How is Logistics responding to changing consumer behaviour?

How is Logistics responding to changing consumer behaviour?

Judy Zhu

Judy Zhu

Analyst

Jack Gallagher

Jack Gallagher

Graduate Surveyor

What’s the story?

We are all familiar with the dramatic change that has been taking place over the past decade, in respect of consumer shopping behaviour. In today’s omnipresent world, the consumer has the option to shop on the go via their smartphone, tablet and even on their smartwatch. The whole process has become ‘frictionless’.

Retailers have naturally had to adapt to cater for these fast-changing shopper habits and in doing so have had to dramatically rethink their retail distribution networks. No longer is it enough for retailers to have one line of goods delivery – from warehouse to shop. Now they must cater for the home delivery market, the Click and Collect market and of course those that wish to return goods in store or from the comfort of their own home. The timely delivery of goods is also high on the list of priorities for shoppers, they don’t want to wait the prerequisite 2-3 business days for their products, they want them now!

In response, many retailers have embarked upon an aggressive process of national distribution expansion, with demand for services provided by third party logistics firms rising significantly in the process. To put this expansion into context, when combining take-up of logistics space for both high street and online retailers, it has more than doubled over the last four years and now comprises over 40% of the logistics market. The question is – how much of this increased demand for distribution space has come about as a result of new-age delivery channels and how much stems from traditional warehouse to shop stock deliveries?

To answer this question, we consider the pace of Argos’ year on year growth and revenue generation, stemming from 3 distinct sales channels; Click and Collect, Home Delivery and In-store Purchase.

 

Argos Distribution Chain & High Street Store Lay-Out

What does the data say?

The data shown below demonstrates that multi-channel distribution is going from strength to strength.

Argos Multi-Chanel Sale (% of total sales)

Source: Home Retail Group Annual Report and Financial Statements 2015
(outstanding % accounted for by in-store sales)

The watershed moment (for Argos’ business) took place between 2012 & 2013, when Click and Collect and Home Delivery orders began to account for a higher percentage of overall sales than In-store Purchases.  There is also a clear sign that the majority of customers favoured the Click and Collect method of product receipt over that of Home Delivery, by a ratio of roughly 9:5 in 2015.

Furthermore, when considering growth rates in popularity between Click & Collect and Home Delivery, it appears (as shown below) that the former is far outstripping the latter.

Argos multi-channel sales annual growth

Source: Home Retail Group Annual Report and Financial Statements 2015

With an average year-on-year growth rate since 2011 of roughly 0.4%, Home Delivery on a pound for pound sales basis is both dwarfed and unlikely to catch up with growth in the Click and Collect market (which is averaging a rate of 5.9% per annum).

An increased reliance on internet purchases in favour of orders made over the phone, is yet another key trend that lies behind the data shown above. Telephone ordering has seen a significant rate of negative growth, averaging circa -17% per annum over the past four years. However, online orders registered over the same time period (which already constitute the vast majority of multi-channel purchases), have seen an average growth rate of circa 6.4% per annum (N.B. including in-store orders for Home Delivery).

 

What does it mean for the distribution/warehouse sector?

The story of Argos’s growth in multi-channel distribution sales, is yet another example of how changing consumer behaviour towards remote selection, is fast becoming the dominant means of product purchase. Compounded by rising consumer spend, the rapid growth of the Home Delivery and Click and Collect market means retailers are obliged to expand their distribution capabilities and space, or risk missing out on potential future sales.

One point of interest highlighted in the data shown, is how the consumer generally favours the Click and Collect option of product receipt a lot more than that of Home Delivery. A major driver of this trend lies in the convenience element of consumers being able to pick up their order at a time and place convenient to them, rather than selecting a predefined time frame during which they have to be at home to take receipt of their product.

Furthermore, a key consideration for retailers is how to cater for the last mile stage of product delivery, in the shortest time frame possible. Argos as a case study is particularly well equipped, given their unique store design, to handle quick product turnaround from selection to customer receipt. As a retailer that devotes a significant amount of shop space to storage, Argos are able to use vans to carry out same-day stock deliveries direct from store to the consumer, thereby by-passing any lengthy delivery routes from distant regional warehouses. Other retailers that have opted for a more conventional shop model will either need to adapt their high-street layout, increase their distribution footprint adjacent to major consumer markets, or simply increase their efficiency/spend on last mile methods of delivery in order to successfully compete.

Ultimately, the overriding focus for retailers in their quest to cater for rapidly changing shopper habits, should be to maintain a reactive, yet well founded distribution base that can accommodate peaks and troughs in consumer demand.

“A flexible and efficient supply chain is crucial to modern operations. We expect retailers who can provide a quick, seamless service from point of customer payment to product delivery to see a continued increase in multi-channel sales.”

– Ben Thomas (Director, CBRE Valuation – Distribution & Logistics)

To find out more about our specialist Logistics Valuation Service, contact Ben Thomas, Director or Jonathan Compton, Director.