E-shopping has long way to go before it delivers

The value of goods purchased online by consumers is generally forecast to increase dramatically from around $20 billion (€23 billion) today to $200 billion by 2002.

The ease of online purchase has given rise to customer expectations of faster, cheaper delivery - conflicting with the real experience of goods delivery to the home. The mass migration to mainstream e-shopping will require consumers to be completely confident of delivery ability. At present this is lacking.

A recent UK Trading Standards Institute study found that 40 per cent of online orders were late; 17 per cent didn't arrive at all.

The distribution infrastructure cannot cope with forecast volumes.

The current infrastructure was not established for home delivery in the volumes predicted and now problems arise at all stages, with the "last mile" being the biggest obstacle.

The growth of e-shopping has highlighted age-old challenges of home delivery, particularly for perishable goods - the cost, handling of returns and no-one to receive the goods.

These are some of the reasons why online shopping is not currently profitable.

For home delivery to become viable, distribution costs, particularly for low value/grocery goods, must be minimised.

PA's modelling of home grocery fulfilment indicates that delivery costs can be up to three times the £5 charge normally made.

Costs can be minimised by maximising the number of customer orders per delivery and minimising the fixed distribution cost per unit.

One route is to outsource delivery to specialists. Netgrocer, a US e-retailer, uses Fedex to ship goods to customers from its distribution centres; Superquinn will use a local distribution company to deliver within two-hour slots.

Picking and packing groceries can also be costly. Retailers going online can pick, pack and distribute from existing stores as a low-cost entry route (Tesco and Superquinn).

However, when volumes grow, the use of purpose-built picking and packing distribution centres, (Asda and Sainsburys), will be the only cost-effective route for virtual retailers.

With 5-10 per cent of all goods being returned, efficient handling of returns is a key issue affecting cost and customer service.

The problems of non-delivery can be addressed by:

Guaranteed delivery times within a limited time-range and area;

Lockable delivery boxes or access to garages/freezers;

Delivery to workplaces or 24hour local collection points, (petrol or rail stations or post offices).

A new distribution model will eventually develop. PA's research indicates that a multi-tiered approach will involve:

Local distributors delivering to doorsteps, local collection points or workplaces for a portfolio of retailers and suppliers;

National and international distributors linking local distributors to manufacturers and suppliers;

Picking/distribution centres linking the above, and increasingly outsourced.

Retailers keen to protect their brands may consider local distribution - a fragmented, low-margin industry - an excessive risk. This opens up market opportunities.

Existing operators with business systems, skills and expertise in doorstep delivery have an advantage.

Alternatively new entrepreneurial companies could succeed by offering high-technology solutions, value-creating processes and customer-focused service.

Maintenance of high customer service standards and profitability is difficult, as new specialist operators have discovered. UrbanFetch.com, a US company offering a one-hour delivery service for snacks, books, CDs, etc, has recently closed this business, despite having built a 70,000 client base.

Kozmo.com, its main rival, is also winding back having lost $26 million to March 2000 on a $3.5 million turnover.

Doorstep milk delivery has disappeared in most countries apart from Ireland and the UK, but there is just a possibility that it has survived long enough to have a new lease of life as an Internet delivery service.

Its market advantage is that delivery vehicles pass a high proportion of doors daily, delivery personnel have consumers' trust and the business model may be able to incorporate a broader product range.

Express Dairies in the UK has bought a stake in M-box, a new online retailer, and plans to deliver groceries, CDs, computers with its own products. Dairyworld, in Canada, has developed a successful dairy home delivery business from a long established catalogue-based one.

However, dairies have long found it difficult to extend their range even into related food products, mainly because of difficulties in managing the new, more complex product mix.

A lack of responsiveness to issues such as order changes, payment errors, was found to have contributed to the decline in doorstep delivery in research into online marketing of Irish food & drink products, according to reseach carried out for PA.

To ensure "brand integrity", retailers will need to assure quality at all stages of the customer experience, requiring distributors to employ new technologies effectively and provide a strong customer focus in all interfaces. Importantly, distribution may comprise the only human contact between the customer and the retailer.

Innovative use of technology will be critical to customer service through retailers using websites to tailor offerings and sophisticated data-mining to anticipate customer needs.

It will also need distributors to guarantee delivery using GPS monitoring devices, handheld telecoms, route optimisation systems, customer web-based scheduling, and streamlined order-picking processes.

Another important factor will be the integration of manufacturers, retailers, suppliers and distributors' business processes through extranets and EDI, ensuring prompt and efficient movement of goods.

Also necessary will be improved forecasting of sales trends and fluctuations, with distribution based on predicted demand, rather than specific orders.

Distributors must not only deliver on time, but also develop a customer-service ethos, exemplified by the delivery personnel, that reflects well on the retail partner.

Call centre back-up must handle administrative order changes, payments and queries, thereby releasing the bulk of face-to-face time for selling and customer service.

All parties along the supply chain will need to be extremely agile and responsive to meet the challenges of this dynamic online commercial environment.

Only then will consumers be persuaded to switch to, and stay with, e-shopping.

Tom Moriarty is partner with responsibility for the manufacturing at PA Consulting