In-Store Fulfillment is No Defense Against Amazon

A very good article from MIT details why having workers pick customer orders for them for in-store delivery of online orders is a flawed strategy.

I can see why by putting my last visit to CVS in that context.   We went to get some cotton balls, peroxide, and hair spray.  Assume we had ordered it online.  And pretend I’m not me, but instead a store employee picking the order.  I go to the first aid section; there are six different kinds of cotton balls, and it isn’t possible to tell them apart from the labeling on the packages.  Some are clearly intended to be identical, but they are in different packaging and imprints, and the different sizes are all mixed up. And they are stored in two different places in the store!  I wander around for five minutes checking them out, then ask a clerk, who tells me about the two stock points. After another five minutes I have my package.

Next I look for the peroxide.  There are two brands, one a CVS private label, and other a named brand. The private label one is nominally cheaper, but the name brand one is almost the same price.  But… the named brand one can be bought cheaper with an in-store coupon, which cannot be used for online.  So I pick the private label brand.

Finally the hair spray.  There are myriad hair spray products but they are stored using vendor managed inventory in manufacturer specific displays.  The one ordered is mixed in with ten different varieties all with similar labeling but minor characteristic differences.  On the way there I find one that is very similar to the one I ordered, and would be suitable, but is half price on an in store special.  If I were me, I would buy it now. but I am picking on behalf of the customer.  Do I pick the cheaper one, and tell the customer that this one would be just as good and is half price? Do I continue to get the one she ordered without any disclosure of a better priced item that might work?  Do I have any disclosure requirement either online or in the store?

Done picking, I go to checkout counter (or kiosk) to ring up and deposit my items in the private locker, where it waits for me as customer.   I have spent fifteen minutes picking; that lets me pick about 32 orders in a shift of 8 hours (no breaks).  If the average order is $30, I have abetted about $960 of business. Assuming half is operating margin, about $480 is left. My salary at $15 an hour (minimum wage) is $120, If I get benefits of 33% (typical in CA) that goes to $160. There is $320 left be credited against other costs and take my profit.   Can I cover all my transportation, stocking, building expenses, and overhead etc with this much?  If I need 5% profit at the store level, that’s $48 on its own, leaving less than $300 out of $960. That’s about 31.25%

(EBITDA for CVS, quarter ending 3/31/2016 was $2,176m and total revenue was $43,215m, or 5.03%; from Yahoo finance figures we cannot disentangle retail from the Caremark drug insurance business; net income was $1,147m or about half the EBITDA).

Operating expenses are currently about 2/3 of gross profit (4568m/6744m, source CVS Interactive analyst center ) , leaving 33%.  My omnichannel experience would be a drag on the store. I think that’s the point of the MIT article.

Somehow retailers are going to have to discover how the omnichannel operation can be streamlined in the store to reduce expenses considerably. It’s certainly possible with improved technology, willing trained workers, and close attention to operations changes to support it.  but it’s going to be a long fight, with many pitfalls along the way.

Source: In-Store Fulfillment is No Defense Against Amazon


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