After years of fits and starts, omnichannel has arrived at a store (and smartphone) near you. To paraphrase Churchill, “It’s not the end, it’s not the beginning of the end, but it may very well be the end of the beginning.” This end-of-the-beginning is characterized by myriad fulfillment choices available to consumers and a fighting back against Amazon on the part of incumbent brick-and-mortar retailers. It is also characterized by consumer goods companies establishing much more direct relationships with their end consumers, and business-to-business (B2B) companies increasingly implementing consumer-like relationships with their customers. As the holiday buying season hits full stride, this topic is once again top-of-mind. The Wall St. Journal last week published an article titled “Black Friday Shoppers Beware: Online Shopping Gets More Complicated,” which profiles some of the different fulfillment options retailers are offering to consumers. (This, of course, also raises the question of when too much choice is too much).
Break-Even Proposition
Companies have experimented with technologies and techniques for all sorts of permutations involving the commingling of online buying with physical stores. This end-of-the-beginning phase has largely been about investing, capturing revenue, and maintaining relevancy with consumers. In other words, it’s about living to fight another day when profitability on the captured revenue will (hopefully) arrive. Thus far, ecommerce revenue is still largely at best a break-even proposition, even for Amazon (see Amazon Value Chain Analysis). In fact, Amazon has driven other retailers (and manufacturers) to dilute their margins in order to compete. The Jeff Bezos quote “your margin is my opportunity,” provides a reasonable summary of Amazon’s multi-industry penetration strategy.
In this invest-or-die environment, those companies with compromised balance sheets will likely die just as many others have in the past several years (see “Toys R Us: Debt Kills; Absolute Debt Kills Absolutely”). From the reports of this holiday shopping season, it seems that retailers have finally sorted out how and where to invest in pursuit of omnichannel revenue. Experimentation and trial-and-error have led to implementations that have taken hold. The Walmart $3.3B acquisition of Jet.com now seems like a brilliant move and, with today’s elevated tech valuations where software companies trade at between six- and seven-times revenue, it also seems like a reasonable price; this is particularly true when you consider time-to-market. Still, this appears to be just the end-of-the-beginning, which augers well for all involved, even if it’s likely to be a rocky ride in the coming years.
Show Me the Money
At some point, ecommerce profitability will become not just a part of the discussion, but also a condition of survival. The end-of-the-beginning is starting to show more signs of a show-me-the-money attitude to profitability, even for Amazon (As retailers spend to chase e-commerce, investors grow impatient).
There is little doubt that many retailers already know how they could drive profitability; most of this is in the area of pricing and shipping costs. But raising prices in today’s environment is seldom an option. Walmart created a stir last year when it decided to raise the online price of some of its products, creating two-tier pricing between online and in-store. Bob Crandall, former CEO of American Airlines once noted that he had a lot of sophisticated computer systems but when it came to pricing, he was “only as good as his dumbest competitor.” The pricing analogy holds in retail, but the dumb comment doesn’t, because in this case, Amazon’s ecommerce may not be profitable, but its supply chain generates billions in cash that can keep the flywheel going.
One area where Amazon and other retailers are attempting to defray fulfillment costs is through “fulfillment shaping.” This is a variation of demand shaping where the customer is offered a discount in exchange for a longer (and cheaper) shipping lead time. Fulfillment shaping is an area of opportunity that could offer significant savings. Amazon has now commingled Whole Foods into the equation by offering a store credit for accepting a longer shipping lead time.
Ten Steps to Omnichannel Profit
The good news is that that most retailers are now looking at omnichannel as an end-to-end strategy, whereas several years ago, it was largely a front-end activity. Three years ago, I wrote a paper titled “Ten steps on the path to profitable omnichannel growth,” which was published in Supply Chain Quarterly magazine. This paper outlines an end-to-end omnichannel strategy. It’s worth revisiting this in the context of the last three years of industry progress. The steps are enumerated here and discussed in more detail in the referenced paper.
Implement flexible, many-to-many relationships in your physical supply chain based on flexibility versus cost-to-serve trade-offs.
Enable stocking locations - whether they are warehouses, retail locations, or pickup points - to receive, pick, pack, store, and ship single orders, and to likewise handle returns.
Plan and execute localized assortments. Personalize based on data-driven personas.
Employ a common demand planning and management process across all channels, and incorporate big data and machine learning into the process.
Synchronize distribution planning, warehouse management, transportation management and store operations processes.
Implement a distributed order and inventory management system to provide a single view of orders and inventory and to execute orders across assets.
Deploy next generation profit-, constraint-, and allocation-based available-to-promise (ATP).
Synchronize returns with assortment, buying, and demand planning.
Create a learning loop between fulfillment, planning, and strategy.
Automate policy management from strategy to planning to execution through orchestration dashboards.
Looking back, it is clear that much progress has been made. But this is only the end-of-the-beginning. Retailers with compromised balance sheets have died. Those with the ability to invest are able to live to fight another day.
This brings us to the next phase – profitability. Margin compression will continue and at some point it will stabilize, as companies learn where they can seek profits and where they cannot. Unless something has changed in the nature of capitalism, it is unlikely that the entire industry will remain unprofitable in ecommerce forever. Having said that, it could last for some time; consider that up until recently the cumulative profits of the entire commercial airline industry over its 80 years of existence were negative.
Omnichannel is an information- and decision-rich environment. Each fulfillment option offers a different economic outcome, for both revenue and profitability. Those companies that can master these decisions at scale will win.