Why Retail Stores Won’t Support Same-Day Delivery
The Gap recently announced it will close more than 400 stores. Meanwhile Amazon is headed in the opposite direction, announcing that they are opening urban “micro warehouses” across the country, from which they’ll perform same-day local delivery of their most popular inventory. It’s amazing to watch the fortunes of two retail behemoths, and essentially all of brick-and-mortar retail, changing before our eyes. To understand why it’s happening, let’s compare Amazon’s customer fulfillment strategy to brick and mortar’s long-standing approach.
Amazon is focused on improving their already industry-leading delivery service levels by rapidly expanding the number of markets in which they offer same-day delivery. Both on-demand (i.e., get your order in one hour) and AM/PM service (i.e., order in the morning, get your order in the afternoon or evening) require inventory close to the customer. Consequently Amazon has added urban micro warehouses in low-rent metro areas that provide easy inbound and outbound logistics. These micro warehouses are optimized for rapid fulfillment, and aren’t burdened with the worries of a retail environment like cosmetic appearance, displays, or public restrooms.
Conversely, most existing retail brick-and-mortar locations are set up all wrong when it comes to rapid fulfillment and local delivery. Here’s why:
• Cost – retailers pay high rents to maximize foot traffic, but Amazon can locate in low-rent districts;
• Consolidation – Amazon consolidates inbound logistics at a single location in an urban center, whereas retailers usually have many dispersed locations;
• Location – Amazon can locate their new facilities based purely on order history, whereas retail stores have numerous logistical and practical constraints when choosing a new store location;
• Access – retail stores in malls and downtown areas are a nightmare for same-day delivery, as many people will be needing to quickly pick up and deliver throughout the day;
• Design – retail stores have the consumer in mind for everything they do, whereas Amazon micro warehouses have fulfillment in mind for everything they do. Optimizing for both consumer sales and fulfillment efficiency is nearly impossible; and,
• Scale – many retailers do not have enough large-footprint locations to effectively roll out same-day or local delivery services.
My local Gap store is in a downtown San Francisco mall, where it is impossible to find parking and get quickly in and out. This store will never be efficient for local delivery, and I estimate that 70 percent of existing retail locations have similar challenges. Some retailers such as Costco and Home Depot have warehouse-like, rapid will-call programs (i.e., order online and come pick up) and reasonable access (i.e., outside city centers, large parking lots)—and could to get into the same-day and local delivery game. But even these retailers will struggle to match Amazon’s micro warehouse model, as they need everything from space to pack packages to more staff.
Don’t get me wrong: not every brick and mortar location is in trouble in the age of e-commerce’s meteoric rise. Profitable, high-foot-traffic stores will persevere, and they also have value for e-commerce in that they provide branding, a showcase for inventory, and will-call. However, the popular assumption that brick-and-mortar retailers can leverage existing local inventory to effectively compete with Amazon on same-day delivery is simply not true.
How will retailers compete if they can’t leverage their stores? I’d expect new consolidated urban fulfillment centers to emerge. These would provide urban warehousing, fulfillment, and local delivery services as an outsourced service for multiple retailers—or anyone wanting to forward deploy their inventory. This way the retailers can pool volume and achieve per-delivery cost and service levels comparable to Amazon. Prologis, Alibaba, and FedEx come to mind as possible entrants into this new market, but only time will tell.