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Retail and the last mile.

by Keith Hart

The traditional retail store is under attack. And the Internet and consumer direct players are the ones on the offensive.

The traditional retail selling channel is a paradox in many ways. While it is one of the most inefficient means of delivering goods to home - it is also one of the most efficient.

Take the grocery supply chain, for example. There is excessive material handling here - by the time a good has reached your home it has been touched over 15 times as it goes from the manufacturer to the distribution centre, then the retailer and the consumer. In addition, there is inventory everywhere. The average grocery store carries 15,000 items yet most consumers purchase the same 200 items over and over again, so many items do not move. Finally, the cost of the retail channel itself is significant with a large labor and real estate component. It's inefficient. On the other hand, the retailer depends on the consumer to do most of the work. The consumer has to get in his car, drive to the store, park and not bend any fenders, do his own picking, packing and bagging and then drive home. That's efficient. It's efficient for retail, but galling and inconvenient for the two-thirds of consumers who dislike grocery shopping and think of it as a chore. This is the compromise made to reduce the cost of shopping.

Enter the Internet and the revived concept of Consumer Direct, which is the concept underlying the dis-intermediating of retail for those consumers who are predisposed to convenience. Collapse the supply chain by shipping goods direct to the home. Bypass retail and - presto - you have created a whole new channel around the residential supply chain. The economics of this model are essentially a tradeoff against traditional retail: you give up the store costs but pick up the costs of picking, bagging, loading and delivery that the consumer once performed for free. This is the birth of a new model for business.

The aspects of retail that made it so compelling are lost in Consumer Direct - customer density with stores nearby, the ability to look and feel the merchandise, the sense of instant gratification. But a new customer value proposition replaces them.

Core consumers are predominantly women with families, and like most families, starved for time. Competitive pricing and a broad selection may be an entry ticket for the Customer Direct business. But convenience and service coupled with flawless execution are the differentiators that drive it. The core capabilities in this new industry, not surprisingly, are driven by logistics execution and information technology and support the customer value proposition around convenience and service.

The Experts Told Us: "Retail is Dying. The Internet and UPS will kill it."

The early pundits cried "wolf" when they looked at the "traditional retailer."

They think they have a great store experience - research shows that 50 percent of people in stores hate shopping. Two-thirds of these people do not like shopping for groceries.

They think consumers just have to "touch & feel" before they buy. In fact, this damages the goods and then no one will buy them. This is true to a certain extent for apparel, fresh fruit and even consumer durables (just check the great prices on display models on final sale).

They think consumers "must have it now." Yet no one will take the last item on the shelf. In addition, the time spent going to the store, shopping and coming back is a premium when "quality time" is in such short supply for most of us and the cold chain for fresh and frozen goods is a very delicate balance that most shoppers rupture in perfect ignorance.

Most consumers will forego instant gratification for dependable supply without inconvenience, with the probable exception of products that are purchased for immediate consumption - ice cream cones, emergency medication or spares, etc.

The retail industry is alive and very well, thank you.

Whole new capabilities must be built, and with speed. A residential-delivery network has to be built, an expertise in single-item picking and packing at high volumes, and an information technology integration skill to blend the whole package together. If at any point in the execution the consumer is forced to go to the store, the value proposition falls down. Case in point: I order a book online and I'm not there to receive it. I receive a note saying I can pick it up a my closest post office outlet during post office hours. There isn't any convenience in this.

"And Now For Something Completely Different"

Here is where the Internet comes in... Touted as a brave new channel that has already captured consumers' hearts and wallets to the tune of $10 billion last year in the United States alone, the actual track record remains patchy. When the dust settled after last years' Christmas Season, Resource Marketing spent 20 hours on each of the top 50 Business-to-Consumer (B-to-C) sites and evaluated performance based 88 criteria. The findings remain frightening - on 25 percent of the sites, the researchers were unable to place an order, then 20 percent of the deliveries were late or never arrived, and on 36 percent of the sites customer service was busy or unhelpful. Is it really surprising that 88 percent of shoppers abandon an order before they made a purchase? It's interesting to note that the more successful sites were generally pure e-tailers like Garden.com, Cooking.com, Fogdog and Amazon. The worst site were often "clicks & bricks" like Walmart, Disneystore and Toys R Us.

Notwithstanding, the leading e-tailers are now well beyond sloughing data entry onto their customers - they are building an online experience. Amazon.com and, to a certain extent, the Canadian nemesis Chapters, have built an online shopping experience beyond "better than in the store." It is far easier to find what you are looking for, and the store can tell you what other products (books) others have bought who happened to purchase the same product as you. They also can tell you what is "hot" at a certain company, or in a certain industry, geography, socioeconomic class, etc. But Fedex loses money on each home delivery.

Truth be told, retail may be under attack. But no Consumer Direct player has shown how to do it economically. The fuel for this attack is, after all, the capital market. Now that this well may be drying up, Consumer Direct players will be forced to show earlier profitability.

How Does This Work?

Profitability can be achieved. It requires scale, military precision in execution and a healthy dash of customer service. It is absolutely imperative to have in-stock positions for the entire range offered. You cannot make an item substitution on behalf of your customer. Therefore the supply chain must be tightly coupled to information about sales, inventories, inbound supply, specials, forecasts, customer ordering patterns, etc.

Deliveries must be on time, and offered within small delivery time windows. The operation must have very high picking accuracies and possess quick order to delivery cycle times, and it must be low cost.

The economics of the Consumer Direct industry are daunting at first. High assets, high labor intensity, compressed order to deliver cycle time, high dependence on unproven systems - collectively leave little wiggle room. On paper, the cost of driving an order in the grocery industry to the home is similar to the cost of delivering that order to a retail store, about $20-$24 per order. In practice, no one has done it but many players are trending there. On the sales side, there's no doubt that big volumes help. High average baskets and high delivery density are absolutely core to the economics of the Direct to Consumer (DTC) model.

That's why the grocery sector fits neatly with this model. Frequent purchases, which also build loyalty, and high basket values means there is enough money in the traditional supply chain to release and pay for the tasks that were performed by the consumer. Some dot com retailers will have to change their business model to survive because either their average basket is too small (Kozmo) or the product is too much of a commodity for there to be meaningful barriers to switching (e.g., any pet Internet retailer) and they have to "buy" their customer time and time again, driving up customer acquisition costs.

On the cost side, volume also helps. A successful DTC operation will be very labor intensive. Since squeezing costs is a critical success factor, automation will help. But for this to be economically viable, there must be enough volume. Large and automated facilities are the key to reducing picking and packing labor and managing inventory. It helps to think of this as high speed manufacturing. These operations are very process driven, and must be balanced with the delivery end to ensure short delivery cycles and good productivity. Volume also improves route density, which is critical for delivery economics, and allows for an improvement in gross margin on the buy side.

Technology to the Rescue

The convergence of technologies will further enable the model (as shown above). They'll lower costs and increase loyalty. For instance, we are only now seeing truly sophisticated transportation management systems geared to residential deliveries, single item picking software, consumer personalization software. But buyer beware - none of these systems are ready for plug and play. That's why most Direct to Consumer players are investing heavily in information integration skills in order to tie these disparate systems together seamlessly.

With Capital Drying-up, There Will be a Shakeout Sooner Rather than Later

Who remains standing to carry it out - converted bricks and mortar players or standalone and deep-pocketed consumer direct players - remains to be seen. What is clear is that they will have to have the speed to launch, hit break-even volumes, adapt to competition.

The early players are trying to lay down first-mover infrastructure. The economics today are similar to the early days of the telecom boom, and building a residential delivery capability is much like laying telephone cable. It is very asset intensive and costly, but once it's in, it's hard to replicate.

Oddly enough, the response of traditional retailers has been muted to date, probably because this is still a small segment (e.g., in grocery retail projected to be five percent in five years). It is also an asset intensive business in non-core areas for their management, plus, there are complicated logistical challenges that could damage established brand and banner names, the economics remain unproven and their established cultures are unsuited for startups.

Traditional bricks and mortarConsumer Direct
PushPull
Transactional environmentService environment
They invite you to their storesYou invite them to your home
Distribution cultureHigh speed manufacturing culture
Locations as assetsCustomers as assets
StableDynamic
Vertically integratedVertically integrated
Information poorInformation rich
Mass marketingMass customization
Pallet/FTL efficienciesSingle-item picking
IT as an enabler and inwardIT as a centrepiece and outward

But retailers have huge assets to bring to the table: established and trusted brand names, huge customer bases, product/purchasing expertise, to name but three. Ultimately there may well be a merging of both.

Grocery Gateway is Building an Unbeatable Consumer Experience

This is the story of how Grocery Gateway is building an unbeatable consumer experience in the tough grocery business, from the moment they log on the Internet until they enjoy the products at the dinner table.

Mrs. Smith was born to shop, but for groceries? No way. It's 7.44 p.m. Mrs. Smith has logged on for her week's worth of grocery shopping. She picks up her normal shopping list, deletes the wipes and eggs she still has plenty of, adds dish washer powder, then turns to the specials to select a roast for the dinner party on Saturday and to look for ideas for little Jack's sixth birthday party. She also sees that now she can buy shampoo and pet food at the same time, so she adds a bag of dog food ("better than carrying it home!").

At 7.52 p.m., she has filled her shopping cart and she checks out. The total is $163.52, and she is offered delivery tonight between 10 p.m. and 11 p.m. (she is a regular customer, and it's a quiet night in the warehouse), or tomorrow anytime from 4 p.m. to 9 p.m.. She lives in a high-density area, so there is always a delivery truck in her area. She chooses 5.30-6:00 p.m. tomorrow. She clicks to accept and the order is placed. Then the gears start rolling behind the scenes. Her order is part of the work ready when the morning picking team arrives at 6 a.m. It has first been automatically routed and then broken down into picking directives by the warehouse management system. At 8:00 a.m. the warehouse management system releases her order to the picking floor. Her order is part of a wave of 100 orders which will get picked within one hour - that's one order every 36 seconds. Her products are picked into six different totes in four different temperature controlled areas of the warehouse including chilled and frozen.

Pickers using sophisticated technology to ensure accuracy and speed carefully pick and pack her order as her totes come within their pick zone. Once her order is complete, it will then be conveyored to the loading dock where it is directed to the right vehicle and scanned and loaded into a truck that will be serving 26 other Grocery Gateway customers, two of them on her street, and five others in the same development.

The trucks and the totes are custom designed for this application and keep the products at the right temperature. The driving shift arrives for work at 2:30 p.m. Fred, one of the drivers, starts the engine of his truck at 2:38 p.m. and drives off on his delivery route. At 5.33 p.m., the grocery Gateway truck stops in front of Mrs. Smith's home. Fred unloads his trolley and loads up the six totes with Mrs. Smith's order. He takes off his shoes and takes it into the kitchen and unloads the totes onto the counter. Along the way he asks how Mrs. Smith's order last week was and wishes Jack a Happy Birthday. Mrs. Smith chooses to pay with Interac and Fred processes her card with the wireless payment terminal. At 5.41 p.m., Fred gets into his truck and drives five houses up the street for his next delivery.