Can Giving Consumers Choice Ever Be Profitable?

U.S. consumers are forecast to spend close to $700 billion buying groceries in 2015, according to BI Intelligence¹. Interestingly the percentage of that spend conducted online is still in single figures. But it’s set to get a lot bigger. The same study predicts that online grocery sales will increase 21.1% every year through to 2018 reaching an annual value of $18 billion. Retailers across all categories are seeing the same trend towards online purchasing.

Thanks to technology, consumers can shop 24/7/365 and often the selection of products online is more extensive than what is carried in brick and mortar stores but all of this convenience comes at a cost to the retailer. Previously we would go along to a Supercenter, buy our weekly list of groceries and submit to the carefully positioned specials. Now we can order our groceries online – probably ordering smaller volumes, more regularly – and want them delivered by the store after we get home from work at 8pm, or before the game starts on a Saturday afternoon.

Grocers and other retailers, looking to differentiate their service, are now offering the choice of 1-hour home delivery windows that can be scheduled during online checkout. These businesses know they need to keep last mile delivery costs as low as possible, but the fight for wallet share means they have to meet the growing consumer demand for convenience. With 55% of US consumers saying they now prefer to buy online², what does this mean for the margin-strapped retailer?

Consumers like the convenience offered by home delivery but smart retailers realize that convenience and flexibility don’t always have to be cost prohibitive. Grocery stores, along with other retailers, are extending their services to include drop off at Click & Collect boxes. These facilities are springing up in all kinds of locations and allow consumers to pick up the orders themselves near their work or home. Other retailers allow customers to order online and pick up in store or in a drive-thru location. It’s a win-win solution. Retailers get to make the most of their existing brick and mortar stores, reduce the number of deliveries required – and therefore the cost – while still offering consumers choice. When you start factoring in deliveries that require multiple attempts before they are successful, and the cost of picking up “returns”, this approach becomes even more attractive.

But this isn’t the whole story. Whatever fulfillment choices the retailer wants to offer, the customer will want to compare all of the options, see the prices and make a decision about their preferred delivery model and time window immediately. It’s vital for profitability to offer choices that are cost effective for the retailer.

Fortunately this can now be achieved using the latest evolution of route optimization systems which can continually optimize delivery schedules and check the cost of the various delivery options before they are offered to the customer. Delivery schedules are optimized as orders are entered, or returns requested, improving profit margins by lowering mileage and transport costs. Keeping track of trucks to ensure they are following planned routes and will arrive on time is also important to avoiding the cost of failed deliveries.

Profitability and choice have sometimes seemed mutually exclusive as retailers compete to meet the consumer need for more convenience and more flexibility. Using routing and scheduling optimization software not only helps retailers lower their delivery costs with reduced mileage, more efficient routes and improved asset utilization but as more and more data about consumer choices is gathered, it may also become a strategic tool to help retailers answer the tricky question of what level of choice consumers are really prepared to pay for, how much and when. Now wouldn’t that be helpful.

Paragon’s home delivery system Paragon HDX is a modular system that provides visibility throughout the order fulfillment process. Get in touch to find out how it could help you balance costs and customer expectations.

¹ BI Intelligence from Business Insider
² UPS Pulse of the Online Shopper, UPS, June 2014