Retailing has always been subject to continual change, and not just in the fashion categories. But
right now retailing is being shaken to its foundations - just as much as when the high street was
altered by the rapid growth of supermarket shopping in the 1950s. In this period of radical
transformation it is the people who work in the industry who are losing out and their customers
who are reaping the benefits. Retail wages are being driven down dramatically and many of those
people who work in the supply chain are self-employed, often on zero day contracts with no
sickness, holiday or pension provision.
Like countless other people my family and I are shopping online for many more things than we
have done in previous years, and that is primarily because retail websites are much better, and the
delivery of goods and the return of unsatisfactory merchandise is far more effective. It’s useful to
look at what is happening here in the U.K. because by one measure the U.K. leads the world in
online retail. In this country a higher proportion of all retail purchases (15.2%) takes place using
the Internet than anywhere else. One reason that U.K. shoppers buy so much online is that
mainland Britain’s dense population is concentrated in urban centres, and very few places in the
countryside are more than an hour or three by van from the depots for those all-important free
home deliveries. Of course the total size of the U.S. retail market is far larger in volume terms, but
their proportion of online sales is substantially lower at 12.7%.
At a time when overall retail growth is low, and some categories are in real decline, online retail is
growing very fast across developed countries: totalling 13.8% in the U.S.; 16.2% in the U.K. and
23.1% in Germany. These figures, and those on the PowerPoint chart, come from The Centre for
Retail Research based in the U.K. Such growth rates during The Great Reversal are amazing – just
imagine what the pace of change would have been if economic times were far more buoyant.
Healthy businesses naturally migrate to where the business is, so the effect on the shopping
centres and high streets of the U.K. is proving to be devastating. If you have a pension and you
think this doesn't affect you then, sadly, you will almost certainly be wrong. Many pension funds
have invested in retail property companies as for decades these were seen as safe bets that would
provide a good return as well as a steadily appreciating property portfolio. For the last 50 years,
retail property only seemed to go up in value – but the Internet and The Great Reversal has
changed all that. How big, and important, Internet shopping will eventually become can only be a
guess. I remember sitting with an e-commerce analyst at a well-known consultancy in Boston in
the U.S. 10 years ago discussing exactly this question. His estimate, considered bullish at the time,
was that online shopping would peak at about 14-14.5% of total retail purchases. Fast forward to
today and the U.S. is rapidly approaching that estimate, and here in the U.K. we have broached 15%
and there’s still no sign of a slowdown.
In response to these unprecedented circumstances some retailers are cutting down on the number
of edge of town large superstores they own. The more sophisticated merchants are rapidly re-
shaping their businesses around an “omni-channel” strategy where online ordering and collection
next day in a store is heavily promoted. This “click and collect” purchasing strategy is preferred by
retailers as much as it is by customers. It obviously plays to the retailers' distribution strengths, as
they’re delivering orders to stores they already deliver to anyway, and they avoid being involved
with the cost of delivery to customer's homes. Although it must be said that many retailers are
struggling to provide this service profitably. Even so, the concept of “click and collect” has become
highly competitive, especially in the U.S.: instead of the usual wait to collect the next day after
ordering, Wal-Mart now offers free same-day in-store pickup on more than 70,000 items.
Many customers have a misguided idea that online shopping is more profitable for a retailer
because they seem to be doing the work of selecting goods from what appears to be a low cost
website. And they get the impression that none of the old costs of a “bricks and mortar” store is
associated with this method of purchasing. They’re wrong. It may come as a surprise to
purchasers but at the moment few vendors make much profit from their online sales. In fact most
established offline retailers end up running their online sales at a loss because of the costs
associated with home delivery and returns.
It was the giant online pioneer, Amazon, which set the benchmark of free delivery. Amazon is
usually secretive but it recently revealed that it had a record breaking year in 2014 shipping 5
billion items worldwide. Just over the Xmas period it saved its loyal customers over $2 billion in
shipping fees. Sucharita Mulpuru, a Forrester Research analyst, estimates that Amazon probably
loses $1 to $2 billion a year just on U.S. Prime shipments. Prime, as you probably know, offers free
unlimited one-day delivery on more than nine million items held in Amazon warehouses, with no
minimum order size, for an annual cost of £79 in the U.K. ($99 in the U.S.). That may initially seem
expensive, unless you buy a lot from Amazon, but it might not be when you consider you also get
unlimited digital photo storage on Amazon servers, unlimited streaming of 15,000 film and TV
episodes, as well as the opportunity to borrow thousands of Kindle book titles thrown in as well.
This attractive bundle is targeted at locking customers in to Amazon. The company realised a long
time ago how important free delivery is to increasing online sales, and in setting that customer
expectation, they have defined the industry. Most people now view free delivery as an online right.
According to comScore the number of online purchases in the United States with free delivery
reached 68 percent in the third quarter of 2014, up from 44 percent the previous year. Now
Amazon is preparing to raise the stakes on the delivery front. The behemoth is preparing the
ground by rapidly building gigantic warehouses near major U.S. cities. Their extraordinary aim is to
roll out their highly successful extra-fast delivery option called Prime Now, a one hour delivery
service in New York, on a much bigger scale.
All this subsidised shipping doesn’t come cheap: Amazon's shipping costs for the first nine months
of 2014 rose 32%, up from 29% for the same period in 2013. It also comes with another cost – a
human one. Knowing the customer expectation of free deliveries, retailers squeeze tightly when
negotiating their contracts with delivery companies. Already in the U.K. we had a major delivery
company failure when Citylink went under, and another well-established large delivery company,
Yodel, is struggling with heavy losses.
It’s becoming clear that only the super-efficient will survive in the home delivery business and,
unfairly, much of the human cost is being passed on to the delivery drivers who do the actual work.
As an example, look at the German logistics company, Hermes, who have been the primary
beneficiary of Citylink's demise. In the U.K. Hermes handles over 200 million parcels a year for
home delivery from the lion's share of High Street retailers like Next, ASOS, Tesco, John Lewis, J.D.
Williams, Debenhams and the Arcadia Group. Hermes has organised a network of over 5,000 small
shops which act as pick-up points for when people can’t be at home to receive goods and drop-off
points for returning goods. The company has also recruited over 10,000 of what Hermes calls
“lifestyle couriers.” By this they mean self-employed couriers on zero hour contracts with no
benefits like sick leave, holidays or pension provision. Indeed their contracts actually stipulate that
even a day-off isn't allowed unless the courier finds a substitute driver to cover the time. Just like
the now defunct Citylink, and the struggling Yodel, Hermes couriers supply their own transport and
fuel and receive between 45p and 50p per parcel delivered. And if the customer isn't at home at
the time of delivery then they don't get paid.
A typical day for a delivery driver starts by downloading delivery schedules at 6 a.m., then driving to
the depot to pick up the parcels, sorting them into local areas, and being ready to leave the depot
at 8 a.m. before going out to deliver the parcels. Nobody can argue against the fact that this is a
job with low pay for working very long hours, with high costs and high risks. If you want a better
understanding of what is involved, visit the cynically-named website lifestylecouriers.net to see the
problems of being a Hermes courier. The couriers recently scored a victory by forcing Hermes to
back down and let them have Easter Bank Holiday off. Some drivers think that hoping the
customer is in so they get paid for the drop is the hardest part of the job whilst others reckon
dealing with inclement weather and tight schedules is the worst aspect. I think very few people
would like to be forced into being a self-employed courier delivering parcels in the rain for 50p a
drop. Interactive Media in Retail Group (IMRG) in the U.K., which monitors over 220 retailers,
expects parcel volume from online retailers to grow by 13% this year so Hermes is in a growth
industry. But spare a thought, and maybe a coin or two, for the courier next time one delivers
online shopping to your door, especially if it’s raining. He’s at the sharp, and uncomfortable, end of
our expectation of free delivery when we shop online.
...with analysis & insight...
The true cost of FREE...