Clicks vs. mortar: E-tail shipping strategies diverge

By Staff -- Logistics Management, 7/1/2000

Old-fashioned bricks-and-mortar retailers handle distribution for online sales differently from start-up Web merchants. That's the conclusion of a recent study conducted by the consulting firm PricewaterhouseCoopers in conjunction with the publication Eretailing World. The study's authors analyzed 36 surveys returned by "pure-play" e-retailers and 39 responses from multichannel retailers that have both Web and brick storefronts.

About one-third of the purely online retailers (30.6 percent) say they fulfill online orders primarily at a company facility that was developed or converted specifically to support Internet sales. Another third (30.6 percent) of those respondents say they drop-ship from manufacturers or distributors of their products. On-line retailers also use other approaches such as having the work done by alliance or joint venture partners (8.3 percent) or third-party fulfillment centers (8.3 percent), or even sending products like software directly over the Internet to the customer (5.6 percent).

Multichannel survey respondents (those that also run traditional retail stores) take a different approach. The majority (61.5 percent) say they pick and ship orders from a company facility that existed before they started online retailing. Only 10.3 percent say they handle orders through a distribution center that was established specifically for online retailing. Another 17.9 percent say they outsource fulfillment to a third-party logistics company. Others either drop-ship from manufacturers or distributors (5.1 percent) or turn to alliance partners for help (2.6 percent). None send products directly over the Internet.

About two-thirds of the multichannel retailers use existing internal resources to handle such tasks as warehousing, picking and packing, shipping, returns management, and replenishment. About one-fifth (20.5 percent) of those companies look to third-party logistics companies to handle warehousing and picking and packing. Some 23 percent turn to 3PLs to handle shipping operations. Only a small number (12.8 percent) of respondents rely on third parties to manage returns and replenishment.

Pure-play retailers, on the other hand, are more apt to look to outsiders for help in handling these distribution tasks. Just under 42 percent say they outsource inventory management and warehousing to a third party. Another 44.4 percent say they outsource picking and packing, while 47.2 percent turn their shipping operations over to an outsider. Only about one-fourth say third parties handle their returns and replenishment (22.2 percent and 25 percent, respectively).

Many Web merchants do handle those tasks in-house. One-fourth (25 percent) say they have developed or converted warehousing capabilities specifically to support online operations, and another 22.2 percent have developed their own picking and packing operations. Interestingly, some in this group claim to have had some of these capabilities prior to the start of their online retail operations. Some 22 percent report that was the case with warehousing capabilities and another 19 percent say they had in-house picking and packing capabilities before start-up. The rest of the pure-play respondents say they are using some combination of in-house and outsourced operations.

Web and traditional retailers also differ on how to handle customer returns of merchandise ordered over the Internet. More than half (53.8 percent) of the multichannel retailers say they allow their customers to choose how to return the product but do not refund the postage costs. Only 36.1 percent of their Web-only counterparts do the same. Less than one-fifth (16.7 percent) of Web-only merchants and 15.4 percent of multichannel vendors say they allow customers to choose how to return unwanted merchandise, with the retailer paying the postage. A very small number-5.6 percent of the online retailers and 2.6 percent of the traditional merchants-simply issue a refund without requiring customers to return products. (Editor's Note: The survey allowed multiple responses to this question.)

Most of the multichannel sellers do not allow customers to return products to stores-only 28.2 percent, in fact, offer that option. The same percentage of traditional retailers ask customers to call a customer-service number to schedule a pickup of returned goods. About one-third (33 percent) of the Web-only merchants require their customers to call a special number to arrange returns.

Finally, the survey notes that Internet retailers are spending a higher proportion of their sales revenues on fulfillment expenses than their bricks-and-mortar counterparts do. The pure-play online merchants say they are spending 18.9 percent of their sales revenues on fulfillment, while the multichannel retailers report spending only 13.4 percent on that function. Because of e-tailers' higher costs, the study authors conclude that "for Internet retailers to produce an acceptable level of profit, fulfillment/expense ratios must come down."