How Store Fulfillment Goes Against the Grain

While most industries are using technology to become more efficient and allow their customers, assisted by technology, to do the work that employees used to do, others are going in the opposite direction, or against the grain, at their long term peril.

Consider Ryan Air, the king of inexpensive flights in Europe. In order to make sure that it does not have to have either customer service representatives or even boarding cards kiosks at the airport (to save both labor and rental space at the airport), the carrier charges €70 for printing boarding passes at the airport. And this charge maybe tacked on to a ticket costing about €12 for flights between London Stansted airport and multiple destinations in France, Germany, Poland and Bulgaria. In other words, Ryan Air really wants passengers to print their tickets at home (or get it on their mobile phone).

Many retailers allow store customers to check out themselves using kiosks at the exit counters, reducing the number of cashiers. Banks use ATM for withdrawal and deposits, while allowing customers to perform many activities that originally required a visit to the bank, to be performed on line or at the ATM.

The common denominator motivating all these businesses is the shifting of work from employees to customers. Technology allows customers to perform tasks previously handled by employees. Customers can check out by themselves in retail outlets, get through the airport and to the airplane by themselves, and conduct financial transactions without engaging a teller or a customer service representative.  Yet some businesses are moving in the opposite direction. An example is retailers that are including store-based fulfilment as part of their omni-channel service offerings.

Many supermarkets and other retailers now offer their customers the option of “store pickup” or home delivery from a nearby store. It sounds like a winning formula – the brick-and-mortar retailers can trump the pure e-commerce players by using their existing network. In other words, customers can visit the retailer’s site and fill a digital basket with their needs. Before they come to the store for pickup (or before the order is shipped) store employees or contractors will roam the aisles, performing a “pick” operation. Then the goods will have to be stored (in several temperature-controlled environments in the store’s back room). When the customer appears, or when the vehicle is ready for departure, another picking operation takes place to get the basket of goods to the customer.

This in-store picking-storing-picking process is, likely, the most expensive part of store-based e-commerce. Not only does such an offering go against the grain in replacing work that used to be done by customers with work that employees have to do, but the employees’ do more work than the customers did by themselves when they shopped at the store.

In many cases, these in-store e-commerce operations are not only inefficient by themselves, they are also expensive and detrimental to the rest of the work flow in the store. The picking operation cannot be mechanized— as is the case in a fulfilment center –  and pickers reduce the efficiency of the back room operation (which in itself is not a paragon of efficiency in most retailers’ locations) because too many people are doing too many different tasks in a space that is not built for such activity and without any technological efficiency.

I understand the need to compete with Amazon etc. For many large retailers, e-commerce is the growing part of an otherwise stagnant business. I’m just not sure that store fulfilment is the best way to compete with the pure e-commerce companies. The idea behind store-based e-commerce fulfilment is to minimize transportation costs, as there are many stores around and they are likely to be close to the customer locations. Such fulfilment, however, can hardly compete with the large, automated fulfillment centers built by Amazon or ES3, where operations are extremely efficient, aided by technology. It seems to me that retailers have several optional strategies here:

• Compete head-on by building a network of fulfillment centers. This is a multi-billion capital expenditure which only the biggest retailers may be able to afford. This will eliminate store-pickup and use delivery-only options.[1]
• Compete head-on by using a third party. Many smaller retailers are using Amazon for their fulfilment. Another option here (which will require a small suspension of disbelief) is that some of the mid-size retailers will band together to build a fulfilment competitor to Amazon (I do not see Walmart or Target joining forces, but who knows?).
• Refine existing models. For retailers continuing to offer in-store pickup and delivery:
  • Develop real yield management options for pricing the combination of in-store picking and deliveries. There are times when there is idle capacity for in-store pickup and where a vehicle is already scheduled to visit the location of the customers. Thus, shorter time windows and time windows during capacity-constrained hours should be priced higher.
  • Ensure that the work force can perform multiple functions: customer service, picking, shelf organizing, back room functions, etc. Avoid building a dedicated management and execution team in-store for e-commence fulfilment.
• Rethink the store. The allocation of space between each store’s backroom and the customer-facing front of the store was developed for in-store shopping. And it made perfect sense then. It may be time to redesign stores for the dual roles of technology-assisted fulfilment centers (especially for groceries) in the back room, and aisle-shopping in the traditional front.
• Rethink the store further. In this model, the front of the store is significantly smaller and used only for displays. Customers roam the aisle and point their phones at the barcode or CR code of items they want to buy. Meanwhile, the backroom prepares the basket which is ready for the customer pickup (payment already completed using the app).

The challenges of omni-channel are real and the pressure on profits from e-commerce players is likely to intensify. None of these options is easy; they involve substantial investments, creativity, silo-busting, and a good deal of experimentation.  The alternative, however, is even less attractive – a death spiral of losing customers, store closures, and further sales contraction.

[1] It seems that Walmart started to go in this direction as it shifts more inventory to its eight massive fulfilment centers around the country (see WSJ 6/29/2016 “Walmart expands Free Two Day Shipping”)