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Profitability back in focus: the online challenge as ‘normality’ resumes

Chris Irish
21 Feb 2023

How are online retailers increasing their profitability and cutting operating costs post-pandemic?

If you’re anything like me, you’ve spent more money online post-pandemic than you did pre-pandemic. Initially, this was out of necessity, but it’s now become a habit and I don’t think I’ll ever return to my old ways.

I’m not the only one. The share of goods sold online is set to remain at the new elevated level in many markets around the world. That said, the double-digit growth triggered by the pandemic will be tempered, with a return to something much more ‘normal’ in the coming years. This shift has seen a familiar question re-emerge: how to develop profitable online operations?

Source: Retail Analysis, IGD (Sept ’22)

Online growth spiked in 2020 and is expected to stabilise over the next few years

In the immediate response to the pandemic, the needs of consumers were prioritised. Of course, the story will be different depending on the business and model, but in general, we saw a move away from capacity-constrained, managed growth to a push for scale at any cost.

This shift has been great for consumers, who now have more choice than ever, both in terms of businesses they can shop with online, and the range of services on offer.

The rapid evolution saw the number of online models rise from five (not so long ago) to thirteen today. Each has its own nuances and complexities, including but not limited to:

  • Managing consumer data
  • Price control
  • Stock ownership
  • Fulfilment responsibility
  • End-to-end value chain cost transfer.

Many businesses operate several of these models, and they can be highly complex to manage.

From five models to thirteen and beyond – the rapid evolution of online

Fig. 1 – 13 online models commonly used by retailers

Where there is complexity there is cost

Emerging channels can be extremely costly to service. For example, costs per unit for a D2C operation may be 10x higher than for a B2B operation. Some of this cost is unavoidable as economies of scale diminish with smaller order sizes, but some can almost certainly be addressed.

The burning platform created by the pandemic and the resulting rush to enhance offers has resulted in imperfect operating models and the baking-in of operating costs that erode profitability. Understandable decisions made during the crisis are now being scrutinised as the dust settles and growth slows, and many will need to review what their online model will deliver for the business both now and in the future.

Addressing operating costs through innovation

Getting it right starts with a clear understanding of customer needs and the development of a compelling proposition.

Operations strategy comes next. For most online operations, the two largest chunks of cost remain picking and delivery. This is an area of real innovation. Examples include:

  • Optimisation of distribution network through saturation assessments
  • Order Management Systems (OMS) for a unified view of stock across a network to enable consolidation, order smart dispatching & fulfilment
  • Automation of warehouses and creation of micro-fulfilment centres to reduce handling and lead-times
  • Last-mile ecosystems that provide customers with options to match expectations

A blended approach to big and small tech

Organisations will move at different speeds, with the maturity of models and appetite for investment to support growth being key factors in investment decisions. For many, the journey along the maturity curve will involve a blend of both big and small tech in the pursuit of improved service, delivered in the most efficient way possible.

In our experience, the fundamental question to answer is: how do we access an end-to-end view of performance? Achieving this underpins the move toward a data-driven approach to decision-making, based on a single version of the truth. This, alongside the development of digital, automated platforms that provide decision support for run activities is how businesses deliver service, improve efficiency and address the profitability challenge.

Innovation in the area of online operations is moving at pace. To drive efficiency and differentiation, we see technologies, including digital twins, quantum computing, and even the metaverse, playing a role in the continued evolution of the online channel.

The benefits of technologies like digital twins in an online fulfilment model, where service and efficiency are delivered through uninterrupted, continuous operations, are clear. Offering everything from simulated picking performance and KPI modelling to virtual maintenance, digital twins, built on a robust digital foundation, will be a key tool in helping businesses understand what scale and growth mean in real-world operations before long. Achieving this will support the path to profit.

A transformation partner

We’ve worked with clients around the world to develop capabilities like these through a blend of both small-tech and big-tech to meet the needs of the moment.

Through experience, we know the online development pathway is not linear and several iterations are needed as the competing needs and interdependencies between scale, efficiency, cost and service play out.

With rapid growth comes growing pains, and these, combined with a worsening economic outlook and the imperative to operate more sustainably, mean now may be the time to take a step back and assess whether your current online ways of working will deliver profitable growth for your business in a post-pandemic world.

Chris Irish

Chris is a Senior Manager within our Supply Chain Transformation capability, leading our Commercial sub-team.