The words “free shipping” usually catch the gaze of the deal-hungry shopper, but for retailers and direct-to-consumer brands, it means pressure to the bottom line. Recently, two other words — price increase — are being seen in announcements by the United States Postal Service, FedEx, UPS and other carriers. These are variable costs that, while pleasing consumers, deeply erode gross margins.
But retailers are strategizing how to recoup costs without having anyone take the hit. In an interview with WWD, Guy Yehiav, chief executive officer of Profitect, a “prescriptive analytics” solution for retailers such as Ann Taylor, Ulta Beauty, Abercrombie & Fitch and DSW, details the impact of increased shipping rates and how to curtail costs.
WWD: What is the biggest challenge caused to the retailer by the increased UPS and FedEx shipping rates? What about the consumer?
Guy Yehiav: For retailers to weather these increased shipping rates, the challenge will be to optimize all portions of distribution — including shipping, supply chain and more — in order to remain competitive.
Retailers can survive these price increases, if they optimize the shipment portion of their own third-party logistics. Any retailer who wants to remain competitive will need to recognize consumers will continue to shop wherever they feel they are getting the best deals, and part of that includes the cost of shipping and returns.
The largest impact on consumers will be contingent on how retailers plan to execute their business in order to manage these price increases from UPS and FedEx. Retailers will need to either absorb the costs or pass them on to consumers. It’s important to remember that not every consumer should be dealt with in the same manner.
Retailers can cater shipping programs by customer, by product, by spend amount and more using data-driven solutions like prescriptive analytics, finding the most cost-effective way to deliver the product to the consumer.
WWD: As a whole, what is the current state of the U.S. postal service? Is “snail mail” generational or does it still hold relevance?
G.Y.: The U.S. Postal Service is facing numerous business challenges that have forced it to raise its shipping fees, stamps and other services. Just last year the organization reported a loss of nearly $4 billion, citing less volume, and higher pension and health-care costs. In early 2019, the organization began addressing this problem with rate hikes on stamps — the largest percentage hike since 1991 — and priority mail.
While volume may continue to decline, the USPS still holds relevance due to necessity. For individuals and small businesses living in remote or rural parts of America, the USPS is the only affordable alternative delivery system. With 157 million delivery points, the USPS has the largest reach and penetration of any other organization. In remote areas, even Amazon relies on the USPS to ensure packages are delivered.
Some retailers will ship to your home through UPS or FedEx for a higher cost than shipping through the USPS. Many retailers take this hybrid approach to shipping by getting products close, but not all the way, to the last mile. Instead, the packages are left at the local post office for the consumer to pick up. This also helps the USPS remain relevant.
WWD: How can retailers identify the best shipping strategies and curtail costs that would otherwise be put on the consumer?
G.Y.: These recent rate changes present an opportunity for retailers to take a data-driven approach to their shipping strategies. Some alternative methods retailers could implement to recoup costs include:
• Fixed-Fee Membership Model: Retailers can charge customers a flat fee that they pay on a yearly basis. Similar to competitors like Amazon, Bed Bath and Beyond, or Walmart, the cost of these memberships offset the shipping fees. Retailers that take this route can further increase yearly membership fees based on hikes from shipping companies.
• Subsidized Returns: Consumers return 15 percent to 40 percent of what they buy online and when they are not resold profit margins can be affected, especially when retailers cover the cost of shipping both ways, according to a proprietary study by Happy Returns.
With this method, retailers can charge customers for shipping if they decide to return a product. This strategy has multiple benefits, but one of the biggest is getting the consumer to think twice about returning a product. Not only does this save the retailer money on the return shipping, but it also eliminates the hassle of processing and reselling the returned product.
• Promoting BORIS [Buy Online Return in Store]: This method encourages returns to the store to create upsell and cross-sell opportunities. Bringing the consumer into the store creates an opportunity to offer new merchandise, while also having sales associates encourage further spending.
• Third-Party Shipping: The newest trend is for retailers to hire a third-party management company to handle returns. This strategy primarily benefits e-commerce retailers with no brick-and-mortar stores. With this strategy, consumers can come to one of the third party’s local drop-off locations with the product to be returned and its receipt. From there, an associate will handle the return for the retailer by shipping the product back and charging either the customer or retailer, depending on the agreement.
WWD: What are cost-effective ways retailers are using data and technology in their shipping/logistics processes?
G.Y.: Leading retailers have been leveraging solutions like prescriptive analytic technologies to improve load planning, transportation and logistics with real-time operational visibility into their loading. By using data such as load density, number of packages scanned and number of packages loaded by time, retailers gain actionable insights to achieve peak levels of performance and profitability.
WWD: How can retailers fine-tune their sourcing and better manage inventory to adapt to shipping increases?
G.Y.: It is common among retailers that certain stores often do not have enough inventory, while other stores have too much. The analysis for merchandise and allocation is frequently based on sales and inventory data that is compared to history, the previous year, market, region and all company data.
Many retailers rely on planning systems and their vendor’s allocation mechanism to identify specifically units per store. The main issue is that these software solutions typically forecast at an aggregate level and store cluster, failing to identify ultra-localization demands. This often results with higher markdowns at the end of a season on one hand and out of stock on required high demand units at the same time.
Another opportunity is to improve inventory accuracy at the store level so you can ship from the closest store to consumer at the lowest cost. With prescriptive analytics, you can easily identify issues for each level and make it easy for merchandisers to identify specific areas for improvement. Prescriptive analytics also identifies units per store and enables automatic clustering which allows a more holistic view of a store’s peers.
With data and technology at their aid, retailers are better equipped to curtail costs.