Figuring out logistics for the ideal home-shopping service remains a formidable challenge for most retailers, and developing a sound, efficient and reliable order-taking and fulfillment system is perhaps the most daunting task.
While retailers are still accepting home-shopping orders via telephone and fax, they are feeling increasing pressure to move to computerized order-processing systems that are far more efficient and less costly. Electronic commerce experts say telephone- and fax-ordering systems can be 30 times more costly than on-line systems.
Another dicey aspect of order fulfillment retailers must confront is whether to take a do-it-yourself approach or to outsource the job to a third party.
Developing systems on their own represents new territory for many retailers and farming out the work to someone else brings with it a degree of risk. Only recently, several retailers, including Kroger Co., Cincinnati; Bashas' Markets, Chandler, Ariz.; and Quality Food Centers, Bellevue, Wash., got news that their order-fulfillment partner would no longer provide the service.
Despite these difficulties, retailers are pressing on to find the the home-shopping formula that works best. They see the potential for generating profits because home-shopping orders frequently outpace a typical store transaction.
Schnuck Markets, St. Louis, for example, is receiving larger order sizes through its on-line ordering, almost five times as high as in-store orders.
"Our average in-store transaction is between $20 and $25, while our home-shopping orders run between $110 and $118 per order," said Larry Maggio, director of marketing services for Schnuck. "People do not mind spending the money on delivery as long as they buy enough items."
A key first step in raising home shopping to the next level is to abandon phone- and fax-ordering systems in favor of on-line systems. Whatever method stores might use currently, most chains realize the need to turn to computers to make their home-shopping strategy truly succeed.
"I don't believe the whole [home-shopping] channel is possible if you don't do it by computer," said Vic Orler, a partner specializing in strategic services for Andersen Consulting, Chicago.
The cost of operating a call center is 6% of sales, vs. 0.2% of sales for an Internet-driven model, according to Orler. "It's 30 times more costly to use the phone-center method," he added.
Bashas' provided home-shopping services via telephone, fax and computer, until the recent demise of its third-party provider, Oncart, Lombard, Ill.
The chain focused primarily on telephone and fax orders because the senior-citizen demographics indicated that was the preferred method. However, "I was amazed by the Internet traffic we got," said Becca Anderson, spokeswoman for Bashas'. Internet orders represented about one-third of the chain's home-shopping program, she said.
Its previous home-shopping popularity with consumers is prompting the company to roll out another model by September, according to Anderson. The new service will accommodate phone, fax and Internet orders.
Bashas' decision to continue offering home shopping, despite some difficulties it couldn't control, are indicative of how committed retailers are to this service even when the going gets tough.
At Peapod, Evanston, Ill., a third-party home-shopping service provider, the value of on-line ordering is clear.
"For the most part, 95% of the [home-shopping] volume is on-line," said John Furton, senior vice president of Peapod. A division of the company, Telepod, accepts orders over the phone, "but we've found that to be very expensive to operate. Phone orders appeal mostly to senior citizens."
Another third-party service provider, Streamline, Westwood, Mass., said about 70% of its orders are placed via the Internet.
Tim Guen, vice president of marketing and category development for ShopLink, Westwood, Mass., said that all his customers must order by computer, using the company's CD-ROM software.
"The logistical cost of manually inputting orders into the system is about 30 times greater than doing it electronically," said Guen.
But the Internet can take hold slowly in some markets. For this reason, some chains and major third-party suppliers, such as Peapod, also accommodate phone orders.
Once retailers make the switch from more costly systems to computer ordering, they can move on to alleviate costs associated with picking logistics.
"The stores are going to have to get their picks-per-hour and group orders up in order to minimize [costs]," said Anderson's Orler.
Bashas' consumer orders were filled one at a time -- a method that worked well for the chain.
"Picking more than one at a time was asking for trouble," because orders could get confused, said Bashas' Anderson. "In 120-degree Arizona heat, food safety was an issue."
Most third-party companies pick several orders at one time for speed, efficiency and profit. Streamline organizes its orders on a wrist-held computer that sequences the products by aisles in the company's warehouse. Additionally, the company has organized its warehouse to accommodate the 2,000 stockkeeping units that represent 90% of its picks. Streamline picks four orders at one time.
"That is the key cost structure," said Tim DeMello, chairman and chief executive officer for Streamline.
One service provider explained that most of its retail partners try to pick four orders at one time. Typically, retailers take the order at a central location and download it to a designated fulfillment store, which has been chosen for either location, selection or quality of labor.
"That has been able to reduce the picking costs of labor between 50% and 75%," the source said.
Still, despite the potential savings of any particular method, the industry is still stumped as to which is best.
"It's premature to say which way is ideal," said Anderson's Orler.
"There is not a specific national model that makes sense," said a top executive for a systems provider that works with more than 50 chains. "There are specific offerings that differ in North Carolina and Indianapolis. It's not a matter of putting a virtual store on the Internet. It's about a retailer mapping strategy to consumer convenience."
Once the picking issue has been deciphered, how to get orders to consumers still remains an area of options for providers.
Streamline, ShopLink and others have tried to reduce costs and improve efficiency by organizing deliveries on a weekly and geographic schedule.
Peapod partners with grocers nationwide, providing the delivery and helping the stores organize their labor force. "We say the party who can do the service the cheapest should do it -- [retailers should deploy] the most cost-effective version," Furton said.
Some stores, such as Marsh Supermarkets, Indianapolis, which declined to comment, offer curb-side pickup for home shoppers. One source familiar with this service noted that this is not only extremely cost effective, but convenient to the consumer.
"The customer never gets out of the car. And it's more cost effective [than delivery] because all the store does is take the order and pick it," the source said.
The source added that an even more effective, and potentially higher profit, idea is starting to take hold at some stores. Stores that offer ready-made meals should have an "express pick-up" parking space for orders of fewer than 20 items.
"It is illogical to expect consumers to pick up meals for dinner with a few staples, and have to fight for a parking space and wait on a line," said the source. "The express spaces complement the drive-through mentality that is an accepted channel of how consumers get food."
Home-shopping services can spur increased sales not only among existing customers but by branching out to others, perhaps by delivering orders once a week to an office park. "You can go outside your market area and get incremental sales. You're putting your store on wheels," the source said.