How Retail is Responding to the “Amazon Effect”

LS International

With retailers adding more and more product categories, offering discounted prices and other mouth-watering deals, it is not surprising that more and more people are shopping online. Orders literally come in from across the world, so the number of locations to which products need to be delivered is increasing rapidly. Unlike deliveries to stores, deliveries to individual customers are often in small units, increasing costs. And with customers often promised “free delivery”, retailers are not always able to fully absorb the delivery costs, thus eroding margins. The hit to the bottom line is even greater if deliveries are made across continents.

The Amazon Effect

Amazon and other online Retailers are clearly disrupting the sector by seamlessly offering customers wider choice, guaranteed faster delivery and lower delivery costs. It is the net impact of these forces that is increasingly being called “the Amazon Effect”, which is forcing other players in the retail industry to respond. As several companies offer buyers omni-channel engagement, the trend (in large markets such as the US) of buyers ordering online and choosing to pick up the goods in store is rising.

As a result, the E-commerce space is becoming more and more like an iceberg: what is visible is only a small part- and it is what is invisible that can inflict serious damage. Visible are the responsive web sites and apps that attract buyers with an ever-growing assortment and the promise of “engage wherever, whenever”. It is the Supply Chain executives who, at the back-end, are left to figure out the invisible stuff- sourcing, distribution, logistics, and above all, ensuring that neither online nor in-store purchases are adversely impacted in a world where customers may start engaging in one channel and conclude the transaction in another.

Shifting battleground

The battle between retailers is decisively shifting to the “middle ground”. Traditional brick-and-mortar chains are investing heavily in responsive web sites, apps, more secure payment options etc. Companies like Amazon have started investing in brick-and-mortar stores because they realize that many customers still prefer to see, touch or taste before buying. Indeed, many buyers even opt to place orders via apps but pick up goods from a store, instead of seeking home delivery.

Strategic responses by the retail industry

Strategies being evolved by Supply Chain Managers in response to the Amazon Effect are either aimed at protecting revenue or reducing costs. Costs are squeezed out of the supply chains by focusing on new sourcing options, reducing transport costs etc. Revenue-enhancing strategies include giving greater real-time decision-making powers to staff at stores, warehouses and fulfilment centres, in order to reduce instances of lost sales due to SKU level stock-outs.

Some retail chains empower store level staff to move inventory from another store and promise customers that their order will be delivered to his/her address (or s/he can pick it up from a convenient store if that works better). Although there is an additional shipping cost involved in such cases, such actions could lead to a higher price is achievable than if the unsold inventory is eventually liquidated on sale. This is especially true for products with a short shelf life. Of course, this does mean “cannibalization” of online/e-commerce revenue by offline/brick-and-mortar revenue because retailers view “online” and “offline” as separate businesses. For such strategies to become more mainstream, senior leaders at retail chains must be willing to see the need to be sometimes cruel to be kind.

By taking such steps, retailers are able to experiment with value-added services such as same-day delivery or next-day delivery. Indeed, some retailers, such as H&M are even talking about delivering in specific time slots. It has been reported that Walmart has announced a program that incentivises employees to drop off orders on their way home if the delivery address is en route.

One cost-reduction strategy gaining popularity is to modify packaging to minimize the space it occupies. Material such as boxes and bubble wrap are eliminated if the product is not fragile and can be packed just as safely in an envelope. The reduced volume allows more individual orders to be shipped in one container, reducing the per-unit shipping cost.

In the days ahead, retailers and their logistics partners will innovate new ways to reduce costs. But it is important to keep in mind that for any strategy to be effective, it must be formulated in the context of the business. A one-size-fits-all strategy will not work. To paraphrase an industry expert, Satish Jindel, President of ShipMatrix: Amazon’s competitors cannot beat Amazon by adopting its model; they need to develop their own model by leveraging their assets, which include both warehouses/fulfilment centres and stores.