Delivery costs continue to drive shopper preferences

Editor’s note: Vertical Voices focuses on specific verticals within the supply chain, highlighting the latest trends and news. It appears on the fourth Monday of each month. This month, we are looking at retail. If you are interested in future topics, you can see a full list of upcoming topics on our Editorial Calendar.

Driven by high levels of online shopping and e-commerce activity, consumers’ ongoing desire for free and fast shipping remains in high demand. But for retailers unable to meet these demands, consumers will not hesitate to turn to other alternatives.

 

Those were among the top takeaways of recent research issued by New York-based AlixPartners, entitled “2024 U.S. Consumer & Executive Home Delivery Survey.” This survey was conducted in the second quarter, receiving feedback from 1,100 U.S. consumers aged 18 or above and 110 North American-based transportation, logistics, and supply chain executives at companies with more than $100 million in annual revenue.

Free shipping impacts decision-making

One of the biggest takeaways cited in the survey focused on how consumers expect online orders to arrive within 3.5 days of being ordered, marking two days faster than what was found when AlixPartners first conducted this research in 2012. What’s more, it explained that 92% of respondents indicated that free shipping impacts purchase decisions, a 9% annual increase over last year’s 83% reading, with 25% of respondents stating that they will turn to another retailer if their time-delivery demands cannot be met.

When looking at the 92% figure, AlixPartners said that is derived from 67% noting it “greatly impacts my ordering decision” and 25% noting it “somewhat impacts my ordering decision.”

Chris Considine, a partner in AlixPartners’ Retail Supply Chain Practice, told Logistics Management that in 2022 that figure was at 97%, noting that the 2023 reading could be viewed as a dip.

“There are also economic factors in place that reaffirm this,” he said. “We have seen over time that it is based around the percentage of folks saying it [free shipping] greatly impacts their decision. It goes back to macroeconomic conditions and folks being sensitive to costs.

Marc Iamperi, global co-leader of AlixPartners’ Logistics & Transportation practice, said that consumers often look at if they will get free shipping when placing an e-commerce order.

“If it is yes, they are in, and if it is no, then they will not buy it,” he said. “One-quarter of our respondents said they will shop elsewhere. It is a big deal to lose a quarter of your potential customers. They may have been shopping on your site but either the retailer’s shipping policy or maybe they don’t have the item in stock makes people shop elsewhere. If you are fighting for every order you get, that hurts.”   

Delivery costs keep rising

Rising delivery costs were also cited in the survey, with almost 80% of respondents citing delivery costs as an area they are looking to reduce costs. Delivery network optimization, inventory positioning, and delivery provider diversification are among the ways companies are looking to control spend.

“There are a few drivers that are major cost drivers,” said Considine. “Parcel provider rates have gone up, with GRI (general rate increases) around 5.9%. There was some renegotiation and opportunity, in some cases, with certain providers, for rate relief. The issue with that is a lot of those providers have contracts that are structured with volume and discounts associated with volume, and nobody’s hitting those volumes, because demand is down overall and revenue is down overall for most retailers. And they are not really getting rate relief because they are missing out on discounts.”

Some of that, he explained, has to do with things like provider costs, general inflation, wage increases, fuel increases, and packaging costs increases.

“In looking at what it takes to fill an e-commerce order to complete and deliver it, pretty much everything along that value chain has increased over the last 12 months,” said Considine. “Some of it is inflation and some is just market dynamics.

Related Resources

 

Research, strategies and more

There are plenty of resources for carriers, shippers, and supply chain professionals to help navigate the retail supply chain, including e-commerce and inventory management. You can find these resources through our partners at scmr.com. Here are just a few:

Talking Supply Chain: The last-mile tech advantage

DIY parcel contract negotiation success

Parcel spend management 2.0: Revolutionizing logistics and supply chain efficiency

No more stock outs, no more revenue leakage

Talking Supply Chain: The evolving retail fulfillment operation

A significant obstacle being faced by executives was related to 72% maintaining that home delivery is not accretive to their respective bottom lines.

Iamperi likened that finding to a snapshot in a period of time, akin to when home delivery for brick-and-mortar stores started.

“Did they make money on that early on, absolutely not,” he said. “They subsidized and lost money. They needed to get in the game, because that’s the future. Everyone is sort of at a point in time in their journey to get to profitability. A large portion of that is not accretive, it is neutral. So, if it is neutral and you know it is the future, are you going to give up on it? No. You are going to continue to stick with it and make adjustments.”

Those adjustments include things like retailers raising minimum order requirements, which he cited as a “huge lever” to increase profitability as opposed to fixed costs which they are stuck with.

“If you can get more gross margin on that order, it makes it more attractive for everyone involved (for the carrier and the retailer),” he said.

Other ways in which shippers are taking steps to improve performance, cited in the survey, include:

• 40% shifting volume away from UPS and FedEx to other providers in the last year; 
• 49% increased the spending threshold for free shipping over past 12 months; 
• an increasing number of merchants tightening return policies; 
• a growing number of executives are utilizing artificial intelligence to optimize performance; and 
• investment in certain tech-enabled cures dipping as shippers focus on more fundamental tactics with only 7% of respondents spending on robotics or delivery equipment like drones and unmanned delivery bots, compared to 16% in 2023.

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