The global COVID-19 pandemic has accelerated the migration to omnichannel commerce.  Given their investments in physical stores and associated supply networks, brick-and-mortar retailers operate omnichannel fulfillment at a cost disadvantage to pure online competitors. Accelerated omnichannel adoption and the expectation of free next-day delivery will force all retailers, virtual and physical, to reduce supply-chain costs, while creating new competitive options for brick-and-mortar retail.

Omnichannel seamlessly integrates multiple sales, service and delivery channels. The majority of omnichannel retailers can be categorized as either those that originated with physical locations, or those that began online.

A key theme in the evolution of omnichannel has been brick-and-mortar retailers drawing on existing assets to create competitive responses such as buy online, pickup in store (BOPIS); fulfillment of e-commerce orders from store, and curbside pickup. The challenge for omnichannel retailers of traditional pedigree is the increased cost of these competitive responses. Consider, for example, curbside pickup. According to an informal survey, grocery order pickers can pick between $370 and $620 worth of product per hour.  Assuming a loaded wage rate of $18 and pick efficiency at $620 per hour, the cost of picking an order is 2.9% of sales. In comparison, Kroger’s 2019 operating profit was 1.8% of sales. Grocery order picking is inefficient because grocery stores are optimized for the end customer, not the grocery picker.

Traditional retailers are at a cost disadvantage because they’re forced to adapt existing assets to omnichannel due to the need to amortize costs over online and brick-and-mortar assets. Any option to charge for convenience-added services such as BOPIS and curbside is blocked by competitor commitments to low-cost or no-cost next-day (LoNoNext) delivery.  As a result, traditional retailers are forced to erode profitability as they preserve market share through expanded omnichannel fulfillment options.

The global pandemic accelerated omnichannel adoption and, as a result, the cost of omnichannel fulfillment for traditional retailers. Given that pandemic precautions and risks are likely to extend into mid-2021, brick-and-mortar retailers with omnichannel operations need to accelerate conversion of supply-chain assets and processes to omnichannel fulfillment. Just as omnichannel seamlessly integrates sales and delivery, retailers need to seamlessly integrate omnichannel fulfillment. Seamless integration requires the removal of inefficiencies and friction between processes, not necessarily the sharing of assets across fulfillment channels. Solutions might include replacing “receive-put to shelf-pick for order” processes with “receive-pick for order-put to shelf,” adopting receiving automation, and augmenting resources to pick orders while stores are closed.

While traditional retailers are at an omnichannel cost disadvantage, LoNoNext commitments made by omnichannel competitors create competitive differentiation opportunities for the brick-and-mortar-based omnichannel. Brick-and-mortar retailers can offer a mix of fulfillment options (for example, pickup, curbside and delivery by mail), and influence customer choice through promotions, couponing and price discounts.  Fulfillment mix optimization based on available capacity reduces costs. LoNoNext competitors, on the other hand, require greater inducements (and costs) to influence customers to accept anything other than LoNoNext.

Outlook

For 2021, expect brick-and mortar retailers to focus on omnichannel fulfillment cost reduction. While leveraging common supply network components may reduce inventory and increase return on assets, brick-and-mortar retailers will be more focused on streamlining operations, due the cost consequences of channel fulfillment conflict. Brick- and-mortar retailers will drive fulfillment savings through fulfillment mix optimization, while exploiting the inflexible expectations that competitors face due to their commitment to no-cost next-day delivery.

Tony Gray is a Director with Tata Consultancy Services.