Retailers See Gains in Serving E-Commerce Supply Chains
Retailers may be figuring out the logistics of e-commerce.
The largest U.S. retailers reported strong online sales in their second-quarter earnings reports this week, extending a trend that has seen e-commerce revenue expand far faster than store sales, and several said they are making strides in delivering goods to consumers more profitably.
Home Depot Inc. said its online sales grew 25% in the second quarter from a year earlier compared with 4.3% total sales growth, and now represent 5% of the company’s total revenue. The home improvement giant, which said in the same quarter a year earlier that high transportation costs weighed on its margins, attributed a slight increase in its gross margin in the June quarter to improved logistics, including increased productivity in its distribution network and lower fuel costs.
Target Corp., which said digital sales grew 30% in the second quarter compared with 2.4% overall sales growth, said on Wednesday it is setting ambitious online sales targets and reported a small increase in its gross margin, to 30.9% from 30.4% compared with a contraction in the same period a year earlier to 30.4% from 31.4%.
The gains come as traditional retailers are struggling to catch up with rapidly changing consumer purchasing habits and competition from online specialist, including Amazon.com Inc. While online shopping is often a boon to sales, it can be a drag on profits as brick-and-mortar retailers ship products to their customers’ homes while maintaining storefronts. Delivering goods to stores and to consumers at their homes requires different distribution channels and retailers are trying to minimize the costs of maintaining parallel delivery networks.
The Commerce Department said this week that e-commerce retail sales grew an estimated 4.2% in the second quarter, far ahead of the 1.6% growth for overall retail sales. At $89.2 billion, the online sales make up 7.2% of total sales, but the rapid growth in the business and the impact digital commerce has on consumer behavior has an outsize impact on retail supply chain.
The big retailers said in earnings calls with analysts this week that they have seen greater efficiency this year in using dedicated fulfillment centers for online orders. Home Depot, Target, and Wal-Mart are building out fulfillment centers to package and ship parcels.
Target Chief Executive Brian Cornell told analysts in a conference call on the company’s earnings that the shifting delivery needs had stretched the company’s supply chain “well beyond its core capabilities.” Target now has six dedicated fulfillment centers for online orders, the company said.
Wal-Mart Stores Inc., which said e-commerce sales contributed 2% to its overall orders in its most recent quarter, is opening two automated fulfillment centers in the next six months. Home Depot said it is close to bringing its third e-commerce fulfillment center online in Ohio, which executives said will expand its distribution footprint enough to enable two-day parcel delivery to 90% of its U.S. customers.
Retailers that move products in large volumes and which have invested in e-commerce infrastructure now are seeing their investments “fully in action,” said Burt White, vice president of industry supply chains at consulting firm Chainalytics.
At the same time, the retailers are beefing up ability to ship from store, which adds complexity to figuring out the most cost-effective way to fulfill orders, but gives online shoppers access to more inventory.
Home Depot is offering delivery from its stores to online shoppers in four markets, and will expand that dual use of stores through next year, said Executive Vice President of Supply Chain Mark Holifield. “We’re working to really perfect that, and make that a flawless customer experience,” he said.
Mr. Cornell said Target has expanded its ability to use stores as fulfillment centers, with plans to ship online orders from 450 store locations by year-end, up from 140 stores now. “Ship-from-store capabilities allows us to balance inventory across the network, leverage the capital and labor already in our stores and reach guests more quickly,” he said.
The company also will test a program to give online buyers a better idea of when to expect delivery of purchases, usually providing a two- to three-day window.
Wal-Mart, still deep in the investment phase of its e-commerce strategy, said its e-commerce investments contributed to an 8.2% decline in operating income last quarter from a year earlier. The company said e-commerce sales world-wide grew 16%, compared with overall global sales growth of 0.1%.
Source: The Wall Street Journal