Study Shows Staggering Fulfillment Costs for Omnichannel Retailing

By Arthur Zaczkiewicz

Key shopping events like Cyber Monday are tailor-made for mobile.

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In a Think Tank column published in the fall in WWD, Antony Karabus, chief executive officer of HRC Advisory, noted that the “Amazon effect” was pushing retailers “to shed a disproportionate amount of their capital spend on e-commerce, despite the reality that most of their profits are still coming from their brick-and-mortar sales.”

Indeed, investments to expand e-commerce have been undertaken by nearly every top U.S. retailer including Wal-Mart Stores Inc., Target Corp., Macy’s Inc. and J.C. Penney & Co. As a result, online sales have reached $201 billion in the U.S., according to eMarketer. But as Karabus notes, the investments made to achieve these sales erode profits.

And according to recent data from EKN Research working in partnership with Aptos Inc. (formerly known as Epicor Retail), fulfillment costs alone garner 18 percent on each dollar of sales to “satisfy today’s customer expectations of buy anywhere, pick up anywhere.”

The analysts at EKN and Aptos applied that 18 percent metric to the $3.07 billion of estimated online sales from this past year’s Cyber Monday and it showed that U.S. retailers “would have spent $540 million on that one single day to get their products into customers’ hands.”

Noel Goggin, ceo of Aptos, said the study serves as a “huge wake-up call to retailers.”

“As traditional store-based purchases continue to decrease and omnichannel transactions continue to increase, ‘runaway’ order management and fulfilment costs have the potential to devastate the bottom line of retailers in virtually every category,” Goggin said.

EKN researchers found that 80 percent of retailers polled “reported an increase in order management and fulfillment costs compared with last year, with an average year-on-year increase of 5.07 percent.” Fifty percent of respondents said that “devising sustainable fulfillment strategies in the wake of consumers’ expectations for free shipping” was the biggest order management-related business challenge they face.

Moreover, the researchers said retailers are likely unaware that orders are not being profitably fulfilled. “To make matters worse, most retailers still measure these fulfillment costs ‘below the line’ on their balance sheets,” the EKN analysts said in their report. “Consequently, these costs are not always integrated into the cost of goods sold. Merchants are therefore not accounting for them when making planning and purchasing decisions.”

EKN noted that 80 percent retailers surveyed “are offering standard, expedited or second-day order delivery.” And 73 percent offer next day shipping, and “only four in 10 currently offer same-day shipping.” But that is changing. The researchers said that over the next two years “same-day shipping is expected to reach 75 percent saturation.”

EKN’s recommendations include setting goals that including creating “efficient, scalable and repeatable processes throughout the order management life cycle.”

Sahir Anand, EKN’s vice president of research and principal analyst, said “a lack of end-to-end order management visibility severely inhibits effective decision-making, productivity and enterprise effectiveness. Many of the retailers surveyed recognize this must quickly become a priority investment, with almost half of respondents (48 percent) identifying improvements to end-to-end order management visibility as a key area of focus in 2016.”