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Traditional retailers failing to defend themselves against rise of Amazon

Editorial
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Facing a growing threat from Amazon.com and its e-commerce imitators, many traditional retailers and supermarkets are trying to turn a weakness—their costly brick-and-mortar stores—into a competitive advantage.

The so-called omnichannel solution envisions those outlets operating both as familiar sites for merchandise display and as fulfillment nodes for online sales.

The idea is that customers that buy goods online can pick up purchases at the store or receive deliveries at home from the store. The goal is to outflank the e-retailers’ cost advantage by using the physical store network to serve the online buying channel.

In reality, however, there are critical flaws in the strategy, and without adjustments retailers won’t get the gains in efficiency and lower costs they need to compete with online marketplaces.

In-store fulfillment requires store employees or contractors to roam the aisles and “pick” the goods that customers have placed in their digital carts. The goods are then held, and for supermarkets they may be stored in a temperature-controlled space. When the customer arrives or the home-delivery vehicle is ready to depart, the goods are retrieved and handed over to the consumer or loaded onto the delivery vehicle.

The trouble for the store is that all this handling of goods runs counter to the concerted efforts companies have made to use technology to reduce costs and employee head count by shifting work from employees to customers.

This is called load shifting, and it has become commonplace across the world of customer service. Bank customers conduct financial transactions on ATMs, eliminating the need for tellers; airlines provide automated check-in desks that allow them to drastically cut back the number of agents at airport counters; supermarkets provide scanning kiosks that have customers scan and bag their groceries.

In-store fulfillment moves retailers in the opposite direction by creating work for store employees that used to be performed by customers. It disrupts work flows at stores and adds new, inefficient tasks in sites ill-designed for the new duties. The picking operations aren’t mechanized—as they may be in highly automated e-commerce fulfillment centers—and the efficiency of backroom operations declines because too many people undertake too many different tasks in limited space. Operations behind the display aisles can be critical to a store’s profitability, but satisfactory technological solutions for mechanizing backrooms and reducing congestion there are not readily available.

Some retailers believe in-store fulfillment can spur sales by bringing online customers into stores. That is a dubious proposition, however, and it’s more likely that it reduces impulse purchases in stores.

Retailers also may believe they are lowering their transportation costs—having customers pick up goods in the store replaces spending on deliveries, after all.

This equation is suspect, however. The biggest cost in the in-store fulfillment model is the picking and packing operation, not transportation, and here companies are adding new costs and new complications that spread across their business.

Yet traditional retailers still need to compete effectively with the likes of Amazon.com. E-commerce business volumes are growing, unlike the relatively stagnant brick-and-mortar sector of retailing. And the major online players continue to pull customers away from stores with expanded product offerings and aggressive free-shipping programs.

How can traditional retailers fight back? There are several possible ways forward:

  • Brick-and-mortar retailers could compete head-on with pure e-commerce players by building a network of efficient fulfillment centers. Perhaps large retailers could band together to build the required infrastructure.
  • Using a third-party to take on fulfillment is another option; many small retailers employ Amazon’s system.
  • Refine the current in-store fulfillment model by, for example, developing stronger yield-management solutions that improve capacity, truck utilization and pricing. In addition, store employees should be better trained to perform multiple functions including e-commerce fulfillment, eliminating the need for a management and execution team dedicated to online customers.
  • Rethink the traditional model for the actual stores. For example, cut floor space, and have customers buy products by pointing their phones at item bar codes or CR codes. The front of the store becomes a showroom and the backroom prepares the purchases for pickup.
  • Amazon’s own growth plans are closely held, but my guess is that the company will open retail outlets operating in a fashion similar to the last suggestion with a redesign of the entire concept and function of a store. If this comes to pass, there will be even more pressure on brick-and-mortar retailers to change their fulfillment models.

    These options aren’t easy; they involve substantial investments, creativity, silo-busting, and a good deal of experimentation.

    But the alternative is even less attractive. That would be the inexorable decline of brick-and-mortar retailers as they lose customers to much more efficient e-commerce players.

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