Omni-Channel Rocks, But Where's The Profit?
By Matt Pillar, chief editor
It appears that the omni-channel imperative has brought big trouble to the CFO’s office.
A new PwC CEO survey (sponsored by JDA) finds that only 19 percent of the top 250 retailers, and just 16 percent of retailers on the whole, are fulfilling omni-channel demand profitably. What’s more, over three quarters of retail CEOs say the costs associated with omni-channel order fulfillment are rising. They cite handling omni-channel returns, direct to consumer shipping, and buy online, pick-up in store as the leading cost culprits, in that order.
Just how sustainable is omni-channel fulfillment without the profit?
Here’s the rub: Retail CEOs are hell-bent on meeting customer expectations at any cost, even if that cost is to stakeholders. Asked about the challenge most likely to impact their businesses to a great extent, “failing to meet customer expectations across channels” was the leading answer. Not failing to manage the cost of omni-channel fulfillment. Not failing to meet profit/stakeholder expectations. It’s the customer, stupid. At any cost.
That plight is understood, but it’s unsustainable. It’s understood because competitive pressure dictates flexible omni-channel fulfillment as necessity. It’s unsustainable because omni-channel activity and expectations are both climbing rapidly. If the current level of omni-channel fulfillment activity is unprofitable for 84 percent of retailers today, what happens what that activity level doubles or triples tomorrow?
Something has to give, but based on the data in the PwC report, it’s not going to give very quickly. Asked to rank their top initiatives for improving business operations over the next 12 months, the top CEO response (57 percent) was “spending capital on creating new customer experiences.” Again, I get it. It’s a competition-driven imperative. But it’s a costly one.
In fact, to better meet the expectations those new customer experiences create, capital spending on omni-channel is about to go through the roof. Surveyed CEOs said they’re investing an average of 29 percent of their total capital expenditures for 2015 on improving omni-channel fulfillment capabilities. That’s a whopping 61 percent year-over year increase. I just can’t help but imagine the conversation in the CFO’s office:
CEO: We need to invest more in the omni-channel customer experience.
CFO: Fulfilling on the omni-channel customer experience promises we keep making is soaking up profits like a sponge.
CEO: Don’t worry, we’re going to spend even more money on fixing that.
Despite the perceived need to throw lots of money at the unprofitable operation, the PwC report isn’t all puzzling. In fact, it indicates that CEOs are prepared to spend that big money on some fulfillment initiatives that should bear fruit. A full 88 percent said step one in the reduction of omni-channel fulfillment costs is to focus on transportation and logistics costs, which directly aligns with the aforementioned leading cost centers. Nobody in retail can control fuel prices, but there’s a whole lot of room to control fulfillment costs by making smarter ship-from decisions, each time and every time a digital order is placed. Why ship from LA to NY if the item’s in stock in Philadelphia? Why ship a full price item from a high-demand store when that item’s about to get marked down somewhere else? There are a host of drooling software providers who sell apps for that.
Of course, the ability to make low-cost ship-from decisions are predicated on the availability of merchandise in the appropriate locations. Wisely, survey respondents said improving inventory allocation to meet omni-channel demand is their second-ranking strategic initiative for reigning in the cost of fulfillment.
If anything, the PwC report reveals that to date, retailers haven’t been doing the best they can to maintain profitability while managing customers’ fulfillment expectations. The Amazon effect has pulled many down that rabbit hole. But while Amazon is a fulfillment juggernaut, it’s historic profit reports are nothing to aspire to. There’s a better balance to be achieved, and there are software tools available to get there. And I’m sorry Mr. CFO, but they’re going to cost some money.