Capacity and Cost: Retailers' Ghosts of Christmases Past and Future

The eggnog's gone, the tree's on the curb, and now it's time to take stock of holiday shopping 2015 and, more importantly, what it means for 2016.

During the 2015 holiday season, retailers again increased their accuracy in getting orders to consumers — and more did it for free — but this year exposed dangerous capacity and cost-to-serve issues, especially during the biggest peak day of the year, Cyber Monday.

Kurt Salmon studied online orders from 62 retailers across a broad range of categories, including traditional big boxes, specialty retailers and online-only e-tailers. The study analyzed online orders that were shipped to consumers, as well as those picked up in-store, to measure shipping speed, accuracy and cost. The study included orders placed on Cyber Monday and in late December to measure whether last-minute gifts would make it under the tree in time.

For orders placed on Cyber Monday, this year's fastest companies delivered on average in 2.8 days, the same as last year's top performers, as shown in Exhibit 1.

Exhibit 1: Fastest Delivery Times for 2015 Cyber Monday Shopping
Delivered in 1 Day:  Zappos*
Delivered in 2 Days:  Lowe's, Barneys,* Burberry
Delivered in 3 Days:  REI, Saks, Amazon,* Under Armour*
Delivered in 4 Days:  Bloomingdale's
* Fastest retailers in 2014

But outside of the top  Black Friday performers, most retailers took longer to deliver compared to 2014. The average order-to-delivery time across all 62 retailers studied was 6.9 days — 20 percent slower than the average of all retailers surveyed in last year's study.

Although speed suffered, success improved: Better execution enabled 80 percent of retailers to complete orders within two weeks of Cyber Monday, up from 66 percent in 2014, with 9 percent fewer cancelled orders.

When it came time to ship last-minute orders, procrastinators were in good hands this year. Saks was a standout, giving customers free shipping (with an offer code) on the 23rd for next-day delivery. Many other retailers allowed ordering up to the 22nd and successfully delivered on the 24th, including Zappos, REI, Macy's, Bloomingdale's and Best Buy — some familiar faces from the Cyber Monday standout list.

The average last ship date for Christmas Eve arrival was December 21, a day later than last year's average, as retailers took advantage of Christmas falling on a Friday. The extra day also helped them better keep their promises, with 94 percent of packages making it under the tree in time vs. 87 percent last year.

A Christmas first, 9 percent of the retailers studied guaranteed that the item would arrive in time and, if it didn't, the item was free. On the other end of the spectrum, 14 percent of retailers didn't make any delivery date promises going into Christmas week.

All I want for Christmas is … free shipping
A whopping 90 percent of retailers offered a way for customers to get free shipping on Cyber Monday, up 15 percent from 2014. And 64 percent of retailers offered free shipping on everything, up nearly 50 percent from 2014. Plus, this year, a full half of all retailers offered buy online, pick up in store (BOPUS) or reserve-in-store opportunities—up 35 percent from last year.

Additionally, many retailers who offered these services in a few stores last year have expanded them to more, if not all, of their stores. Since this is typically the fastest way to get your order, and is usually free, this is good news for consumers.

BOPUS blues
While 35 percent more retailers are offering the buy online, pick up in store option, and many retailers who offered it in 2014 have expanded the service to additional doors, it was clear that many of them are still on thin ice.
The winners — Target, Macy's and Lowe's — provided good communication after the purchase, had the order ready in less than two hours and made the pickup experience quick and easy. Most importantly, the experience was equally painless across all of the chains' tested stores.

But many more retailers were on the naughty list when it came to BOPUS. In fact, only 40 percent of BOPUS transactions were error-free this year, compared to 92 percent of delivered orders in the study and 98 percent of delivered orders during the rest of the year. This huge service gap — especially in such a customer-facing area — exposes retailers and can leave customers out in the cold.

Retailers "bah humbug" at cost to serve
With more distribution points, the number of packages per order is increasing. Paired with less revenue from shipping, with only 10 percent charging a fee, retailers are facing higher-than-ever fulfillment costs, especially when rising carrier costs are thrown into the mix.

Increasing capacity to handle this growth is expensive, but may be necessary as e-commerce sales continue to grow. Retailers are now beginning to confront one of e-commerce retailing's basic issues: It's less profitable than brick-and-mortar. When online sales made up only a single-digit percentage of a retailer's total sales, this issue was easier to ignore, but as e-commerce sales only continue to grow, retailers will have to confront the cost issue in 2016.

Turbulence ahead for Santa's sleigh?
Higher-than-anticipated e-commerce volumes stressed carrier networks during Cyber Monday ordering. For example, 9 percent of packages sent via UPS Ground encountered some type of unexpected delay in the shipping process. While these are typically small delays and pale in comparison to some retailer-caused delays, they point to a larger problem — a carrier network at capacity.
You have only to look back to 2013 to find out what could happen if the order volumes exceed retailer and carrier capacity. That was the year that 15 percent of the packages Kurt Salmon ordered at the last minute did not make it under the tree in time. 

On the bright side, the majority of these issues seem to have subsided as volumes declined heading into Christmas week, although carrier success rates were down slightly over last year. But the capacity issue remains a huge one for retailers heading into 2016 and will likely drive up carrier costs even higher.

With a new year comes a chance to address these two significant issues — cost and capacity — in the relative calm before next year's sleigh bells start to sound in the distance. Retailers that don't will likely find themselves on 2016's naughty list.

Steve Osburn is a retail strategist at Kurt Salmon, a global consulting firm. He has over a decade of experience advising the world's leading retailers and brands on their supply chain strategy. Contact Steve at [email protected].
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