Where have all the shoppers gone? Online, where 3Q retail sales climbed nearly 6 percent
If there’s a silver lining for retailers anywhere in the economic storm, it’s online.
While in-store sales sagged in the third quarter, online sales were up nearly 6 percent year over year, indicating more consumers are hunting for bargains on their laptops or PCs, rather than department store aisles.
That may be down from the rocket-like expansion of years past but to many the growth in the face of a severe downturn suggests e-commerce is likely to become a more important, even transformative part of supply chains as the recession clears shopping mall crowds.
It’s already reshaping transportation networks as retailers collaborate with manufacturers to ship items directly to consumers, said Brian Kilcourse, managing partner at retail analyst RSR Research.
“All the supply chain costs go away,” he said. “It’s a competitive advantage. Can they grow it? I don’t see anything but blue sky for that opportunity, when you start to think about the implications of it.”
Most retailers’ online supply chains largely reflect their brick-and-mortar operations, says Dave Hogan, senior vice president of retail operations and chief information officer at the National Retail Federation. But that’s beginning to change as companies see savings from having fewer fixed assets in trucks and warehouses, more flexibility in transportation, lower inventory carrying costs and less costly and risky handling processes, he said.
Although online retail accounts for just 3.4 percent of all retail sales, according to the Department of Commerce, its weight in the retail space is almost certainly much greater, Kilcourse said.
The big unknown, he said, is the extent to which the online channel has become a lead generator for the stores. “The online retail space continues to grow (though) it’s still a minor part of the top-line revenue,” Kilcourse said.
It’s all a result of applying just-in-time principles familiar to manufacturing to the world of retailing enabled by the Internet, said UPS spokesman Norman Black. “We are impatient consumers,” he said. “We have gotten to the point where we expect an instantaneous response.”
E-commerce sales hit $34.4 billion in the third quarter, up 5.7 percent over the third quarter of 2007. The increase from the second quarter of 2008 was only 0.3 percent, perhaps signaling the recession’s initial impact on e-commerce.
Total retail sales fell 1.4 percent from the second quarter to the third quarter, dropping to $1.02 trillion. Year-over-year third-quarter sales inched up 0.3 percent.
Reports from shopping malls and stores were worse than the total figures reveal, however. Same-store sales for November fell 2.7 percent from the same month last year, according to the index maintained by the International Council of Shopping Centers. That was the biggest drop in the group’s index since 1969. The ICSC reported a 0.9 percent drop in same-store sales in October.
Retailers are already reorganizing their supply chains to take advantage of the emerging online channel, Black said.
Just getting shipments into the UPS system for delivery to the consumer used to be enough, he said; nowadays, shippers want to be as close to the system as they can.
Online footwear retailer Zappos built its warehouse in Sheperdsville, Ky., next to UPS’s main air hub in Louisville to take advantage of UPS’s late night pick-up schedule, Black said. This helps Zappos fill orders less than two hours after they are placed.
California-based specialty-gift online retailer CafePress moved its production to Louisville, Black said, allowing the company to ship T-shirts designed by their customers on the Internet within 24 hours.
Growing confidence in delivery reliability, said Black, has allowed online retailers “to extend the selling season later and later and later.” Online holiday retailers who used to require one-week’s advance purchase for Christmas delivery have shortened that to two or three days.
Changing consumer preferences are also driving retailers, Kilcourse said. “People don’t just view a store as a source for products,” he said, “they view it as a solution.”
“Instead of the consumer walking into the store, they’re clicking into the store,” he said.
In some cases, shoppers use the online channel to research a product and then go to the physical store to purchase it. In others, they’ll pay for an order online and expect to pick it up at the store by appointment the next day.
This poses hefty challenges for an online retailer’s transportation and IT systems, Kilcourse said. Inventory management systems must operate as close as possible to real-time in order to prevent stock-outs and overstocks.
Because retailers are trying to minimize their inventory at the same time that wholesalers want to consolidate their shipments, aligning transportation is always problematic.
“The notion of push-oriented supply chains is really being challenged by online retailers,” Kilcourse said.
“We’ve seen some pretty remarkable changes over the years as far as the consumer comfort level with online shopping and we don’t see anything that’s going to change that,” said Black.
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