New consumer expectations
From health care to banking to retail, the growth of digital channels across nearly all aspects of our lives has raised expectations for retailers across four key areas:
Time
Consumers expect access to goods, services and information faster than ever before. Sixty-four percent of online shoppers expect orders placed by 5 p.m. to qualify for next-day shipping or delivery and 61% expect orders placed by noon to qualify for same-day shipping or delivery.
Location
With nearly 80% of U.S. adults owning a smartphone, consumers now have instant access to goods, services and information. They expect to make a purchase or research a product at any time and in any place, placing significant burden on retailers to provide fully digitally-enabled platforms and 24/7 support.
Convenience
Numerous consumer surveys cite convenience as the No. 1 reason customers shop online. Consumers carry their expectations for convenience into the store, demanding efficiency and ease in finding, testing and purchasing products.
Choice
The "endless aisle" of goods accessible on the internet has raised consumer expectations of how much choice and variety they should have when shopping for a product. In a recent survey, 36% of shoppers cited "product variety" as a major factor influencing their purchasing decisions.
To compete in this omnichannel setting, retailers must acknowledge these expectations and meet consumers’ new needs while adjusting back-end operations to deliver in a cost-efficient manner.
Increased Costs
New demands to offer digital and online shopping platforms and fulfill e-commerce orders at little or no additional charge to consumers have placed significant financial burden on retailers. A 2017 survey of 350 major retailers conducted by JDA and PwC found that only 10% of them can fulfill omnichannel demand profitably. The survey also found that 75% of respondents have seen “some” or a “significant” increase in online operating costs in the past 12 months.
Figure 1: Growth in Online Operating Costs
Source: JDA and PwC, “CEO Viewpoint 2017: The Transformation of Retail,” 2017.
Many of these new costs are unavoidable, as retailers must meet rapidly rising consumer expectations. However, brands must prioritize adapting their back-end operations to meet demand on the front end. Without these adjustments to cost and operational structures, profit margins will suffer.
Returns and distribution disruption
Online delivery has proven expensive, but returns are by far the greatest logistics challenge for retailers. On average, returns for in-store purchases average 8%, while online return rates are as high as 40% in peak shopping periods. Traditional retailer supply chain and logistics structures were built to deliver goods on a regular schedule to a relatively set number of retail stores and have proven ill-equipped to manage a large flow of merchandise coming back through the supply chain (reverse logistics). Customer returns are forcing retailers to restructure their distribution and supply chains, which is an expensive undertaking. According to the survey cited above, 74% of retailers reported that customer returns were eroding profit to “some” or “a great” degree (Figure 2).
Figure 2: Impact of Returns on Retailer Profit Margins
Source: JDA and PwC, “CEO Viewpoint 2017: The Transformation of Retail,” 2017.
A light at the end of the omnichannel tunnel?
Though adapting to omnichannel will involve increased cost and profit pressures for most retailers, the initial investments likely will reward enterprising brands with more customers and higher spend. Omnichannel shoppers tend to spend more than single-channel shoppers and display more brand loyalty, suggesting that those retailers that deliver seamless omnichannel platforms will enjoy a competitive advantage over those that don’t. Many retailers are also learning to drive efficiencies in their retail and industrial real estate portfolios, focusing on agile pop-up strategies and investing in new infill distribution facilities closer to high population centers. Overall, the opportunities presented by omnichannel merit the investments retailers are making to address the initial challenges head-on.
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