Delivery charges cost online retailers dear

From the click on the order button to the knock on the front door, today’s customers expect their online orders to be fulfilled reliably, conveniently, quickly and, above all, cheaply. But how much is delivery costing retailers?

In many cases, the answer is too much. Research by management consultancy Kurt Salmon, conducted for trade publication Retail Week, found that UK supermarkets are losing about £300m every year from online business, at a rate of £3 to £5 per individual home delivery.

That is causing some supermarkets to have a rethink. In July, UK supermarket Tesco announced plans to increase its minimum spend for online orders for home delivery from £25 to £40. After 23 July, it said, any order under the £40 limit would be subject to a £3 surcharge on top of the existing delivery charge, which ranges from £1 to £6, depending on the delivery times. The moved echoed a January announcement by rival Asda, when the minimum spend for online deliveries rose from £25 to £40.

In both cases customers responded angrily, posting threats on social media to switch allegiances to rival supermarket chains.

But supermarkets are a special case, argues Stuart Higgins, a partner at LCP Consulting, a management consultancy specialising in supply chain management. The big supermarkets, after all, typically pick, pack and deliver orders using their own employees and their own vans.

And, because the average online grocery shop tends to comprise a larger number and wider range of products, they achieve a lower number of deliveries per van when compared to couriers delivering, for example, toys, books or clothing on behalf of more specialised online retailers.

That said, the economics of online delivery should be a matter of concern for all online retailers. The average cost to them of sending a delivery through a third-party carrier’s network, says Mr Higgins, is about £3 to £3.50. That is fine for higher value items, but it starts to get tricky for shipments of individual books or CDs, for example.

Either way, he adds, “online fulfilment is fundamentally more expensive for retailers than fulfilment to store and, as more sales volume goes through the online channel, many, many retailers are suffering margin erosion.”

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Not all are even aware of the problem, he adds, because they do not have the robust back-end systems and reporting capabilities in place that would help them identify it in the first place. And even when they do, they consistently prioritise customer satisfaction over economics.

At US online outdoor furniture retailer Thos Baker, Alan Blackford, chief operating officer, uses the company’s NetSuite business resource planning package to do the mathematics. “Shipping is our second-largest expense after marketing, even ahead of labour,” he says. “Year after year, our subsidisation of shipping continues to grow and, right now, we recoup around 50 per cent of our cost of shopping through [delivery] charges to customers.”

He adds: “But we don’t get a lot of say in that. The truth is that the market will bear what the market will bear. Customers are extremely sensitive to delivery costs.”

This is an important point. Retailers are increasingly forced to compete with rivals on cost and speed of delivery. That is particularly true in the US, where free shipping is more widespread and has become a competitive flashpoint.

Moreover, many retailers have become accustomed to using fulfilment as a “marketing lever”, says Neil Ashworth, chief executive of parcel service CollectPlus. “If a key competitor is offering free shipping on orders over a certain amount, then they often feel forced to offer a lower minimum spend.”

That leads many to resort to squeezing third-party delivery partners on cost, which in turn can lead to a downturn in the service levels they receive from carriers and, from there, to a decrease in customer satisfaction rates, says Nigel Doust, chief executive of Blackbay, a technology firm that makes mobile apps for delivery companies. “It’s a bit of a vicious circle,” he says.

Retailers are increasingly forced to compete with rivals on cost and speed of delivery

What is clear is that something has got to give. Click-and-collect services, where the customer makes their purchase online but picks up products from a physical store, are one option. In the US, Walmart recently announced that it would not be offering free shipping on purchases under $50 during the coming holiday season, a tactic used by many US retailers, but would instead be encouraging customers to pick up goods in-store.

UK supermarket J Sainsbury announced earlier this year that it would be rolling out click-and-collect at selected stores during 2015. By Christmas, it will have opened 100 of these pick-up points, says Robbie Feather, the supermarket’s online director.

Is this a response to struggling margins in online delivery? Mr Feather is circumspect. The supermarket sector, he says, has “competed away” some of the value it might otherwise have derived from the online channel in the battle to offer customers low delivery costs.

There are still many things to work out about the economics of delivery, he says. “But to say that the online channel is profit dilutive, and therefore you should abandon it, that would be leading yourself back into the dark ages and into failure. It’s simply not an option.”