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Putting a price on deliveries

Logistics firms are warning retailers that to ensure a viable delivery model, shoppers must be enticed to pay for a first-class service

Free home deliveries from the likes of Asos, Dorothy Perkins and Esprit have been hugely popular with young shoppers keen to get hold of their skinny jeans and prom dresses at the lowest possible prices. Premium services have become popular too – ‘express’ next-day, named day and even 90-minute delivery – are all designed to meet different shopper needs.

Carriers have welcomed the business, but some have struggled to cope with capacity at peak times, and have battled the ‘last mile’ conundrum. Now Jonathan Smith, chief executive of Yodel, and David Smith, managing director of City Link, have publicly questioned the sustainability of low-price delivery models.

These couriers and others are planning to negotiate higher rates with retailers, leading to the possibility of double-digit percentage price increases for parcel deliveries.

Patrick Wall, chief executive of online delivery specialist MetaPack, says there aren’t “the expected economies of scale with home delivery”, and while busy companies must invest by opening up new delivery routes, recruiting and training more drivers and using more fuel, the problem still arises at quieter times when the resources aren’t being used.

“It’s become apparent that a lot of pricing in fashion home delivery has been too lax. And if carriers are under price pressure and can’t invest in improving operations, retailers are putting their service levels at risk, so there needs to be some movement in pricing in the market,” he says.

Leading delivery providers say shoppers will have to pay more, because the current expectation of free or very cheap home delivery simply isn’t economically viable. So while fashion retailers push for better technology and operational innovation to ensure customers get great service via carriers, they might have to accept charging more for delivery, or struggle to find delivery partners to work with.

“Few carriers are making money. What’s the incentive for us to invest in faster systems for returns, or innovate with things like payment on smartphones at point of delivery, if we don’t make any money out of the service ourselves?” asks David Smith.

Because of recent regulatory changes allowing it more commercial freedom, Royal Mail has put postage prices up, and this is likely to cause an industry-wide hike in prices. “If Royal Mail – traditionally the cheapest option – now charges 20% more for some types of packets, then the rest of the market will naturally move up. Overall I would agree that this price shift is probably necessary to sustain the industry, and in the longer term it could benefit the industry,” says Andrew Starkey, head of e-logistics at trade association Interactive Media in Retail Group (IMRG). 

Etailer’s finance director Morgan Hay says he has seen courier providers make efforts to adapt to a rapidly changing market, which has required significant investment in infrastructure and the adoption of new technology, such as pre-delivery text alerts to customers, to ensure they are able to realise the potential. “The couriers who adapt best to this new market will continue to win good business, and be rewarded for their investment,” he says.

Retailers realise that delivery is a sales and loyalty driver, with 77% of consumers confirming that a good delivery experience encourages them to repeat purchase, according to IMRG. Starkey says retailers should invest in delivery and need to help consumers appreciate that it can’t always be free. “They may have to start to pass on delivery charges on a wider range of goods, or perhaps only offer it free at a higher order value. Clearly the concern is that if some do and some don’t, then those that don’t will have an advantage. However, I do expect to see all carriers harden on rates, so in time all retailers will be in the same boat,” he says.

In return, carriers need to invest, develop, and innovate. “If retailers and consumers are to be expected to pay more, then it must be in return for better services and more services,” asserts Starkey.

In particular, carriers need to use data to provide more real-time information to retailers and consumers, and need to be able to accept and use customer-specific delivery instructions while being more accurate with delivery times and places.

Wall predicts that fashion retailers will have to communicate two distinct offers to customers, making clear the service add-ons that come with a higher price. The choice will be between Royal Mail deliveries for customers who don’t want to pay much for delivery and don’t mind waiting; and premium delivery services for which they will have to pay a fair price.

Wall thinks nominated day delivery could become a popular ‘halfway to premium’ option if the right systems are in place. “There could be cost savings to couriers if they worked with each other on delivery consolidation models,” he adds.

Other improvements retailers should expect to see include the ‘standard delivery’ week running from Monday to Saturday rather than just Monday to Friday. “This can only be sustainable for the logistics industry if it is able to change working practices to accommodate this increasing demand; that is, Saturday working traditionally attracts a premium of some sort, which helps justify the need for a premium for delivering on a Saturday,” says David Scott, head of warehouse and distribution at logistics firm Torque.

Yodel has already announced plans to move to a six-day-week service for its standard delivery, and says shoppers will receive email and SMS delivery updates as standard, including time-slot advice and an online tracking service. “Inevitably, these changes will come at a price and we must pass on our reasonable costs. We believe that all parties, once they recognise the benefits that this will provide, will accept the changes as a necessary shift for all involved,” says Jonathan Smith.

Retailers such as John Lewis and Marks & Spencer have not offered free delivery as a marketing ploy, instead focusing on a more sustainable end-to-end approach working closely with their carriers, says David Smith. “This way, ongoing improvement to delivery service, returns management and coping with peaks during promotions can be facilitated,” he says.

Hay agrees that communication between retailer and carrier is central to improving delivery satisfaction rates. “We’ve seen constant development in our back-office support systems, and the integration of our courier partners into these systems has been key to driving improved cost and operating efficiencies,” he says.

The extension of ‘delivery to store’ or ‘delivery to nominated location’ options is also likely as the home delivery market evolves. The Collect+ network, utilising 4,700 corner shops, is already used extensively by fashion retailers to reach customers who aren’t going to be home for their delivery.

Meanwhile, ByBox has proved popular with customers at lingerie etailer Figleaves, as customers can pick up their orders from secure lockers at their own convenience.

The ‘pick-up point’ model is a greener option and dramatically cuts down on failed delivery rates, but it won’t appeal to all fashion shoppers. Fashion retailers are likely to view such services as a useful addition in what needs to be a range of options to keep ever-more demanding customers happy.

Even once the current debate around pricing has died down, there will need to be a constant focus on improving service, because a poor delivery experience will likely mean a lost customer.

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