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Several aspects of retail supply chains have been revisited during the Covid pandemic. Retailers have been dealing with the crisis using different fulfilment strategies which integrate online and physical stores more than ever. Some of these will probably last into the future, or at least have an impact on future retail models. Many of these new ways to serve customers are in fact supply chain questions which are becoming an increasingly important part of the retail business.

Fulfilment from stores: an additional role for the store

In the US, Target had been developing a “click-and-mortar” model well before the pandemic hit. It was fulfilling orders from stores, in part thanks to its acquisition of Shipt in 2017. This company provided on-demand grocery delivery allowing customers to shop online and have their orders delivered from their local stores. Target now offers delivery to home from as little as one hour by using their 1900 stores. In the second quarter of 2020, Target e-commerce sales doubled compared to the previous year, and 80% of e-commerce orders are now fulfilled from stores. Most importantly, the average unit fulfilment cost has been cut by 30%. Same day pick-up and drive-up options which don’t require packaging and delivery are now Target’s most profitable fulfilment options.

However, fulfilment from operating stores may require using store personnel which is also more expensive than warehouse staff (especially given the recent minimum wage increases announced by some of the large retailers) and, in the long run, than a robotic warehouse picking system. Even if these issues can be solved, the problem remains of what a large-scale fulfilment operation from an working store would do to the stock and indeed the attractivity of that store. And delivery services require a lot of space. As previously noted, SM in the Philippines has been integrating a “call to deliver” system in its stores which accounts for over 15% of sales.

The trick here is to use data-driven inventory allocation to compensate. A central warehouse able to sort items into packages intended for particular store aisles, allowing store staff to unpack directly onto the fixture, bypasses the backroom of the store. Deliveries to stores may be sorted in trucks so that unpacking follows a predetermined order.

Dark stores: a micro-DC close to customers

However, “classical” online sales requiring a box, a shipping label and a carrier pickup are also growing, and this type of operation uses a lot more space than the same-day options. To overcome the limitations of using operating stores for online orders, some retailers have been looking at abandoned sites in malls to use for order fulfilment. Others have been converting their own stores to “micro-distribution centres”. Indeed, these sites labelled “dark stores” are often better situated closer to customers than the traditional warehouse or DC operations.

The design of such buildings, often with several floors is not necessarily suited to high density deliveries. Although parking is sometimes available, at least for sites in malls, there is only one entry for incoming goods rather than the double inbound and outbound channels needed for quick turnaround fulfilment. Certain laws govern traffic and deliveries in populated areas, at night for example, which is not a problem for warehouses or industrial locations, but may be for more central dark stores.

Whatever the problems, it remains that having centres closer to customers could mean transferring the job of pick-up and delivery to consumers which would create considerable savings. It also opens up the possibility of allowing customers to return goods themselves instead of packing them up and taking them to a delivery office. Some companies like Tesco in the UK or Walmart in the US have been experimenting with dark stores for some time. Other companies are increasingly interested in the idea, such as El Corte Ingles in Spain for example.

Paradoxically, retailers without stores appear now to be considering a presence in retail stores as well as micro-distribution or dark stores. If, as it has been suggested, vacant Sears or JC Penney stores in the US were to be used as dark stores by online players for delivery and returns, it is only a short step to offering customers a little more during their journey and beginning to return the store back to its original purpose.

Returns management: shift some logistics to the customer

The NRF estimates that total returns by customers to retailers doubled in 2020 to 10.6% of total retail sales. This will include returns to e-commerce operations with a return rate estimated at over 25%. We can safely assume that, since apparel and shoes have the highest return rate, department store returns will be higher than that. A return is not only a failed sale, and one which has incurred selling costs, but also an operation which generates its own additional costs through reverse logistics. This reverse logistics process is one which is a prime target for refinement.

In this vein, even before Covid, Amazon partnered with Kohl’s to integrate the department store into its reverse logistics process thus supporting Amazon’s optimised returns while bringing an estimated 2 million extra customers into the Kohl’s stores. That the process creates increased revenue to stationary stores has not been ignored by retailers, some of which such as Magasin du Nord in Copenhagen, have set up a click and collect counter and storeroom on the ground floor to serve customers from a range of other retailers.

This vision of stores as a sales and logistics platform would appear to be a significant advantage held by store-based retailers. It allows them to place inventory close to customers in a situation where e-commerce is growing fast and the costs of fulfilment are taking off. Amazon’s fulfilment costs grew in 2020 by 45%, outpacing their online sales growth (estimated at 37%).

Thus, in effect, stores or dark stores are shifting some of the logistics costs of fulfilment and returns to the customer.

In-store retail: the rule of resilience and the hybrid store

Of course, even if e-commerce has been growing tremendously, most department stores are maintaining in-store retail as their core concentration. Some have been forced to close down, under the pressure of a sharp rise in the cost of shipping, substantial decreases in customer footfall, supply chain disruptions that proved too much for legacy planning and inventory management tools, and inbound inventory delays. According to Advanced Supply Chain survey, up to 92% of retailers have experienced inventory management issues. What some have described as the “supply chain strain” is not only the result of the Covid pandemic. The leaner the supply chain, the greater the strain it is put under by any disruption at all, such as the recent Suez canal incident.

It has become increasingly clear that, in a situation of uncertainty, just-in-time does not work. Many retailers are eschewing the once-popular lean model and thinking about a “just-in-case” model (see FT Just in time planning). Instead, they are broadening warehouse footprints to localise inventory for improved availability to their customers. Only a quarter believe that just-in-time inventory management is still relevant in the post-Covid environment. All gazes are turning towards the question of how to build resilient supply chains. Many are recognising also that investment in cutting-edge digital solutions to improve inventory management and visibility is part of the process of bolstering supply chains.

Furthermore, uncertainty and lower footfall has resulted in a new interest in local retail. Any method is welcome which will help provide shoppers with more reasons to visit a store. Diversifying ranges to attract and retain customers may transform stores into a model closer to the convenience store or the US drugstore, albeit with one dominant category. The desire to increase footfall might well bring operators in other retail sectors to serve consumer needs outside of their specialty.

As early as 2013, Forbes reported Macy’s pulling goods from stores and developing algorithms in order to limit out of stocks at store level, and achieve faster delivery as well as buy online pick up in store. In a strangely prescient piece, given the developments at John Lewis and Marks & Spencer for example, it also mentioned condensing the selling area and allocating more space to the backroom.

Imagine a store in which the selling area has been shrunk and converted to more of a showroom with interactive experiences; the rest of the store serving as a separate zone in which pickers would assemble a customer’s purchases; and digital technology would allow shoppers to select and pay for products on display. The resulting order might then be delivered to a kerbside collection point for the customer to pick up without having to wait in a checkout queue. Such a hybrid, traditional plus dark store, would answer many customers’ desire for a store experience without risk while allowing retailers to be flexible with both conventional and e-commerce formats as required. It would also serve as a collect and return point for online customers.

Logistics has become a customer issue

Many of the questions raised by omnichannel, and which have been put under the spotlight by the Covid pandemic, are in fact logistics questions. The recent customer expectations we are struggling to fulfil are in fact issues for supply chain and logistics: fulfilment from stores; dark stores; buy-online-pickup-in- store; click-and-collect; buy-online-return-in-store. All these are trends dominating the current retail scene and which have been accelerated by Covid. They are all heavily dependent on efficient and adaptable supply chains, and they all place logistics under consumer scrutiny. In the same way that steam and electricity transformed manufacturing, so digitisation is having an equally important impact on supply chains. As it matures, digitisation will be increasingly used to fulfil customer expectations in terms of time and availability, as well as offer a profitable and resilient fulfilment solution to retailers.

Credits: IADS (Dr Christopher Knee)