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Can the World's Logistics Industry Handle Cyber Sales Surges?

The chaos surrounding deliveries from last year's UK Black Friday event maybe the clearest sign yet that the logistic sector is falling behind the needs of the e-commerce industry, argues John Baulch, publisher of Toy World magazine.

Photo: Yodel: Black marks for late Black Friday deliveries.
Yodel: Black marks for late Black Friday deliveries.
Photo: Yodel: Black marks for late Black Friday deliveries.
Yodel: Black marks for late Black Friday deliveries.

The UK Toy Industry Day is an event ably orchestrated by the British Toy & Hobby Association. Typically, the day features a selection of speakers, with the first presentation traditionally reserved for review of the retail market, along with the requisite statistics and observations. This year's speaker covered well-worn ground, with a particular focus on the continuing stellar growth of the online retail channels.

Admittedly, the figures make a compelling case – 84% of UK homes now have internet access, while 62% of consumers own a smart phone. Globally, there are 5.74 billion searches a day on Google, while 72% of internet users are active on social media.

This trend towards greater reliance on the internet has clearly transformed consumers' shopping habits, with online shopping becoming a way of life for the vast majority of people. Once, retailers abided by the mantra: 'location, location, location'. The 21st century equivalent, however, is surely: 'convenience, convenience, convenience.' Increasingly, customers want to shop however and whenever they want, and to have their order delivered where they want, when they want (and if they need to, to be able to return their order to their channel of choice free of charge).

You could be forgiven for thinking that the march of online sales is inexorable and unstoppable. Indeed, the aforementioned speaker suggested as much, with a graph that showed a constant upward curve. However, there have been a few signs recently that a few stumbling blocks are emerging. These are challenges that – if not conquered – could provide significant obstacles to the growth of online sales over the coming years.

First of all, there is the core question of logistics. To see the extent to which this could become a major issue, we only have to turn the clock back to last November, when the UK tried its hand at Black Friday.

It was America, of course, that successfully pioneered the Black Friday concept back in the early 2000s. It is now regarded as the beginning of the Christmas shopping season in the USA, with most major retailers offering aggressive promotional deals.

Seeing the growing success of the concept – and the opportunity it presents – a number of UK retailers have followed suit over the past few years, notably Wal-Mart-owned Asda and Amazon. Last year saw the biggest ever UK Black Friday, with Amazon UK recording its busiest single trading day ever.

The problems came in the days that followed. In short, Black Friday broke the UK delivery system. Orders were being placed on websites that retailers were unable to fulfil, largely due to a lack of logistics capacity. Ultimately, even the largest retailers had to admit defeat and tear up their delivery promises.

At one point, Yodel, the UK's second largest delivery company, refused to collect any more parcels from retailers as it struggled to clear the backlog. A number of deliveries were delayed by up to three weeks, while customers fumed at the broken promises of retailers. Having pulled out all the stops to drive huge sales volumes, it appeared that retailers had no plans in place to cope with the fulfilment of the extra demand created.

So what is likely to happen this year? Talking to retailers, they seem convinced that the 2015 Black Friday will be bigger than ever. With the benefit of hindsight and twelve months' planning, the delivery companies will also, hopefully, be better prepared. Doubts remain, however.

Photo: Amazon: Even free click-and-collect has a cost.
Amazon: Even free click-and-collect has a cost.
Photo: Amazon: Even free click-and-collect has a cost.
Amazon: Even free click-and-collect has a cost.

One very prominent UK toy retailer recently suggested that delivery companies are turning away business if the projected increase in demand is more than five-fold at any point during a given year. It seems that the logistics companies have taken the view that they cannot plan a sustainable business around such extreme swings in demand. With capacity struggling to keep up with demand, they are very much in a position to choose which orders to take on and which to decline.

There is a parallel here with the situation that a number of global toy companies have faced in recent years with Chinese manufacturers. As factories have closed down, the remaining facilities have been able to pick and choose which orders to accept.

In addition to the issue of capacity, there is another major factor in the online delivery equation – price. It's no secret that modern retailers have many challenges to face in their bid to secure an acceptable margin. In many respects, online sales have contributed significantly towards margin erosion.

Generally, customers have been conditioned to accept free delivery by companies such as Amazon, a business that has been building its customer base by offering deals which some see as commercially unsustainable. The fact that Amazon has never made a profit is well-documented, and swallowing delivery costs must have contributed significantly towards this shortfall. Furthermore, toys are tricky products for a logistics operation to cope with. They are not, after all, a consistent size, shape and weight like books and cds.

There have been some warning signs recently. Amazon, for instance, has doubled the amount of money customers have to spend in order to qualify for free delivery, raising it from £10 to £20. Bearing in mind that delivery was free in 2013, it's a steep rise in such a short space of time. It's also an indication that even Amazon acknowledges that it is impossible to subsidise delivery for ever.

Then there is the issue of non-delivery. Explaining the problem, one retailer said: “The minute that the customer isn't at home to accept an initial delivery, the clock starts ticking. Every minute until it is successfully delivered costs us money.” With customers reluctant to wait at home all day for a delivery – especially given the unpredictable nature of delivery timeslots – this situation is likely to remain a huge challenge for all concerned.

Photo: John Lewis: Breaking rank on click-and-collect costs.
John Lewis: Breaking rank on click-and-collect costs.
Photo: John Lewis: Breaking rank on click-and-collect costs.
John Lewis: Breaking rank on click-and-collect costs.

Even the click-and-collect facility, something that has become hugely popular with bricks and mortar retailers over recent years, has a cost implication. As a concept, it has been an overwhelming success. Customers have clearly embraced the convenience of being able to order goods online and pick them up in-store or elsewhere.

The IMRG, the online retail industry body, estimates a growth rate of 20% per year in click-and-collect orders across all retailers. For retailers that sell online and also have physical shops, click-and-collect accounted for 4% of online sales in 2010. That figure jumped to 17.7% in 2014.

Photo: Baulch: “Inexorable and unstoppable”.
Baulch: "Inexorable and unstoppable".
Photo: Baulch: “Inexorable and unstoppable”.
Baulch: "Inexorable and unstoppable".

Retailers also welcome this approach. This is largely because of the opportunity for incremental sales, with between 30%-40% of click-and-collect shoppers estimated to buy something extra in-store while picking up their order.

The product, however, has to be selected at the warehouse, loaded onto a lorry and delivered to store. In the majority of cases, for free. When the order is of low value, the cost to the retailer undoubtedly exceeds any profit on the transaction. Offering click-and-collect for free may attract shoppers, but it is clearly financially unsustainable in the long term.

John Lewis has been the first UK retailer to break rank and accept this situation is untenable. In future, it will charge £2 for each click-and-collect order under £30. It is almost certain that other retailers will follow their lead. John Lewis is banking on the fact that shoppers will understand the reasons for this move and not rebel against the charge. Initial feedback, however, has been split, with some pointing out that they are effectively paying to make sure their product is in stock at their local store.

Online shopping remains a conundrum. It is no longer just an up-and-coming challenger to the high street. In fact, it is at the heart of every retail business, with established retailers needing to embrace the channel in order to prosper. It is not without its challenges, however, and these should not be under-estimated. Ultimately, it will never replace the magical toy store experience for children, but it may save some bricks and mortar retailers from disappearing altogether.

John Baulch, Publisher, Toy World

Content provided by Picture: HKTDC Research
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