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02/24/2016

Silos Persist Despite Rise of Omnichannel

The rise of omnichannel retailing and the age of "me commerce" in which the consumer is the new boss has led retailers to transform their business models towards a more integrated, seamless experience for consumers, regardless which channel they choose to shop. However, to succeed at developing an omnichannel model also means doing so profitably, no small feat for retailers today.

The third annual JDA survey of more than 300 retailers finds that only 18 percent of CEOs say they have eliminated operational silos and are delivering seamless omnichannel shopping experiences for their customers. This means that the majority of retailers surveyed are still operating in silos, which is taking a toll on retailers' profitability and ability to create a seamless shopping experience for customers.

This and other findings are highlighted in CEO Viewpoint 2016: The Journey to Profitable Omnichannel Commerce, a new report prepared for JDA Software Group, Inc. by PwC. This study is based on a global survey of more than 300 retail and consumer goods CEOs conducted in late 2015.

Retailers without omnichannel operational silos are more competitively positioned
This year's report highlights crucial differences between CEOs surveyed who eliminated operational silos and now deliver a customer-centric omnichannel shopping experience (18 percent) vs. those who had not eliminated such silos. Companies without operational silos expressed greater confidence in revenue growth (59 percent vs. 48 percent average for all CEOs) and profit growth (63 percent vs. 43 percent) than their peers.

The elimination of such silos speaks not only to stronger positioning for revenue and profit growth in the year ahead, but considerable differences in omnichannel maturity across the companies and countries surveyed (these include: China, Germany, Mexico, United Kingdom and United States). CEOs that have removed silos are also achieving significant competitive advantage though lower costs and increased investments in customer-centric services.

"The survey results from our third annual CEO survey indicate that retailers poised to become omnichannel leaders are investing more in capabilities that allow them to better understand their customers, delivering richer customer shopping experiences," said Wayne Usie, senior vice president, global industries and value delivery, JDA. "Companies who want to successfully compete with these leaders, therefore, must not only remove the business silos that hinder seamless operations, but also rapidly increase their investments in omnichannel capabilities before they fall further behind omnichannel leaders. These actions will define retail winners and losers going forward."

Omnichannel fulfillment costs threatening retailers' profitability
Not only are CEOs who have removed business silos less concerned about the impact of omnichannel operations, they also may have significant cost advantage over those companies still operating in silos. While a staggering 74 percent of CEOs in companies operating in silos say their costs for omnichannel fulfillment are increasing, only 59 percent of the companies that have eliminated silos say these costs are increasing. The highest costs for omnichannel fulfillment centers around shipping to consumers:
  • Nearly one third (32 percent) of CEOs who have eliminated silos and 45 percent for those with silos indicate shipping directly to consumers from a distribution center is their highest omnichannel fulfillment cost
  • Processing returns was second highest; 51 percent without silos vs. 67 percent with silos
This data strongly suggests that removing silos from omnichannel operations can give companies a competitive cost advantage. To deal with the high costs of omnichannel fulfillment – particularly for those operating in silos – CEOs are planning to offset increased costs in the following ways:
  • Raising the minimum order value for free home delivery (39 percent)
  • Raising the minimum order value for free Click & Collect services (31 percent)
  • Increasing the cost for home delivery (29 percent)
However, putting cost increases back on the consumer may dissuade consumers from shopping with them, as the recent JDA 2015 Consumer Survey indicates that consumers are unwilling to pay for returns and may choose an alternate retailer instead.

Click & Collect options increasing in emerging markets
This survey also reveals that retailers who wish to compete in global markets (China and Mexico) realize they must offer a wider range of fulfillment offerings to their customers, to compete with companies in those markets already offering such services (tweet this). Over the next 12 months:
  • Sixty percent of retailers in emerging markets are offering or plan to offer in-store Click & Collect services vs. 41 percent of retailers in mature markets
  • In addition, 46 percent of retailers in emerging markets are offering or plan to offer Click & Collect services in commuter travel hubs vs. 22 percent of retailers in mature markets
  • Another 42 percent of retailers in emerging markets are offering or plan to offer Click & Collect services via third-party retailers vs. 18 percent of retailers in mature markets.
Of note, more mature omnichannel companies (non-siloed) are more likely to offer in-store Click & Collect (56 percent vs. 47 percent) than their peers with silos, but are less likely to offer any of the other Click & Collect options such as picking up purchases at lockers or commuter travel hubs (tweet this). These companies appear more focused on the speed of delivery, favoring same-day over next day deliveries and are more likely to offer specific time slots for customer deliveries. In mature markets, speed to delivery can be a loyalty-building competitive advantage.

Where are CEOs investing in omnichannel? Order fulfillment options
Ultimately, the data from this survey reveals that CEOs are investing in the one area that is costing them the most, and potentially impacting their profitability: order fulfillment options.

CEOs surveyed are spending 26 percent of their investment capital on omnichannel readiness in 2016, with some of these investments centering around extending omnichannel fulfillment options for customers (51 percent), providing a seamless customer shopping experience (49 percent) and most importantly, understanding social media for business use (49 percent). Understanding and analyzing customer data is critical to mastering omnichannel in 2016 and beyond.

"Understanding customer sentiment and shopping preferences by way of social media and big data analytics is key to meeting the omnichannel imperatives dictated by consumers, ensuring customer satisfaction and increasing retailers' profitability in the years ahead," continued Usie.

"It's important to note that CEOs' investment intentions are higher now than they are over the next three years, especially around the critical omnichannel functions of extending the range of customer fulfillment options and providing seamless customer shopping experiences.

"Retailers need to get it right now in order to stay competitive and expand into emerging markets, particularly as big box retailers and discount retailers continue to proliferate and threaten smaller retailers globally," Usie concluded.