Jarden’s retail guru reveals hidden cost pressures for online retail
For example, a just-in-case supply chain means holding more inventory. But that stock has to be stored somewhere, and with industrial property vacancy rates at just 1%, warehouse rents are on the rise.
These cost and capacity issues are compounded by customer demands for faster delivery, forcing companies to get creative in finding solutions to what is known as the “middle mile” logistics challenge. Some use existing stores as fast fulfillment centers for online orders, while others partner with delivery aggregators; Metcash’s delivery agreement with DoorDash is a good example.
But in many cases, these can be temporary solutions. Fresh out of the pandemic, the boards of directors of retailers and other consumer goods companies must now consider how they will invest to rebuild their supply chains for this new reality.
And they must do so in an environment of runaway inflation and enormous uncertainty.
“Nobody really knows, with very high level conviction, what the right strategy will be. Historically Australia could look to other markets because we were behind in many areas, but we have caught up in many ways,” Gilbert says. “My feeling is that the general belief of what the right path looks like is weaker than it was nine months ago.
“Companies are going to have to make decisions over a three to five year period, and it’s a question of whether investors are going to have the patience for that.”
At the heart of the question of how to reorganize the supply chain is the fact that it is becoming more and more expensive (and less and less profitable) to sell things online.
Jarden’s tracking of local and overseas retailers suggests that the cost of acquiring new customers online through paid search, targeted promotions and other forms of advertising has jumped up to 50% since FY2020, reflecting increased competition and changes to Apple’s iOS platform that made tracking customers more difficult.
Scale is vital
Logistics is another major cost driver. With players like Amazon investing heavily in its supply chain and raising customer expectations for delivery times, free returns and better prices, retailers have no choice but to ride these moves.
All of this means that scale is vital. This includes scaling up to invest in improving the supply chain, to deliver the range of products that customers expect, to split logistics costs and to develop what Gilbert says “to become the most Valuable in Retail”: rich databases that retailers can use to win more targeted, more efficient and cheaper offers to customers.
Gilbert says pressure on margins and sales growth from digital retailers selling direct to consumers has been building for some time, while bigger players such as Amazon, Woolworths, Wesfarmers, Super Retail Group and Coles are gaining share online market.
But at the same time, their store networks have gone from being a cornerstone a few years ago to becoming an important asset.
Gilbert argues that omnichannel retailers with strong store networks and online sales channels should be in a good position when consumers return to stores. Not only are their customer acquisition and delivery costs expected to drop as in-store sales increase, but click and collect – essentially using existing stores to fulfill online orders – is a powerful and popular model that brings the added benefit of generating additional in-store sales.
Yet even highly successful omnichannel retailers will face tough decisions on how and where to invest to ensure their just-in-case supply chains can meet customer expectations.
How do you bring customer fulfillment closer? Could we see distribution centers in mall parking lots or abandoned storefronts from department stores?
Could retailers partner with aggregators or logistics providers, or even each other, to reduce middle-of-the-road and last-mile logistics costs? How can automation be used to reduce exposure to rising labor costs?
Another key question is whether it is good to be a leader in these important and costly strategic changes, or a quick follower, letting others experiment and learn from their mistakes?
What is clear is that now is not the time for retailers who don’t know what they stand for. Attempt the kind of reinvention and reinvestment required amid rising inflation and changing consumer behavior – Gilbert says UK buyers are already turning down and looking for value amid higher inflation high – is not for the faint hearted.
“You have to have a point of differentiation,” Gilbert says. “It could be price, or it could be value, i.e. price, range, service, quality and range. But either way, you need a point of differentiation.