination store the goods are scanned in and an alert tells the receiver to set a number of units aside for customers collecting in store. These are then routed to a dedicated customer service area in the store. Extra handling is thus minimal. Adidas is an example of a company doing this.

If your store stock accuracy is good enough, when you take an online order and you have overstocks in certain stores, you could fulfil the order from a store with one of the worst overstocks. The staff cost to pack the goods for shipping and the postage will be a lot less than taking a 40% to 60% markdown later on in the season. This relies on the fact that you do weekly re-forecasting of the season outturn for each SKU in each store, so that you can identify the potential overstocks that you would otherwise mark down later in the season.

It’s likely that you will experience an increased share of your total sales from essentials or basics, rather than seasonal or fashion items. As we said in earlier articles it is very important in the Covid environment to have high on shelf availability for essentials. Assuming you do this, it reduces the need to fulfil all BOPIS orders from central warehouse stocks, thereby contributing to improved net margins.

 

Bonobos Strategy

Bonobos is a US company now owned by Wal-Mart. They are a menswear fashion retailer. They don’t have stock you can buy and take away, everything is showroom stock.

For each product they carry one of each size so that customers can try them on for fit. Each size will be a different colour so you can see the colour choices. If there are more colours than sizes they will add a duplicate size in the new colour so all colour choices are available to be examined.

 

 

The customer can browse items, try them on and when they have decided what to buy a store sales associate will place an online order for them. The order could be delivered to the customer’s home or to the store as the customer prefers. A store delivery is always appropriate if the garment is likely to need some alteration.

The Bonobos strategy is a way of having showroom only stock in stores, thereby minimising stock investment. This approach not only means less stock in stores it also means less safety stock in the warehouse. Since safety stock can be 60% of total stock, this can be a valuable reduction, both in money tied up in stock and the financial carrying cost of the inventory. If you have a good online operation, even if the scale is small now, this can be a good option for operating at lower cost and you don’t necessarily have to do it for all departments.

Made.com is a UK furniture retailer. They run a very similar business model and the only furniture stock is the display item. They do hold stocks of things like the higher selling table lamps which customers can buy and take away.

 

Assortment Planning Options

Most retailers have a portfolio of different sized stores. Suppose we have an autumn/winter assortment of ladies slacks. Two colours – navy and black are basics. These colours are the two biggest sellers and appear in the assortment every year. The other 4 colours are this year’s fashion colours. Big stores get the complete selection.

The sales in smaller stores do not justify the full range of colours. Based on sales projections, a logical answer might be to have the two basic colours plus one or perhaps two fashion colours.
Unfortunately, this does not project a fashion image so many retailers force in extra colours to make the store look more like a fashion store. The penalty for this is that towards the end of the season they end up taking bigger markdowns on the fashion colours because they now have excess inventory. This damages profit recovery.

Some retailers have adopted a different approach which maintains their inventory investment at a sensible level but presents a better fashion image to the consumer, and protects sales at the same time. The idea is that in the smaller stores the inventory is primarily invested in the fashion colours so the store has a reasonable fashion range. The non-fashion colours – navy and black in this case – have display stock but no backing stock. Consumers can order the basic colours in the store or online for home delivery, or as click and collect a day or two later. This is an omni-channel approach to assortment management.

Now, in the pandemic, it’s the wrong strategy. Consumers want basics, so the right answer now is to swap the labels showroom and stocked over in the chart above, so navy and black are stocked again and perhaps one or two fashion colours are stocked as well. The others are online order only. This is the right answer now, but be aware, that as the Covid threat reduces, a point will come where consumers revert to their original interests and you will need to adjust your strategy at the appropriate time.

This will be true in a number of other areas in the business too and this underlines the need to review all trends frequently and respond to changes quickly.

This example is a clothing example but applies equally to other categories. For example, televisions have many brands and many models and customers are often spoilt for choice. This approach will work equally well for TVs.

 

Summary

Online retail is here to stay and is an essential channel for most retailers. There are some exceptions like Dollar/Pound stores and convenience stores plus retailers like Primark, where the gross margin per item is too low to accept the lower net margins from online retail.

Omni-channel retailers have an advantage over pure play online retailers as they can get the benefits of online while improving the achieved net margin compared to pure play online companies.

As an omni-channel retailer, there are a number of significant steps you can take to improve the profit contribution of your online channel while providing services to encourage shoppers back into stores.

In future articles in this series we will explore other ways of improving profitability as you adjust your business processes to cope with the impact of Covid in the most effective ways possible.

Coming soon we will also be launching a program of live webinars to help retailers and consumer goods manufacturers develop their own strategies plans for their long term profitable recovery from Covid. These webinars will also help suppliers of services and technology to retailers and consumer goods companies to help them support their retail accounts in the most effective ways.


0 Comments
Leave a reply

You must be logged in to leave a comment.

Back