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The Care and Feeding of the Multichannel Consumer
By Henning Hagen, Rich Kauffeld, and Alexandra Conrad
Retail has entered a new age in which consumers expect a seamless shopping experience across mobile, online, and in-store merchandising platforms. As smartphones, tablets, and high-bandwidth connections become prevalent, virtually all retail sales growth will occur online or be assisted by online research. Online retail sales are expected to grow 10 percent annually through 2015.
Ten years ago, skeptics said apparel would never move online because shoppers would always insist on trying things on in stores. Today, the numbers are proving them wrong. Online U.S. apparel and accessories sales amounted to $34.2 billion in 2012 and are expected to grow 16 percent annually — more than other online sales — through 2016 (eMarketer, April 5, 2012).
Innovative retailers are working to close the gap between the in-store and online shopping experiences. High-quality images and even body imaging technology provide virtual customers with more and more information on how clothes will look, feel, and fit. Retailers are embracing business models that encourage customers to try clothes on at home and that make online apparel shopping highly convenient. Some, such as men's personal shopping service Trunk Club and the new women's equivalent StitchFix, do not even charge customers until a few days after they have received shipments.
These novel business models depend on supply chain and fulfillment capabilities that are extraordinary by today's e-commerce standards. The trend toward them suggests that most apparel retailers can no longer choose whether to offer extraordinary service, however. To meet customers' increasing expectations, apparel retailers must build supply chains that support varied operational requirements. Retailers' decisions should be based on their unique "way to play" — their business model, their customer expectations, and the capabilities that set them apart — as well as the emerging external trends that are driving change in the retail sector as a whole.
Supply chains that deliver the extraordinary
In-house versus outsourced. Whether to outsource elements of the supply chain or keep them in-house is an important decision for apparel retailers. In most cases, outsourcing offers flexibility and fixed-cost advantages at the expense of control and differentiation. Small, fast-growing, or dynamic businesses whose value proposition does not require unique supply chain capabilities should probably outsource elements of their operations. Because many apparel items are lightweight and of uniform size, distribution centers can machine-pick them easily and retailers can typically obtain outsourced fulfillment at low costs.
At the same time, return rates for online apparel orders — 20 to 30 percent by one estimate (Internet Retailer, "Get Back," March 31, 2010) — present a financial as well as an operational challenge that many outsourced fulfillment service providers cannot address. Whereas other retailers fight high return rates — mining returns data and customer reviews for ways to improve product descriptions and reduce damages — sellers of apparel increasingly accept that return rates are not symptoms of operational failure; they are necessary by-products of the multichannel consumer's growing expectations for service and convenience.
Generally, if a core part of a business's customer value proposition implies highly specialized operational needs, as frequent returns do for apparel retailers, that business should consider the higher up-front costs of in-house supply chain management. Apparel retailers may find off-the-shelf outsourced fulfillment solutions unsatisfactory.
Zappos.com pioneered the idea that a generous return policy could substitute for the in-store experience of buying shoes (and eventually apparel). At a time when most online retailers viewed returns as a necessary evil, Zappos started offering fast, free, convenient returns to make customers comfortable buying shoes online. The retailer has fulfilled orders in-house with few exceptions since it launched in 2000; within a year of shipping its first order, Zappos began transitioning from a drop-shipment model to an owned-inventory model. A brief experiment with outsourcing fulfillment to UPS in 2001 proved unsuccessful.
Zappos's fulfillment center is organized to repackage and move returns back to inventory promptly. Other operational features further reduce the financial impact of reverse logistics. "Surprise" upgrades to overnight shipping on outbound orders and preprinted return labels reduce the time merchandise spends in transit or in customers' garages before it is returned. Zappos's management has been adamant since 2001 that fulfillment operations supporting its extraordinary customer service are a distinctive capability it cannot outsource.
Zappos's story does not mean that apparel retailers cannot outsource elements of their supply chains, but it highlights reasons for caution. Unless they are competing in the discount market, where service expectations are low, apparel businesses should be skeptical of whether outsourced providers can meet their service needs. Until e-tailers themselves fully grasp the multichannel consumer's expectations, they should expect that outsourcing providers are at least a few steps behind the most advanced in-house models.
Shared versus dedicated. Multichannel apparel retailers must also choose whether to combine supply chain operations or run dedicated operations for each supply chain. Shared supply chains have lower overhead costs, which tempt traditional retailers just venturing into e-commerce. But traditional and online retail have different business requirements. Even with adaptations, most bricks-and-mortar supply chains will not support features such as the online order cancellation, diverse shipping options, and package tracking that multichannel consumers expect.
In the worst case, a shared supply chain can impede service on the established channel. E-commerce requires accurate picking, packing, and shipping of individuals' orders, while traditional retail requires inventory management and demand forecasting at low costs. These differences convinced Walmart — whose bricks-and-mortar supply chain is legendary — to outsource fulfillment of most owned-inventory orders on Walmart.com.
To serve channels' distinct needs and to protect established businesses, most retailers moving into a new channel should consider dedicated supply chains. One apparel retailer chose the expensive fixed-cost option of building separate physical store and e-commerce distribution centers nearly side by side. The retailer, a big-brand luxury store, believes separate in-house supply chains are the best way to meet stringent service requirements for both channels. The store supply chain is designed to help stores avoid costly "stockouts." The e-commerce supply chain supports the wide assortment — every size and color combination — that customers expect from e-commerce as well as customization that includes monogramming. The cost of the dedicated e-commerce facility is high but necessary to support a luxury multichannel experience.
Trends to watch
As apparel retailers consider the above options, they should also take into account the emerging trends shaping e-commerce fulfillment for general merchandise.
Shorter Delivery Time Frames. As programs like Amazon Prime grow and leading retailers continue to invest in subsidizing expedited shipping, e-tailers will face increasing market pressure to deliver goods in shorter time frames without charging more. This pressure forces retailers to choose between subsidizing time-definite shipping (overnight, two-day, or even three-day) and expanding their distribution networks at significant cost. For apparel, which is usually lightweight and inexpensive to ship, subsidizing shipping from one or a few strategically located distribution centers is the more common, and usually the more economical, choice.
Drop Shipments. In the past, retailers have generally used drop shipping to provide products that were out of their traditional orbit (for example, bulky products or those requiring refrigeration). As e-commerce evolves, however, drop shipping has become popular among startup and fashion-forward e-tailers. These businesses are generally focused on merchandising and marketing and prefer to avoid managing fulfillment infrastructure.
Gilt Groupe is a prominent example of an online retailer that drop-ships a large share of orders (Gilt outsources fulfillment for the few items it keeps in inventory). Drop shipping allows businesses like these to expand their product assortment virtually instantaneously and to reach longer-tail customers without increasing inventory carrying costs. However, successful drop shipping requires strong technological integrations with vendors and diligent vendor management. For the reasons illustrated by the Zappos case, drop shipping may not be compatible with meeting multichannel consumers' service expectations.
Know your customers
To build the right supply chains for multiple channels, companies must identify which services are central to their customer value proposition for each channel and build the supply chain capabilities to support them. Supply chain operations should be optimized for the features that differentiate a retailer. For apparel sellers, services such as free returns are differentiating now but are fast becoming commonplace; the pressure to improve and enhance supply chain operations is especially strong. The time is not far off when customers will expect to walk into a store, snap photos of a garment they like but is out of stock in their size, purchase it instantly through a synced mobile app, and have it arrive at their house the next day.
Still, businesses should remember the basics when choosing a supply chain model. Know your customers: What aspects of the shopping experience do they value? What do they expect from online fulfillment and delivery? Answering these key marketing, operational, and strategic questions will inform which supply chain capabilities you need to compete and to delight multichannel consumers.
Henning Hagen is a principal in Booz & Company's Communications, Media and Technology practice. Rich Kauffeld is a partner and Alexandra Conrad is an associate in the firm's Operations practice.
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