Availability – the secret to online retail success

Joe O’Sullivan asks a number of questions about the path being followed in the appliance market

As location, location, location was the byword in the retail market for many years, so it has now been replaced by availability, availability, availability. In the past decade or so, the traditional retail model has changed beyond recognition and in no area is this seen more clearly than in the home appliance market. The explosive growth of online sales, price comparison sites and escalating structural costs are giving retailers and manufacturers a headache the size of which is only just being realised. Are we facing the death of the high street retail model, as is being widely reported, or just a shift to a different model? Will retailers and manufacturers realise that their goals are the same, that collaboration might actually work? That indeed it must work if they are to survive?
The growth of online appliance sales in the UK occurred so rapidly that most underestimated the impact. What many thought at best would take generations to become socially acceptable and at worst was a passing fad has happened in the blink of an eye. Retailers and manufacturers have reacted or are reacting to this change in some way. Many are embracing the changes and challenges, but most have been slow, albeit not always consciously
In what we fondly refer to as the traditional high street retail model, the appliance world was a simple one. Manufacturers produced and offered a decent range of products, some of which were budget models and some premium. They kept stocks in the UK, the levels generally dictated by where manufacturing took place and/or the lead-times and general surety of supply. Retailers ranged a proportion of these products and for larger retailers stocked them to a smaller or greater extent in their own distribution centres. They in turn fed their retail stores with an even smaller proportion of these models so that consumers could buy and collect from store.
Lead-times were generous. The manufacturer would supply the retailers DC within a week or two and its store once or twice per week. This would increase to, perhaps, a week if the store ordered an extended-range product that was only stocked at the DC. Promotional activity was limited to a few models and these would be delivered in bulk quantities direct to the retailers DC. In general, activity levels were well known and reasonably planned for, and the same could also be said for space. Many home appliance manufacturers and retailers operated from buildings with long lease histories or tenancies confirming the fairly stable marketplace in which they existed.
To appreciate the scale of impact on this industry you have to stand back, remove the rose-tinted specs and assess what has changed in just a few short years. The online store gave the retailer the opportunity to sell a wider and wider range of the manufacturers’ portfolio. Suddenly there were no limits. Yes there were technical issues (many still around), but in simplistic terms if it was in a catalogue then it could go online and be sold. There were no limitations, no space constraints, no shop floor layout concerns. It was a gift from heaven to the marketeer.
This kernel of opportunity had a sinister side effect though, one that slipped mainly unnoticed under the nose of many a retailer, and that was the comparison website. Now the retailer not only wanted everything from everyone on its website, it absolutely needed it. Why? Well, it soon became apparent that shopping habits were changing and changing fast. Consumers becoming far too lazy to search individual websites for their appliance needs. It was much easier and simpler to have them all arranged on a single site. This then became the twist in the tail: if you did not range what your competitors did, you just did not appear when consumers were comparing prices. You were not in the game.
The other effect that largely slipped under the radar was the slow but steady increase in manufacturers’ product ranges and portfolios. The ease with which products could be listed online seemed to remove the many barriers that had existed before. This would add significantly to the problems seen today, but for now if you wanted a blue oven or needed a green fridge, why not? You could have one.
Of course, the appliance also needs to be delivered. Two-person home delivery has been around for some time, but now it was being looked on as a tool that provided competitor advantage. Consumers were demanding their goods faster, on a Saturday or in a time slot, with added-value services such installation; and, of course, we as consumers were being conditioned to expect it for free. Manufacturers and retailers have set up dedicated and shared-user networks to support this consumer demand. But is there enough volume for them all? The cost is anywhere between £25 and £35, but this has to come down. The consumer is demanding it.
So will the consumer’s needs continue to be met if manufacturers and retailers view the delivery or final mile as a legitimate area in which to compete? Will scale and cost drive the change that is needed?
So we come to the present day and the online appliance retail market of 2014. Everyone is in the race to differing degrees and all are interested in attracting the consumers’ spending. Indeed, retailers far outweigh manufacturers in their belief that the supply chain needs to change. The pure play online retailer has grown rapidly and in most cases is technologically more advanced. However, the bricks-and-mortar retailer is now also established online, and although weaker technically and perhaps less agile does have the advantage of being more established brand names with display space on the high street.
However, all are now after one thing and one thing only and that is availability. It is the ultimate prize and one that is being aggressively pursued by all retailers. The bottom line is that consumers when shopping online for appliances are absolutely ruthless. If the consumer visiting a retailer’s website finds that the item is not in stock, then he or she will not hesitate for a second before going elsewhere. Retailers know this, they get it, and as a result never has the scramble for better availability been more intense. The tool being used by many to achieve this is, however, a fairly blunt one. Add more stock. Is this sustainable? Can the industry afford the cost in stock and building space?
Manufacturer product ranges have been increasing. Some have seen increases of 20% or more in the past 12 months. Now look at what is happening in many retail distribution sites. As a result of online sales rapid growth (for some it accounts for over 40% of all sales) and the need to have it all available, more stock is required. The old system cannot be changed easily, so you have to perpetuate what you know. Retailers that had 50 SKU in stock previously now have 500. Those with 500 now have thousands. Is this sustainable? Perhaps, but there are other problems. Operationally it is difficult for many retailers to change their complex and established distribution operations. So while more and more stock comes in, booking capacities get stretched and lead-times get pushed out. This in turn reduces the accuracy of forecasts and results in warehouses with large quantities of overstock and out of stocks. It is not unusual to see a distribution centre stock level grow by 10–20%, but result in falling availability.
Appliances are also large boxes. They require large warehouses and there are only so many large warehouses. Distribution centres are filled, particularly during peak periods, temporary warehouses are sourced and third-party shed operators are engaged. The warehouse property market is currently buoyant and is forecasting an improving situation for developers and funds in the next few years. Rents are rising as the number of available sites falls. An element of this supply drought is due to the lack of building undertaken in the past six years, but some is inevitably due to the change in the retail model, which has driven a chase for space.
Are the costs sustainable? If the march for larger stocks is not brought under control, the impact on cost and efficiency and ultimately the viability of the retailer in question is potentially catastrophic.
A further effect not yet mentioned is the impact of transport, in particular trunking. All of this additional stock has to be delivered to the retail distribution centres impacting on cost, time and the environment. Ironically, some will be transported by the home delivery service back to the very area it originated from. Is this sensible? Could the cost be used to better effect?
This article poses many questions for retailers and manufacturers alike, some uncomfortable. I believe they are valid questions and many readers will recognise similarities in their own organisation or industry. Many articles have been published on the subject of lean supply chains, most notably by Professor Richard Wilding1, Cranfield University, who has written extensively on lean and agile supply chains and in particular the trade off between cost and service. I believe that it is these topics that not only best describe, but also potentially offer the most sensible long-term solution in the home appliance market today.
If they want a sustainable business, retailers need to be lean and manufacturers need to be more agile. The consumer wants the new purchase tomorrow or even today and for free; but can we square this circle? Retailers will, of course, need to stock some product – for example, OEM or exclusive models – but everything else should be held by the manufacturer. Collaboration on forecasts particularly promotional must greatly improve. Retailers need urgently to improve their technology, connect with the manufacturer and share information on stock levels and availability.
Manufacturers also need to step up to the plate. They need to ensure more consistent supply from their factories, but accept that increases in ranges and the need for better availability will inevitably mean that they will have to hold more stock. They have to recognise that as engineers they operate in an fmcg arena, not in a factory, and in an fmcg arena you have to be agile. Manufacturers need to look at seven-day working, 24-hour operations, rapid despatching and cross-dock solutions, all of which will be needed to meet the consumer demand. Finally, I believe that home delivery operations will be carried out by the manufacturer or at least from the manufacturer. This demand will grow as consumers demand and expect next-day and same-day delivery, and it will be impossible to achieve if both the retailer and manufacturer are involved in the delivery process.
Retailers have to accept that manufacturers are integral to the achievement of better availability. For their part, manufacturers have to get closer to the consumer, provide what they are demanding and, in so doing, support the retailer proposition. The retail appliance market is extremely competitive. If nothing changes, then more retailers will fail, some large, some small, and perhaps only those with the largest pockets will survive.
I believe that there is a solution and I have tried to identify some strategies in this article. I am, however, a realist and understand that on some points a seismic shift in thinking would be required. In my idealised world, the manufacturer will incur more cost. It will need more space, and do not forget that the consumer will want the delivery to be free. It will save some money on trunking and the retailer, of course, will reduce the cost of storage and handling while hopefully improving availability. But the key question is, will they collaborate?
If availability is the pot of gold at the end of the rainbow, then it must be achieved at a reduced cost and it will take true collaboration to do this. It remains to be seen if this will happen.