Insight

Retail viewpoint: April showers retailers with positive news

April 2017

Much like the spring weather we’ve been having, the outlook for retailers is warm—and getting warmer. Core retail sales in March showed a 0.3% month-over-month gain, and a 4.4% year-over-year gain, which is a nice surprise.1 Electronics and appliances led the way with a 2.6% increase in spending, the biggest jump since June 2015.2 Clothing stores sales climbed 1.0% last month after falling 2.7% in February, which is the largest advance since February 2016.3 E-commerce was another bright spot. Sales at non-store retailers moved up 0.6% in March, which is an impressive 11.9% increase over last year, suggesting consumers are continuing to shift to online shopping.

Speaking of online shopping, it’s no secret that retailers are playing catch-up with Amazon’s delivery services. The e-commerce juggernaut continues to delight its Prime customers with free two-day shipping—among other Prime services like video streaming and e-book lending. In fact, a recent report valued a Prime membership at greater than $500 versus the annual subscription cost of $99.4 Offering five dollars for one is an easy sell.

In our 2016 home delivery and final mile services report, we surveyed 1,016 direct customers and discovered that the promise of free shipping “greatly impacted” 75% of online shoppers when they make purchase decisions—no doubt due in large part to the Amazon effect. But not all traditional retailers are willing or able to offer free shipping, or at least not without high minimum order values.

In this report, we explore what four retail sub-sectors are doing to compete with Amazon—and at what cost to the customer.5

Footwear

  • Number of companies evaluated: 10
  • Range of free shipping minimums: $24.996 to $100
  • Range of standard ground charge: $4.95 to $13.98
  • Average delivery commitment: 5.6 business days

The Amazon effect:

Of the four sub-sectors we evaluated, footwear companies had the shortest average delivery time and the lowest average free shipping threshold (figure 1). Clearly, footwear retailers take the Amazon effect seriously. Two of the footwear retailers we evaluated have even integrated free shipping as a key reward in their loyalty programs. They bundled free shipping with their tiered rewards program, which includes both standard and premier levels that reward customers based on their loyalty and engagement.

Specialty apparel

  • Number of companies evaluated: 11
  • Range of free shipping minimums: $40 to $75
  • Range of standard ground charge: $4.95 to $7
  • Average delivery commitment: 6 business days

The Amazon effect:

Specialty retailers are continuing to ramp up their e-commerce offerings, hoping to slowly chip away at Amazon’s lead. Yet as a group, they offered one of the longest average delivery commitment times that we saw—clocking in at almost a full week. Individually, however, there is a wide disparity within this group. For example, the shortest delivery commitment is three days, while the longest is eight days. Our perspective is that specialty retailers are slowly adapting to this choppy climate, providing trend at a value but free shipping at a slower pace.

Department stores

  • Number of companies evaluated: 9
  • Range of free shipping minimums: $49 to $99
  • Range of standard ground charge: $6.25 to $10.95
  • Average delivery commitment: 6 business days

The Amazon effect:

Like the specialty retailers, department stores have long average delivery times and high free-shipping thresholds.

On the plus side, departments stores have other tricks up their sleeves. Many are using their physical locations to try to create a better customer experience for online shoppers—investing in “buy-online pick-up in store,” “reserve online, try on in store,” and “curbside pick-up” strategies. These strategies can minimize both the time it takes for customers to receive online orders, and the amount of inventory returned from online shopping. Although customers don’t widely use these options right now, they may begin to bridge the gap between online and retail shopping. Another possible advantage to these strategies is that driving customers in-store gives the retailer an opportunity to sell them additional products.

Off-price

  • Number of companies evaluated: 6
  • Range of free shipping minimums: $49 to $100
  • Range of standard ground charge: $5.75 to $8.99
  • Average delivery commitment: 5.9 business days

The Amazon effect:

Overall, these off-price retailers do not appear to be moving aggressively toward Amazon’s two-day free-shipping plan. But this makes sense, because unlike some of the other retailers, this group relies very heavily on in-store sales and the in-person bargain hunting experience. E-commerce revenue is typically a low, single-digit percentage share of total company revenue in this group.

The rise of fast and free shipping

These days, consumers have high expectations. The maximum acceptable delivery time has declined 13% since 2012 to 4.8 days (figure 2). Even the most competitive sector in terms of delivery days (footwear) falls below these expectations.

Yet free or low-cost shipping doesn’t translate directly into increased revenue or profits. Retailers are looking into a variety of strategies to improve their service levels—while also minimizing the impact to the bottom line, including:

  • Using brick and mortar locations to offer same-day pick-up services.
  • Turning store locations into mini-fulfilment centers to reduce delivery cost and time.
  • Offering free shipping as part of a loyalty rewards system to increase customer engagement and collect customer data for targeted communications.

At the end of the day, consumers will speak loudly and clearly with their purchase decisions. It will be a wild ride for our brick-and-mortar retailers as they try to satisfy them both in-store and online.

Data pack

For our complete data pack of retailer and macroeconomic data including many of the key economic indicators discussed above please contact retail@alixpartners.com.

1    Seasonally adjusted retail sales exclude motor vehicles, gas, food services, and drinking places.
2    US Census Bureau Advance monthly sales for retail, March 2017 (seasonally adjusted retail sales exclude motor vehicles, gas, food services, and drinking places).
3    in.reuters.com/article/us-retail-sales-idINKBN17G0ZI.
4    May 2016 JP Morgan report.
5    Our research targeted retailers across five retail categories (footwear, fast fashion, specialty apparel, department stores, and off-price) and selected companies that rank among the 100 largest by global sales, have both physical stores and an online business, and generate more than $1 billion in annual sales.
6    Excludes retailers with loyalty programs that offer free shipping on any order.
 

Read More About

Meet the Authors

For more information, contact: