Christmas is upon us, and despite brands’ and retailers’ best attempts to kickstart seasonal promotions as early as possible this year, the thorny fact remains that consumers have an immense appetite for last-minute delivery — and the majority of retailers will be unable to provide it a week prior to the holiday. That translates to roughly a week of lost online sales during the most critical sales period of the entire year.
The holiday season used to be the most wonderful (and for retail, profitable) time of the year. When and how did this change? The blame lies with the sudden rise of e-commerce, and the inability of supply chain infrastructures to adapt to rapidly changing consumer expectations.
The holidays come but once a year, and in the age of e-commerce, that’s precisely the problem. Holiday sales account for about one-fifth of annual retail sales, says the National Retail Federation, and for some businesses it’s an eight-week window that can account for more than half of a retailer’s annual sales.
This sudden spike in sales used to be a boon to brick-and-mortar retailers: Because holiday sales came without significantly increasing retailers’ fixed costs of doing business, they maximized profitability. But that has all changed since online sales have skyrocketed with the onset of the pandemic.
Peaks are notoriously hard for e-commerce operations to manage. It’s no longer a matter of extending store hours and ushering customers through checkout lines more efficiently; in the age of e-commerce, retailers need to navigate a complex and costly web of challenges. One last-mile lump of coal that far outweighs all other concerns? Shipping carrier constraints.
Seasonal Capacity Limits
The relationship between retailers and shipping carriers is fraught even outside the holiday season. The rise of e-commerce has put shipping carriers in a position of power, squeezing the retailers who overwhelmingly rely on them. It’s estimated that delivery titans United Parcel Service Inc., FedEx Corp. and the U.S. Postal Service control about 95% of last-mile delivery of third-party parcels, and to cope with the unanticipated volume of packages, they have slapped higher surcharges on residential deliveries all year round.
The holiday season represents a “peak on top of a peak,” and to manage volume, carriers impose two distinct but interrelated constraints: capacity limits (how many orders a carrier will dispatch during a specific period of time) and cut-off dates (the date that items need to be shipped to make it to their destination on time.)
Ninety-eight percent of the brands we surveyed reported that carrier-imposed cut-off dates cause them to lose sales during the holiday season. The main driver of these losses is the fact that most retailers miss out on an entire week of online sales leading up to Christmas Day.
Fifty-one percent of brands and retailers are forced to stop promising delivery to their customers four to seven days before Christmas; 12% have a longer cut-off window of eight to 14 days, and another 13% stop accepting orders two weeks prior.
This is especially painful, given that consumers have demonstrated an immense appetite for last-minute delivery. Google Trends data from last year shows that searches for “same-day delivery” began to spike on Dec. 22 and reached peak popularity on Dec. 24. This is consistent with Salesforce’s findings that online sales grew last year around 58% in the five days leading up to Christmas. These last-minute sales are disproportionately funneled to Amazon.com Inc., which can provide deliveries when other retailers cannot, both because it has negotiated preferential treatment from the carriers and has its own supply chain infrastructure in place.
The revenue loss can be significant. Among brands and retailers questioned in a survey by e-commerce platform Fabric Inc., 20% said that cut-off dates cause them to lose up to 50% of sales. Another 5% said they lose more than 50% of sales.
It’s clear that in a post-pandemic reality where a significant share of online shopping has shifted online, retailers need to find alternatives to their overwhelming reliance on shipping carriers to capture these last-minute holiday sales.
Although most surveyed retailers and brands have tactical workarounds in place to overcome cut-off dates — namely, kickstarting holiday promotions early, promoting buy online, pickup in-store (BOPIS), and even upgrading to a premium shipping service at their own expense — these are only stopgap measures that fail to address the core issue.
The larger problem is that the centralized fulfillment model, which has traditionally helped brands and retailers reduce fulfillment costs through economies of scale, is no longer sufficient on its own. The vast majority of retailers we surveyed (95%, in fact), are aware of this and are working to implement a distributed fulfillment strategy.
Distributed fulfillment is a long-term strategy that turns the current hub and spoke fulfillment model on its head, and enables brands retailers to future-proof their businesses and maximize profits during holiday peaks that will increasingly shift online.
Fulfilling e-commerce orders from a network of local micro-fulfillment centers enables retailers to work with myriad last-mile delivery providers in addition to national carriers, whether it’s bike couriers or on-demand rapid delivery companies, alleviating the power imbalance that so painfully limits their selling potential. Critically, it also enables the fast deliveries that consumers have come to expect at profitable unit economics, even if (especially if!) it’s the night before Christmas.
Colin Coggins is chief commercial officer with Fabric.
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