Omnichannel fulfillment remains an imperative for retailers that are aiming to pick up market share in the coming years. Much has been made of consumers’ return to in-person shopping post-pandemic, but digital sales remain higher across retail than had been projected prior to 2020.
Delivering a consistent digital customer experience is critical for retailers to increase market share in a competitive environment where customers prioritize speed and convenience.
In high-frequency categories – such as grocery – reliable and cost-effective order fulfillment is foundational to winning with omnichannel customers, a high value segment. We often see omnichannel customers outspend strictly brick-and-mortar shoppers by almost 35-50% in the grocery channel.
In more discretionary, lower-frequency categories – such as apparel and luxury – a shift to faster service speeds to meet changing customer expectations is slowly underway.
Historically, this segment of retail has not felt the same urgency to increase order service speeds; but as customer expectations change and retailers pursue growth in a more challenging environment, there will be greater emphasis on fulfillment operations to increase sales.
With so many changes afoot, what might we see as it relates to retail fulfillment operations in the coming year or two?
Picking: High frequency retailers will pursue more automation solutions at order fulfillment sites
A consistent theme across retailers has been wage investment to recruit and retain store associates amidst a tight labor market with no relief in sight. Retailers, from Walmart to Kroger to Home Depot, have announced large-scale increases across their store employee base.
As a result of the labor market shortage – and related investments – the picking portion of the omnichannel fulfillment equation has increased for retailers.
So, how will they react?
As digital orders increase – along with wages – automation has been deployed to lower the cost to service each order.
For retailers with a high volume of orders and SKUs – such as grocers and general merchandise –fulfillment automation at locations with high digital order penetration (digital orders as a percentage of the store’s total sales) may be inevitable.
A pre-requisite for strong returns from these systems – such as microfulfillment centers (MFCs) – is having more than 5,000 SKUs available to customers from the location to provide enough unit volume. As a result, grocers and general merchandise stores are often good candidates for automation systems in the back of their stores.
Retailers are already thinking about how to optimize their store footprints and back rooms to account for more digital order volume going forward. Look no further than
Target’s announcement that it would increase its store footprint to improve back-room efficiencies or Walmart’s acquisition of Alert Innovations, an automation fulfillment provider.
Automation will be a key enabler of digital order growth for many large retailers to work around the labor market shortage and meet customer demand in the coming years.
Picking: Lower frequency retailers will increase their service speed and, in turn, launch broader store-based fulfillment models
Retailers with lower volumes and total SKUs – such as apparel or luxury brands – have not yet adopted store-based fulfillment models en masse to improve shipping speeds for customers. Instead, many of these retailers still fulfill orders from centralized warehouse(s) across the country.
The tide, though, seems to be turning as customers demand faster order fulfillment driven, in part, by their experience with other retailer segments which they, in turn, have come to expect across all retailers.
To meet faster service speeds – while also increasing inventory turnover and reducing markdowns – store-based fulfillment is often the right solution.
Shifting to store-based fulfillment, though, means that retailers will need to provide enhanced tools (and processes) for store associates to locate inventory while redesigning or re-thinking back-room space to hold orders. This is no small task for retailers, especially in mall-based locations.
Faster service speeds – and a re-designed fulfillment network – may not be right for every retailer, but it’s clear that customer expectations around service speeds have changed.
Discretionary retailers will need to consider how to continue increasing service speeds or risk losing sales and market share.
Delivery: Consolidation of same-day last-mile delivery
For many years, retailers struggled to pinpoint the preferred same-day delivery economics: Does it make sense to build out a delivery network or partner with local providers? As recently as 2021, the question was still being debated as some large grocers continued running their own first-party delivery service.
Thanks to the scale of delivery platforms, though, the delivery economics have become obvious: partner with third parties. The continuous routing software improvements from hundreds of thousands of rides – along with the access to on-demand drivers – have made it impractical for any retailer to replicate the efficiency of the upstarts for last-mile delivery.
Today, the three main, same-day delivery partners in the space are DoorDash, Uber and Instacart.
Instacart has been the longest-tenured partner in the space, having started as a grocery delivery platform for customers where it handled everything, from picking to delivery to customer service.
Recently, though, Instacart has seen its star fade as regional grocers detach from the platform, choosing to build out their own platforms and manage picking on their own, given the popularity of pickup service options.
If smaller players continue to eschew Instacart’s broader offerings, then last-mile delivery will become more commoditized and just go to the lowest-priced option(s).
The question to ask is whether there is enough same-day volume for DoorDash, Uber and Instacart to co-exist or if the market consolidates to one or two players.
The future has yet to be written, but we think there may be further consolidation ahead, considering the thin margins in last-mile delivery and the macro pressure these businesses are under to be profitable.
What do you foresee shaking out in the omnichannel fulfillment space over the next year?
