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Multi-Channel Matters

A route to next generation retailing

Prepared for DHL Supply Chain June 2010 This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organisation without prior written approval from Fresh Minds Limited.

FreshMinds 229-231 High Holborn London WC1V 7DA Tel: 020 7692 4300 Fax: 0870 46 01596 www.freshminds.co.uk


Table of contents 1.

Executive Summary ........................................................................................................ 3 A note on the terminology used in this report ........................................................................ 5

2.

Multi-channel retailing is a strategy for success ......................................................... 6 2.1 Multi-channel becomes an essential strategy for success ........................................ 6 2.2 Each channel presents different opportunities .......................................................... 7 2.3 Customer experience is the key competitve battleground for retailers ................... 11

3. Retailers need to re-think their priorities to deliver multi-channel strategies successfully ........................................................................................................................... 14 3.1 Retailers have focused on the front-end in recent years......................................... 14 3.2 Retailers are continuing to think about customer service purely at the front-end ... 15 3.3 Road testing retailers’ fulfilment and returns processes.......................................... 20 3.4 With great opportunities come great risks ............................................................... 24 4. Retailers can overcome the challenges to produce a satisfying end-to-end customer journey through a number of practical steps.................................................... 25 4.1 Solving challenges, meeting expectations............................................................... 25 4.2 Channel launch – starting as you mean to go on .................................................... 25 4.3 Aligning for a truly multi-channel approach ............................................................. 27 4.4 Stock availability issues – how to respond .............................................................. 28 4.5 Delivery issues – how to respond............................................................................ 33 4.6 Returns process issues – how to respond............................................................... 36 4.7 Packaging issues – how to respond ........................................................................ 40 4.8Case Study: Home Retail Group exemplifies a holistic, customer centric multichannel approach ....................................................................................................... 42 5.

Conclusion – finishing the journey.............................................................................. 44

6.

Appendix ........................................................................................................................ 45 6.1 Methodologies used in this report............................................................................ 45

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1. Executive Summary The retail world is shifting The shift from traditional retail channels towards multiple channel strategies is an ongoing process. It has taken place over the last twenty years and is accelerating, fuelled by the rise of the internet. The dynamism of the channel landscape is continuing to create new growth opportunities for retailers. “Retailers today are faced with increasingly volatile marketing conditions. An ability to transform their market channels in an agile manner in now a condition for survival in this environment. Mobile phone technology, the internet, social networks, and other elements are only the beginning of this revolution.” Robert Handfield Director, Supply Chain Resource Cooperative (http://SCM.Ncsu.edu/blog), North Carolina State University: Department of Business Management, Bank of America Distinguished University Professor of Supply Chain Management

High street retail will be maintained as a key element of branding as well as an important revenue stream, but we can expect that e-commerce sales will continue to increase as more and more retailers follow consumers to what is becoming their preferred market place. Retailers are responding to a new consumer expectation of interacting with unified brands by increasingly focusing on a multi-channel strategy as an integral part of their business strategy. In our survey of 500 UK retailers, 69% said that having a multi-channel operation was now very important or essential to their business. However, the findings of this report demonstrate that retailers are failing to deliver a consistent, end-to-end brand experience across all channels, putting their brand image at risk.

Customer expectations are only half-met Modern consumers are demanding and expect a retail experience that is both easy and convenient. They are adept at operating across multiple sales and communication channels during the retail journey, taking full advantage of the transparency of price and quality created by online price comparison sites and peer review of products. In short, they expect multichannel retailers to offer integrated cross-channel services. To meet these expectations, retailers have to date focused on improving ‘front-end’ service elements in order to convert ‘promiscuous’ browsers into hard sales. Website re-design, instore improvements and customer support services have been the most significant investments made over the past year by 63% of the retailers surveyed, as they seek to ensure the customer has a positive retail experience. Retailers have recognised the importance of providing a retail experience that maximises convenience for the customer. In an environment of perfect transparency the customer retail experience has emerged as a key competitive differentiator for retailers.

Finding solutions to the back-end challenge While retailers have prioritised investment in customer facing, ‘front-end’ services such as website redesign and store improvements, they have fallen behind consumers’ increased service expectations for behind-the-scenes, ‘back-end’ processes, such as fulfilment and delivery, which can as keenly influence customer experience as the front end. Reluctance to invest in these areas can lead to service failures and brand damage for many retailers. However, this highlights an opportunity for forward-thinking retailers to differentiate themselves in delivering excellence in the end-to-end customer experience.

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If companies are going to be truly successful in a multi-channel environment they must continue to invest in their back-end processes to keep up with consumer expectations. This report explores the issues that retailers face in providing a high level and consistent service across all their channels, particularly across back-end processes such as stock availability, order fulfilment and returns. It then identifies practical solutions that retailers can implement to meet consumer expectations.

Excellence is achievable As this report shows, the barriers that hold retailers back from achieving excellence are eminently surmountable. We suggest retailers’ responses should be concentrated in the following four areas:-

Instilling a cross-channel ethos Today’s consumers expect multi-channel retailers to offer integrated cross-channel services. However, in many cases these services are either not offered or poorly executed. This is symptomatic of each channel being viewed and operated as an independent silo. Retailers need to take a unified, ‘brand’ approach to multi-channel retail that cuts across every level of their business, from board structure to frontline staff training, and ensures that customer and stock data is centrally integrated across channels.

Planning and investment in the supply chain Many of the issues associated with back-end fulfilment are rooted in an inappropriate supply chain structure. Structural differences between store replenishment and single item efulfilment are central to these issues. However, they can be overcome with intelligent, bespoke, and innovative logistics solutions. Retailers can support consistent and clear interactions with the customer across all channels by careful selection of an appropriate stock pool configuration and stock management process.

Cost should not be an inhibitor It is important that retailers recognize the cost of enhancing back-end processes as an investment in customer satisfaction that will pay off in the long-term. This is particularly true in the provision of returns services. For retailers launching new channels, carefully planned, phased pilots enable retailers to trial systems and optimize processes before full roll out, and ensure investments can be made incrementally.

Collaboration for cross-channel success Multi-channel retail requires clear communication and close collaboration with stakeholders. Downstream, emphasis needs to be placed on managing customer expectations in a clear, open and honest way. Upstream, dynamic collaboration lines also need to be put in place with suppliers. Managing demand patterns across several channels is complex and volatile. An agile supply chain is crucial in order for multi-channel retailers to meet demand and avoid overstocking.

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A note on the terminology used in this report In this report, we make frequent reference to ‘front-end’ and ‘back-end’ elements of retailers’ processes. ’Front-end’- refers to the ‘interface’ between the customer and the retailer. Examples include: stores, websites & call centres. ‘Front-end’ activities include sales & marketing. ’Back-end’ – refers to ’behind the scenes’ retailer activities and processes. ’Back-end’ activities include: warehousing, order processing & returns processing. Figure 1: The front-end / back-end division

Source: FreshMinds

In this report, we also use a number of terms to describe segments of the retail market, which are defined as follows:  E-commerce / e-tail – the buying and selling of goods and services through the internet.  M-commerce – the buying and selling of goods and services through wireless handheld technology.  Pureplay retail - the process of selling goods and services to consumers through one single distribution channel, typically e-commerce.  Multi-channel retail – the process of selling goods and services to consumers through more than one distribution channel.  Bricks and mortar retail – the process of selling goods and services through physical stores.  Bricks and clicks retail – the process of selling goods and services through both the internet and physical stores

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2. Multi-channel retailing is a strategy for success 2.1 Multi-channel becomes an essential strategy for success Retailers are targeting channel expansion for growth A multi-channel sales operation is critical to the sales strategies of the UK retail sector as it emerges from the recession. In response to FreshMinds’ survey of 500 decision makers from the retail sector, 69% of UK retailers said that having a multi-channel operation was ‘very important’ or ‘essential’ to their business. A further 18% reported that it was ‘quite important’ to have multi-channel operations. 1 Figure 2: How important is it for your business to have a multi-channel operation?

Base: 500 Source: FreshMinds Research

Retailers are targeting a diverse channel strategy as a way to overturn the effects of the recession. 25% of retailers now consider establishing new channels to market as the biggest growth opportunity for their organisation. It is seen to be equally as important to organic growth as entering new territories (29%) and product diversification (25%).1

The opportunities for growth compel retailers to overcome the challenges of a multi-channel strategy The ever-accelerating pace of technological development creates a constantly evolving multichannel retail landscape, which presents both new challenges and new opportunities to the modern generation of retailers. The findings of our survey demonstrate that retailers increasingly perceive that the opportunities of broadening a sales channel strategy outweigh these challenges. Retailers understand that they must embrace new technologies or risk becoming outdated.1 Real opportunities for growth continue to be created as new technologies come online and bandwidths expand. As we will see in the following sections, retailers have gained access to

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new or growing markets by embracing new channels and driving sales through channels that have traditionally been peripheral to their operations. The cost of failure A decade ago, Borders was a leading retailer on Oxford Street, but its subsequent fall was said to be “symbolic of an unforgiving decade for those retailers that failed to develop a multichannel proposition.” 2 Borders struggled to compete with the rise of Amazon, which undercut its prices and offered the convenience of online ordering. In 2009, it collapsed into administration. 3

2.2 Each channel presents different opportunities The end of the beginning for online retail From a retail perspective, the online revolution, which has already transformed how people communicate, work and live their lives over the previous decade, has only just begun. The online environment will be a key competitive battleground over the next decade as it continues to grow and evolve. In 2009, UK shoppers spent £49.8 billion online on ‘hard’ goods compared with only £0.8 billion in 2000 (and up 14% from 2008). 4 5 Online retail is now growing at a rate eight times that of the overall retail market and makes up 6.4% of total retail sales. 6 By 2013, ecommerce has been forecast to siphon off 10% of total retail in the UK.6 This growth is driven by both increasing numbers of users and the increasing accessibility of high speed internet. Wi-Fi wireless services are also on the rise, simplifying the prospect of multiple access in the home and becoming increasingly available in public areas such as pubs, cafes, hotels and trains. 7 Meanwhile, the proportion of the population that is technologically literate is both growing and expanding into new age groups and demographics. Over 60% of the population now has broadband in their homes and 90% own mobile phones.2 Whilst internet shopping is most popular among 35-44 year olds, mail order shopping is more popular the older the shopper. Older consumers are, however, increasingly moving to the internet and are more confident than their younger counterparts in buying from a retailer they have just discovered in an online search.6

E-commerce has seen recession busting growth Perhaps as a result, e-commerce has outperformed the market during the recent recession.6 Bricks and mortar retailers who invested in their online channel strategy prior to 2008 will have been insulated against the ravages of the recession by this growth. E-retail in 2008 saw its slowest level of growth since 2002. This is largely due to the maturation of the channel and its entrance into a more subdued growth phase as the penetration of the population levels out. However, the channel still benefits from an increasing number of internet users and shoppers and more transactions being placed online.6 In addition, though domestic UK growth in e-commerce has begun to slow, UK retailers are being used by more international shoppers online. 8

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Retailers are most likely to want to grow their e-commerce channel over the next three years Retailers are confident that the significance of e-commerce as a sales channel is going to continue into the future. In our survey, 66% of retailers expect to either start or grow ecommerce sales via own-brand websites over the next three years.1 E-commerce is deemed to be important by retailers because they perceive it becoming increasingly used by consumers. 52% of the retailers expecting to grow sales through ecommerce said that the primary reason for its importance is a ’growing consumer demand.’ 1 Furthermore, e-commerce will increasingly be used by retailers to expand into new geographies. 44% of retailers responding to our survey are selling from the UK to overseas. A further 14% are intending to start doing do. Of these, half will use own branded websites to launch their international operations.1

The ‘death of the high street’ remains a myth Meanwhile, in-store commerce does remain a highly significant component of a successful retail strategy. One online study undertaken across Europe found that ‘stores remain key drivers of multi-channel customer satisfaction’ despite the huge increase in online shopping. 9 Bricks and mortar retail will remain vital to multi-channel strategies for many years to come. The majority of retailers continue to consider high street stores as a priority channel. 46% of retailers surveyed stated that they foresee high street sales continuing to grow as a percentage of their total sales revenue. A further 23% are expecting it to retain its existing contribution. 1 The reason that many retailers consider the high street to be so important is for the benefit it brings to the company brand. In our survey, 48% of the retailers that consider high street channels as an important growth area stated that they do so because they consider it good for their brand presence.1 Due to the associated costs, a few retailers are moving away from bricks and mortar as a sales channel. 15% of retailers stated that they anticipated that bricks and mortar store revenues will reduce as a percentage of total sales, 30% of these said that this was because the running costs were too high.1 Will e-tailers move into bricks and mortar? Just as bricks and mortar retailers are increasingly moving online, some pureplay online retailers are considering a move into the physical realm. Lingerie e-retailer Figleaves, for example, has trialled its first physical retail offer from March 2010 in Alders’ Croydon store and this will be expanded to other outlets if successful. This has been spurred on by customer demand to “see and feel the product.” 10 Furthermore, it was reported in December 2009 by The Sunday Times that e-commerce giant, Amazon, had launched a property search to find high street stores where consumers would be able to pick up bigger items such as TVs and PCs, rather than have them delivered to the home. 11 Such stores would ensure convenience for the customer and avoid the negative effects of Royal Mail industrial action, which tests consumer patience.11 It is likely that Amazon would emulate ‘check and reserve’, a system similar to that of Argos which recently announced a 100% year-on-year increase for the service. Argos stated that 18% of its internet sales are items purchased on the web and collected in-store.11 Amazon, however, has denied the claims, stating that ‘it had no plans to open physical stores.’ 12

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There are, of course, many difficulties for e-tail pureplays in moving into bricks and mortar, including their relatively low brand awareness, and the costs of opening stores, which together can seem prohibitively risky. 13 Our research indicates that 30% of retailers that are predominantly or exclusively ecommerce will be seeking to grow revenue from high street stores over the next four years. 4% of this type of retailer will be entering the channel for the first time.1 Whether this represents the tip of the iceberg remains to be seen.

M-commerce growth will be spurred by its win-win nature M-commerce (the buying and selling of goods and services through wireless handheld devices) 14 is a channel that is set to grow dramatically. Advancements in technology, security, flexibility and payment options have made purchasing via a mobile phone or device easier than ever.6 M-commerce creates benefits for both parties in the transaction. Consumers are able to access retailers’ products at any time, source their goods and compare items in-store with the competitor next door. Retailers are able to constantly access and advertise to potential customers with promotional information tailored to the individual.6 UK retailers are embracing the m-commerce market. In the summer of 2009, Oasis, the high street fashion retailer, launched an iPhone application. This was quickly followed by similar launches from Ikea, Next, Warehouse, Mydeco and Barratts who all created software tools for consumers to download on to their mobile phones. Ikea UK launched its ‘app’ at the beginning of December 2009 and by the end of January 150,000 consumers had downloaded it to their iPhones. 15 And this enthusiasm for mobile capabilities is paying off. The eBay iPhone application, for example, is used to sell an item every 12 seconds in the UK. 16 And it isn’t only Apple’s ubiquitous handheld that retailers are focusing on, with applications also being designed for other handsets, such as Blackberry, Nokia mobile phones and Google’s Android.15 Our survey showed that m-commerce is the channel that the most retailers have plans to enter. 10% of retailers indicated intentions to start selling through m-commerce over the next 3 years. It is seen as a service that consumers want, as well as something that sets organisations apart from competitors. Of those that indicated m-commerce to be an important channel for their organisation, 35% do so because of a perceived growth in consumer demand and 28% do so because it positions them as an innovator.1

Multiple channels complement and nourish each other Retailers are increasingly realizing how multiple channels can complement one another as the high street store and the website come to depend on each other. Indeed, sales in one channel can actually be driven by activity in another. In-store sales are heavily influenced by consumers’ experiences online. The majority of visitors to online stores are actually using the internet as a research tool before buying in-store.7 The magnitude of this effect can be surprising. For example, a recent study in the U.S. found that “online and web-influenced offline sales combined actually accounted for 42% of total retail sales and that percentage is expected to grow to 53% by 2014.” 17

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Multi-channel maturity: regional differences and the UK position The degree to which multi-channel retailing has become integrated into the fabric of consumer behaviour and retail strategy varies from country to country. There is, in effect, a continuum, beginning with the advanced western economies where consumers are enabled to engage in e-commerce activity by blanket broadband access, and retailers are enabled by transport infrastructure and supply chain sophistication. As would be expected, the US tends to lead the way in terms of the maturity of its multi-channel approach. Further along the continuum a number of factors limit the extent to which a multi-channel approach is feasible for particular countries. Developing economies are often characterized by factors such as the legacy of unsophisticated transport infrastructure and a fragmented retail market composed of a large number of small players, which provide direct barriers to retailers looking to expand into e-commerce channels. Multi-channel retail can also be hindered within specific geographies by indirect factors. For example, in Poland credit card uptake is very low and the majority of transactions are made in cash. This has the knock-on impact that customers are unwilling to order products for home delivery and prefer to collect in-store. Aspiring multi-channel retailers in Poland have had to negotiate a solution to these cultural preferences. It is expected that over time these barriers will be overcome, through the confluence of technological developments and societal changes. In a few years time, for example, mainstream access to the internet in Poland will have caught up with Western economies, and internet transactions will be commonplace amongst Polish consumers. This report focuses on the retail market in the UK. The UK is interesting because its ecommerce channel is relatively sophisticated. Both UK consumers and retailers have extensive experience of the process of internet retail and this channel is now moving into an advanced phase, as evidenced by the glut of revamped websites that have emerged over the last few years. However, as this report examines, before the UK can truly deliver customer satisfaction to the modern generation of consumers, it must improve its back-end processes. In comparison with the US, the UK is lagging behind on the continuum of sophistication. In the US, retailers are better than their UK counterparts at maintaining cross-channel information within a single system about their customers. As the findings of this report show, having the right IT systems in place to take a brand rather than a silo approach is key to meeting customer expectations. UK retailers are ‘complacent’. Only 52% of them have a cross-channel order management system and only five per cent plan to implement one. 39% also do not have cross-channel stock visibility and 15% don’t believe they need it. 18 By contrast, US retailers prioritize the importance of having a cross-channel order management system and having visibility and access to stock across their various channels. 60% of them are capable of achieving a single, cross-channel view of the profile of their customers compared to only 38% in the UK.18 The changes that are taking place now in the UK will ultimately be adopted by countries with less developed retail sectors. Such changes will often take place more rapidly for those countries that can learn from others’ mistakes. Therefore, developments in the UK can be seen as a bellwether for changes that will take place in a slew of countries in the coming years.

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2.3 Customer experience is the key competitve battleground for retailers Technology has enabled a demanding consumer that expects an easy retail experience One major effect of the rapid pace of technological change over the last two decades has been to democratize the retail environment and hand over greater decision-making power and influence to customers. Consumers now conduct their own product research through several different channels prior to making purchases. The explosion of price comparison websites, which has been one of the characteristics of the Web 2.0 era, has accelerated this trend.17 However, the online environment of perfect transparency of price and quality (some retailers will even advertise their competitors’ prices on their own websites) 19 , combined with near limitless choice, carries its own risks. The principal implication is that, because price is devalued as a competitive differentiator, customer experience has become of central importance. And in the new retail democracy, the recently empowered customer carries very high expectations for an easy and convenient service. As the technological developments that have created the multi-channel retail world began well over ten years ago, the lack of novelty in e-commerce further exacerbates this trend. Customer expectations for service have been rising in tandem with the inexorable progress of 20 technology since the birth of the internet.

Retailers must capture the attention and imagination of promiscuous consumers If retailers cannot meet customers’ need for a satisfying experience that is both easy and convenient to them, then they run an increased risk of losing that customer altogether. Customers have far more choice when deciding what to buy and how to buy it due to the increased array of media through which they can shop. 21 This shortens their attention span and decreases their loyalty to any one particular brand. Price transparency, combined with the effects of the recession has driven this trend forward, further altering the pattern of demand and creating an ever more price-savvy population that will look for the best deal and allow itself to be courted by a variety of retailers.7 These ‘promiscuous’ consumers want websites to be easy to navigate, user-friendly and aesthetically pleasing. On a website, a consumer’s experience is compressed into between 30 seconds and five minutes, and so its presentation and layout are crucial for keeping that consumer’s attention and business.6 Multi-channel retailers therefore must provide interfaces and stores that are both accessible and compelling.

Consumers expect a seamless brand experience as they interact across all channels The modern generation of consumers expect to be able to interact with a brand across several channels when and where they choose. They can and will pick and choose from a range of shopping combinations and then mix and match them, reserving online and collecting in-store or selecting off the page and buying over the phone, and choosing which channel to return the product by. For example, one study found that 31% of consumers expect to be able to reserve online and buy in-store, and the demand for such ‘click and collect’ services is growing, driven by the consumer’s expectation of convenience.6

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Figure 3: A typical customer journey – getting the product

Source: FreshMinds

One implication of this environment is that customer experience is defined in relation to the brand as a whole rather than within one specific channel. 22 Customers expect a seamless brand experience of consistency, efficiency and flexibility regardless of the channel through which they choose to interact with the retailer.7 As a result of this, a multi-channel strategy can increase the risk of damage to the brand. A consumer’s experience with a brand through one channel, whether positive or negative, will colour their views of and loyalty towards that brand across all channels.22 Meeting these expectations can be challenging. One study calculated that a customer can interact with a three-channelled brand in 700 different ways across a combination of six touch points; researching, choosing, purchasing, receiving, using and returning a product. Within each permutation, customers expect the same seamless experience at each touch point, emphasising the challenge for retailers.7 Vice versa, strengthening the brand can boost online sales, turning risk into opportunity. A well-known brand will be more trusted by its customers in terms of web security and, as a result, they will spend online more frequently and progress on to bigger and more expensive items.6

Customers expect convenient delivery and returns Whereas once the ease of ordering products online had led customers to accept poor backend service, such as its delivery, customers now expect retailers to operate all elements of their service in a way that is as convenient, quick and easy for them as possible.6 The offer of an effective provision of such a service is a key competitive advantage.20

Retailers are only half way to delivering a successful multi-channel strategy that gives customers what they expect As this report will go on to demonstrate, in executing their multi-channel strategies, retailers have addressed the different needs of the expectant consumer with varied degrees of

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success. Their principal successes have been in developing front-end processes that engage the consumer. Their principal failure has been in the lack of development of back-end processes that complete the customer experience.1 These discrepancies create further opportunities for retailers to differentiate themselves and indicate that back-end processes that contribute to the consumer experience will become a key competitive battleground in the next few years.

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3. Retailers need to re-think their priorities to deliver multichannel strategies successfully 3.1 Retailers have focused on the front-end in recent years Optimising shopping experience has been the principal focus of multichannel retailers in recent years Consumers expect shopping undertaken through any channel to be an ‘experience’ from start to finish.6 In recent years, in terms of building a successful multi-channel strategy, retailers have primarily focused on creating accessible and compelling web storefronts. This addresses the principal risk that online consumers, faced with overwhelming choice, will be fickle in their retail habits and therefore can easily be lost. The aim has been to make online shopping an engaging experience, in some cases by replicating the in-store environment and offering relevant information in both visual and textual formats. Online sales assistants are increasingly being made available for live product debates. The number of products showcased online has increased dramatically and the number of web 6 shops has grown, meaning that consumers are spending more time and money online. In 2008, e-DigitalResearch released a report praising UK e-retailers for the significant improvements in service quality. There had been a strong provision of online services including search facilities, clear homepage content, product ranges and customer service contact. Each type of retailer can learn from the other. Pureplay continues to provide a strong online experience whilst brick-and-clicks retailers perform well in providing good offline activities, such as telephone and e-mail customer support. 23 In re-designing websites, retailers have also sought to develop a seamless brand experience across different channels. Marks and Spencer Marks and Spencer has made a significant investment in its entire customer journey, overhauling its online retail offering in 2008. They have predominantly focused on front-end service, improving all aspects of the website and fostering strong supporting communications by emphasizing telephone and e-mail contact capabilities. 24 The website was upgraded in order to ‘instantly improve the customer shopping experience’ which would in turn ‘support future growth’. 25 They have focused on improving visual and audio content in order to catch the customer’s attention and guide them along the retail journey. Additions include videos, a more comprehensive search facility, the inclusion of reviews and ratings, a wider screen, improved outfit shopping and a pop-up shopping basket so that customers can automatically view and buy their selection without being diverted from their shopping page. Whilst there is still lots of room for continued improvement,24 Marks and Spencer has received praise for its services. Marks and Spencer was named by eDigital Research as the top overall performer on the strength of its clear and detailed website and telephone service. 26 More recently, Marks and Spencer has also added a feature that shows available stock levels online.

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Evans Cycles The UK’s largest specialist cycle retailer has invested heavily in its online search capabilities to enhance functionality and personalize its website. Its Avail Intelligence System learns from customer behaviour by analysing where shoppers go to on the site after using the search facility. Over time, search results should improve with more relevant products displayed within category pages. In its first month, the system halved the number of customers who had to make multiple searches to find what they were looking for. 27

New Look The fashion retailer launched its second-generation website equipped with several new features in mid-March 2010. The website uses lifestyle photography to attract browsers, and simpler navigation and click-through to convert sales. Shoppers can re-create their favourite celebrity’s look and access a 360-degree view of products. A new software platform is to be implemented to create a personalized multi-channel customer experience. New Look also plans to integrate m-commerce, develop local language sites and widen currency options. 28 As 5% of its online sales come from overseas, the long-term goal is to double this to 10% which would be worth more than £100 million.28

Debenhams Debenhams has opened dedicated online stores on the UK sites of both Amazon and eBay, complementing Debenhams.com. This is designed to reach more customers and allow them to choose from a wider range of products anywhere in the UK from the comfort of their armchairs. Its ‘Designers At’ range will be sold on Amazon.co.uk and Debenhams eBay is part of eBay’s new Outlet store which sells homeware, electrical products and gift ideas.

Online retailers have recognized the need to respond to different social groups at the front-end eBay has recently declared that it recognizes that the wide range of customers that shop online creates a ‘kaleidoscope of demands’. eBay’s UK managing director, Mark Lewis, has said that a “30-year old guy buying a DVD player has completely different needs than a 20year-old woman looking for an outfit for a night out.”16 This has led them to introduce a segmented user experience for their different eBay shoppers by offering a number of subsites, such as fashion, green products and magazines. 29 Such websites provide a search of a sub-set of all merchandise on eBay. 30 They will have a greater emphasis on the use of photography and promote a browsing rather than list-based interface. The focus of these developments has been to further improve front-end services by, in effect, clarifying a customer’s search for items and presenting the product range in a more compartmentalized layout.

3.2 Retailers are continuing to think about customer service purely at the front-end Retailers’ multi-channel strategies are concentrated on optimising the customer experience at the front-end The findings of our online survey support the conclusion that significant investment has been placed on front-end services.1

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When it comes to considering their multi-channel strategy, issues such as brand protection and marketing are foremost in the retailer’s mind. This holds true as they consider both entering a channel and maintaining an existing channel. In our survey, 27% of retailers considered brand continuity as the biggest challenge both when launching and maintaining a channel. 18% of retailers considered marketing as the biggest channel entry challenge and 14% considered it the biggest channel maintenance challenge.1 Figure 4: Which one of the below items is the biggest challenge when maintaining a multi-channel operation?

Base: 375 Source: FreshMinds

Unsurprisingly, footing the bill of a multi-channel operation is also deemed to be a significant challenge. 21% of retailers consider cost to be the biggest challenge for channel entry, and 25% consider it to be the biggest challenge for channel maintenance.1 Interestingly, these factors seem to take attention away from back-end considerations. Relatively few retailers consider fulfilment as the main challenge in their multi-channel strategy. Only 10% thought it would be the major obstacle to channel entry and channel maintenance.1 Retailers with overseas operations are similarly unlikely to place emphasis on back-end considerations. 43% of retailers intending to expand internationally see exchange rates as the biggest challenge they face. Only 11% see fulfilment as their biggest challenge, behind trading regulations (24%) and lack of local marketing (19%).1

Retailers think that the front-end dictates consumer experience This focus on front-end, in part, is because retailers consider these elements to be the primary influence on consumer behaviour. When considering what most dictates customer opinion and behaviour, retailers hold issues such as product choice, staff advice and website usability as being more significant than back-end issues like delivery and returns.1

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The results of our survey state that 31% of retailers consider product choice to be the dominant influence on consumer opinion, 29% chose staff knowledge and advice, 22% chose website usability. Only 11% thought accurate and on-time delivery was key, and even fewer the returns process, 3%.1

Investments are weighted towards the front-end These front-end concerns have been dictating where retailers are spending their money. In line with the perceived brand and marketing challenges, the majority of retailers have been investing most heavily in improving stores, websites or customer support services.1 However, considering the number of retailers identifying stock availability as the serious issue they are facing (45%), relatively few have prioritized investing in it. Our survey says that whereas 28% have most heavily invested in store improvements, 19% in website usability and 16% in customer support services, about 24% have most heavily invested in stock availability.1 Figure 5: Which one of the below activities has your organisation invested in most heavily over the past year to ensure the customer has a positive retail experience?

Base: 500 Source: FreshMinds

Failure to develop the back-end services is a risk The emphasis placed upon front-end services by retailers has been designed to attract as many customers as possible, presenting multi-channel retailing as quick and easy. However, in expanding across channels and attracting new customers, retailers have taken on a responsibility to deliver that they struggle to meet, in part because they have given insufficient attention to both front and back-end fulfilment. This has meant that their services, according to one recent commentator, ‘are often not joined up, with the left hand unaware of what the right hand is doing.’ 31 In effect they have failed to properly address the consumer’s expectations for reliable and flexible delivery options, and only partly addressed the need for a seamless brand

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experience. They have addressed the point-of-sale element but not the point-of-delivery element. There are three core elements of customer experience that depend on the back-end: product availability, delivery and returns.1 Retailers have had varied degrees of success in tackling these areas.

Product availability is a major area of focus post recession “The [ability] to provide high levels of product availability, whatever level of inventory you have, is important. If you do it poorly you have to add that expense to the cost of the product, so weaknesses in that area turn into higher costs of the products. And given how efficient the markets are right now, it’s better be a price leader...If you are wasteful in your back end you are going to hurt your front end.” 32 Dr Corey Billington, Head of Research & Development e3 Associates If customers order an item from a retailer’s online inventory, they expect that product to be in the retailer’s warehouse. If retailers have an outdated and inaccurate inventory system, consumers may only be notified at the point of despatch or delivery, which they view as unacceptable.21 According to one survey, 61% of respondents said that they would spend more with a retailer if they got product availability right. 33 During the recession, retailers operating through more than one channel have been struggling to ensure stock is available to meet their customers’ needs. In fact, the findings of our online survey demonstrate that 45% of retailers consider problems surrounding stock availability as the most significant issue they have faced over the past year.1 In the current financial climate it has been extremely difficult for retailers to predict changes in consumer demand. Our survey indicates that, of those facing significant stock availability challenges, 39% mentioned issues relating to demand forecasting as a cause.1 Not only has it been difficult for retailers to keep up, but the fluctuating demand has also taken its toll on suppliers. 31% of retailers mentioned the interruption in the supply of manufactured goods as a reason they have faced stock availability issues.1 Stock availability issues are exacerbated by a move into a multi-channel strategy. Retailers report difficulties in deciding which channel to prioritize, and in balancing variable demand between the channels with the customer expectation for an identical service from all channels. “Due to the high volume usage of websites, more product is held for these customers, therefore in-store availability is poor.” 1 Commercial Manager, fashion retailer “It is more of a case of having enough stock, but not in the right places – too much in the web warehouse meaning not enough in the store or vice versa. There is a lack of being able to predict which will be more popular with customers especially for release day.” 1 Area Manager, entertainment retailer This means that as retailers look ahead to the future, stock availability continues to dominate their concerns. A large proportion anticipates that better product availability is going to be the key customer requirement in years to come; in our survey, 40% of retailers believe that product availability across all channels will be the biggest customer expectation in the next three years.1

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Delivery fulfilment and returns are equally important to customer satisfaction Back-end processes form a core element of the customer journey. Consumers expect an efficient, speedy and successful fulfilment of their orders, tailored to their own convenience. The item must therefore arrive at the place and time of the customer’s choosing.21 As consumers want shopping to be an experience, the item must be both well presented and practically packaged so that it is not a chore to open.21 The so-called ‘final-mile’ of delivery is also crucial. The item must be delivered in perfect condition by a professional with good customer service skills. If not, the whole delivery process may be regarded by the customer as a failure.21 Just as consumers expect the delivery service to be flexible and accommodating, this also creates an expectation that the collection and returns processes are flexible. They expect to be able to purchase through one channel and return through another just as easily, no matter the reason. 34 The importance of returns is growing as more channels open for the consumer, green legislation puts pressure on companies to recycle, and it becomes easier for customers to return goods.34 Underperformance in offering a sophisticated back-end fulfilment service carries real risks for the retailer. A 2010 study found that 40% of consumers have been put off from shopping with a particular retailer due to poor delivery experience and that 45% look for delivery information before they start to browse and a further 33% do so before they go to check out – as they fill their baskets. “Consumers positively discriminate against retailers who don’t demonstrate a clear delivery offer and will abandon their shopping cart if, by the time they are ready to check out, appropriate and affordable delivery options are not made very clear. 35 ‘Delivery’ has become a strategic marketing tool that will win and keep customers” Andrew Starkey, Delivery Director IMRG

There is a risk that retailers may overlook fulfilment issues A study by the IMRG in 2010 found that consumers have the perception that 17 out of every 100 deliveries fail to meet their expectations, while 75% of consumers have experienced a failed delivery. 36 FreshMinds’ survey of retailers also indicates that issues relating to goods fulfilment require further attention. For instance, of those that have been facing stock availability problems, 20% mentioned fulfilment and delivery issues as a factor.1 In addition to this, a number of retailers are struggling to keep up with their customer delivery and returns expectations. 10% of retailers considered that increasing numbers of complaints regarding goods fulfilment was the most significant issue they have experienced over the past year. A further 6% consider the biggest issue to be an increase in the number of issues relating to processing returns.1 The result is that retailers, having applied most of their energies to building attractive and entertaining websites, now need to prioritize product availability measures as a result of the fluctuating demand experienced during the recession. Too many are currently underperforming in terms of their fulfilment and returns services.

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3.3 Road testing retailers’ fulfilment and returns processes What we did In March 2010, FreshMinds conducted a mystery shopping exercise with 30 UK retailers to test their effectiveness at providing fulfilment and returns services. We wanted to see if they do what they said they would, and whether any types of retailers significantly outperformed any others. Choosing a mixture of multi-channel “bricks and clicks� (21) and pureplay online retailers (9), we ordered three products from each retailer, combining different sizes and values. Ten retailers from each of the following sectors were tested: Fashion (items ordered jeans, t-shirt, socks) Electronics (printer, lead, camera) Generalist / department (perfume/aftershave, pillow, watch) All three items were ordered together during normal business hours, to be delivered to FreshMinds head office in central London. When we received the goods, we examined the packages, checked we had received the ordered goods and then returned them. The performance of each retailer was measured at each stage of this process against its own fulfilment processes and benchmarked against other retailers. The results reveal several areas in which UK retailers can and should improve their back-end services to ensure that they provide customers with the retail experience they demand.1

Pureplay retailers lead the way in providing a free delivery service A study conducted by Verdict found that 59% of customers prioritize free delivery as important when seeking a convenient shopping experience.6 Another by GSI Commerce found that 94% cited free delivery as a deciding factor when choosing between two competing retailers on a high street. This was an increase from 68% the previous year.20 Multi-channel retailers are failing to meet this demand for free delivery, despite the very high and ever-growing proportion of customers expecting this service. Only 33% of bricks and clicks retailers provided delivery free of charge compared with 44% of their pureplay competitors in our research.1

Pureplay retailers lead the way in specifying a delivery time The greatest failing of bricks and clicks retailers lies in the ability to specify a convenient time for customers to accept their delivery. This option was only offered by a disappointing 14% of our multi-channel retailers. Pureplays outperformed again, with 44% providing this service.1 This is despite a GSI Commerce finding that 45% of consumers cite the ability to choose a delivery time as important when choosing a retailer, an increase from 16% the previous year.20 Where bricks and clicks retailers do offer the opportunity to choose from specific delivery windows this is charged as a premium delivery service. Purely online retailers are more likely to offer this service for free.1

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Spot check: How retailers are failing to provide a reliable delivery service One large high street fashion retailer that has recently invested heavily in its front-end website usability would not ship to a business address. This was not clear on the website, however, and was discovered by calling. One high street department store sent a bottle of aftershave that was destroyed during transit. Five different retailers, both electronics retailers and department stores, delivered multiple packages on different days, despite the fact that all orders were placed together. Reinforcing the point that stock availability will remain an issue for retailers in the future, one pureplay electronics retailer misquoted an item as being ‘in stock’. All three items were supposed to have arrived within 1-3 days. After having not received the items for eleven days, we enquired as to the status of our order. We were told that the items were awaiting stock from the supplier. On the twelfth day, we cancelled the order. Overall, 10% of the profiled retailers failed to deliver within the promised time frame.1

Fashion retailers charge their consumers for superior delivery services Where the delivery service is not free, it seems that on average fashion retailers charge the most for standard delivery (an average of £4.22 in our mystery shop). Department stores and electronics retailers charge less, (an average of £2.83).1 However, the level of service provided by fashion retailers is significantly higher overall. They consistently perform best in terms of appropriately sized packaging, the clarity of included return instructions, sending multiple products together and on the same day, and for ease of opening. This may explain why customers do not mind paying more: for a better quality of service.1

Free returns are demanded by consumers, but many retailers charge for this service 62% of the profiled retailers offer a free returns service. However, the 37% that do not offer it ignore the demand that exists amongst consumers and may be failing to convert browsers into sales as a result.1 Verdict found that 46% of customers cite a free and easy returns policy as of great importance when deciding to shop online.20 Furthermore, GSI Commerce states that 76% of consumers cited expensive and lengthy online returns and refunds processes as reasons not to return to a retailer.20

Fashion retailers lead the way in creating a convenient returns process In our research, fashion retailers offered more effective returns processes than other retailers, demonstrating that they have identified the importance of easy returns as a barrier to sales in their sector.1 Being able to try on an item of clothing before purchase is a service customers would expect to receive in a high street shop, and they expect and require the same freedom with their online stores. Electronics retailers, on the other hand, offer a very low standard of returns service. This finding is corroborated by a 2009 Snow Valley mystery shopping report on the returns process, which found that fashion retailers provided a far better service fulfilment than electronics. 37 Overall, 28% of the retailers we profiled offered returns processes that we classified as ‘difficult’ or ‘very difficult’. The majority of these were electronics retailers.1

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The key to delivering a satisfying returns process experience is in maximising the convenience for the customer and building the returns process into an all-round shopping experience. There are a number of ways in which retailers can make the consumer’s life easier when it comes to returns. Those that performed well at this had clear returns instructions and contact details displayed on their websites. Packaging included both returns instructions and the required dispatch and freepost notes with the products. Several return options were offered including tailored pick-up services and return in-store services (where possible).1 At the front-end, staff members were helpful, accessible, knowledgeable and courteous, possessing an adequate knowledge of their retailers’ policies and of the customers’ order details.1 By contrast, many retailers had not adequately joined up their front and back-end services, with customer convenience not prioritized. Websites were poorly designed, with customer information inadequately displayed and service instructions unclear. Packaging was impractical, often too big and not reusable, and in some cases it was impossible to send the items back together. Retailers also often failed to include instructions and the relevant notes with the orders.1 Returns options were also limited. Pick-up services, if available, were inflexible and return instore was not offered by a quarter of bricks and clicks retailers surveyed (despite customer demand). 38 Staff members lacked adequate training when handling customer complaints and enquiries and possessed inadequate knowledge of both their retailer’s returns policies and their customers’ order details.1 Returning in-store: how to lose customers and irritate people One electronics multi-channel retailer and household name demonstrated a very poor in-store returns service. We attempted to return the item in-store and were told to bring an invoice, which was the only thing included in the packaging. Upon arrival we were informed that this was insufficient and that the invoice had been e-mailed and needed to be printed out. Instead of locating our order online they told us to leave, print the invoice, and return again. At that point, we observed that an incorrect name was displayed. When this was pointed out, the staff member continued to display a lack of basic customer service skills A second electronics multi-channel retailer was unable to process the return in-store (contrary to the information online) and could only post items back to headquarters. We had to package the goods up ourselves and take them to the store to be posted. The staff were confused by the process and had to call headquarters, causing a long delay for the customer.1

Returns: room for improvement Half of the surveyed electronics retailers and one department store failed to include any return instructions in the packages. Three electronics retailers promised to e-mail the customer with return instructions but did not. One online electronics retailer required different return shipping methods for different items. Two high street electronics retailers sent items without any substantial packaging, requiring the customer to purchase packaging to return the items. Two high street department stores only awarded store credit for returned items that were bought online.

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One fashion retailer did not accept in-store returns for items ordered from their webpage. Two retailers failed to refund the value of the returned goods within their promised terms. Overall, 38% of the bricks and clicks retailers profiled failed to offer an effective in-store return option.1

Bricks and clicks retailers fail to brand their packaging Multi-channel retailers should find it easier to cultivate customer loyalty to a brand. With many channels, they have many ways through which to reach more customers and promote themselves. Despite this, it seems bricks and clicks retailers are lazy when promoting a brand. Only 48% branded their delivery packaging.1 Pureplays do not have stores and so cannot afford to be so complacent. They have more work to do to build up trust and will heavily exploit any opportunity they have to promote their brand. They seem to have realized the significance of branding their delivery packaging, with 62% doing so.1

Branding levels differ depending on sector Our research demonstrated that levels of branded packaging varied dependent upon the kind of retailer. The biggest branders of packaging were the fashion retailers, who rely upon image in order to sell to their audience, with 70% of them doing so. Department stores were next, with 60% of them branding their products. By comparison, only 22% of electronics retailers saw the need to brand their packaging.1 While the need to brand packaging might be perceived to be higher in the fashion sector versus the electronics sector, it should also be seen as an opportunity to strengthen the brand and enhance the shopping experience that is being missed by the electronics sector. Packaging: the good, the bad and the ugly One multi-channel electronics retailer provided only a large, unmarked grey plastic bag. There was nothing inside or outside of it, no receipt or invoice, and it was devoid of any branding. One pureplay fashion retailer, on the other hand, sent a plastic bag covered in the web address and brand. Several special offer pamphlets were also included in the packaging. One electronics retailer sent a package with inadequate taping around the box, which meant the package was actually already open at the point of delivery.1

Ironing out these wrinkles can and must be done Two common trends emerge. One is that pureplay e-commerce retailers tend to be more advanced in terms of their fulfilment and returns processes.1 This might go some way to explaining why research has found that customers tend to be more satisfied overall with the shopping experience of a purely online retailer compared with a bricks and clicks retailer. 39

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Retailers with a store presence should be able to offer a more rounded, engaging and convenient shopping experience tailored towards customers’ requirements for choice and convenience. Multi-channel retailers should also be more proficient at cultivating customer loyalty to a brand due to having a physical presence in a store. Here, customers can buy and return products, have someone human to talk to, and see and touch items before buying them. In this context, it appears that the contribution of fulfilment and returns processes to customer satisfaction may explain the counterintuitive finding that customers rate an online shopping experience more highly than a multi-channel one. This highlights the importance of getting the process right. The second trend is that fashion retailers are leading the way in terms of offering successful fulfilment and returns process, especially when compared with the electronics sector. These results may reflect a greater need amongst fashion retailers to provide these services. It also 1 demonstrates the great strides that can be made across all retail sectors in these areas.

3.4 With great opportunities come great risks As retailers seize upon the opportunities of the multi-channel world – opportunities which they cannot afford to ignore – they also expose their brand to new risks. With customers expecting a first-class experience whatever channel they are interacting through, any imperfections can damage the whole brand. It is imperative that retailers address these risks, and those that do will achieve competitive differentiation by leading the market in the essential currency of customer experience. Retailers have addressed the most obvious risks, those that relate to the point-of-sale customer experience, but they have work to do on mitigating the risks to customer experience 1 at the point of delivery. Specifically, retailers need to find solutions to stock availability issues relating to both their exposure to an increased number of channels, and demand volatility rooted in the recession. At the same time, they must also find ways to improve the fulfilment and returns services they currently offer.1 These issues are significant, complex and ubiquitous. In the next section we will look at how retailers can solve them, and turn risk into competitive advantage.

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4. Retailers can overcome the challenges to produce a satisfying end-to-end customer journey through a number of practical steps 4.1 Solving challenges, meeting expectations Meeting the needs of the consumer who expects convenience and ease can appear to be a daunting task for retailers. However, with the right ideas and expertise each issue can be mitigated and managed in a number of ways, and practical solutions can be implemented to give the customer what they require. In this section we look at some of these practical steps that retailers can take to overcome the challenges in delivering a multi-channel strategy. Logistics experts from across DHL Supply Chain have shared their knowledge and the innovations of their customers to help us understand what retailers need to do to bring their back-end service levels in line with the front-end. We start by looking at the challenges of launching a new channel and how embedding a multi-channel mentality at all levels of an organisation is a prerequisite for providing the brand consistency demanded by consumers. Then we turn to the challenges of stock availability, fulfilment and returns, exploring how some UK retailers have responded to these challenges and drawing on insight from DHL Supply Chain to produce recommendations for the future.

4.2 Channel launch – starting as you mean to go on Importance of getting off on the right foot In many ways, the most critical point in the lifetime of a channel is at its launch. This is particularly true when considering back-end processes. Logistics decisions made at a channel’s outset will help or hinder a retailer’s ability to meet customers’ expectations for years to come. It also follows, due to the size of the investments required, that once decisions are made they are not easily reversed. Done well, a channel launch can result in a supply chain solution that is tailored, flexible, efficient and cost effective. Done badly, a retailer can be faced with years of dissatisfied customers, a damaged reputation and the need for further large investments.

M-commerce: how will you launch? Many retailers are intending to enter the m-commerce channel in the coming years (10% of all UK retailers over the next 3 years). With only a limited amount of consumer ‘mind space’ available via this channel, it is important that retailers ensure that they get the fulfilment processes right from the beginning to capture the attention of potential advocates. “The complexity of m-commerce lies in the fact that there is only so much mind space on a mobile. Due to there being so many different applications that customers can purchase, trying to get some mind space is very difficult… My own advice is to get in there early, develop a brand in that area, and really focus on advocate selling.” 40 Hugo Patten, IT Director for UK and Ireland DHL Supply Chain The launch of an m-commerce channel (or any new sales channel) raises a number of logistical challenges to overcome.

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Channel launch throws retailers in at the deep end Unfortunately, it is at the channel launch stage that retailers are most likely to underestimate the difficulties of multi-channel logistics and are least equipped to make informed decisions. There are many factors that should influence the choice of a supply chain solution which, without experience, are difficult to predict. The complexity of the challenge also means that there is no ‘one size fits all’ logistics solution. “Every business is different. I think there is a bit of a habit to say; ‘it’s e-com: you do it like this’ but when it gets to reality the display might be different, the way the customer purchases those kind of goods might be different, the demand spikes will be different… even amongst the same sort of retailers it may vary quite a bit.” 41 Ian Clay, IS Director, Fashion Division DHL Supply Chain Further to this, even if there were two retailers selling identical products and experiencing identical demand patterns, the legacy of their existing logistics infrastructure could mean that they require very different supply chain solutions in order to integrate a new channel.

Retailers should prepare, plan and pilot Prepare: Given the complexity of the challenge, a phased approach to channel launch is extremely beneficial. Firstly, retailers need to work hard at defining the market and supply chain factors that will influence their launch strategy. “If you add to your portfolio you need to do a systemic analysis to know what the effect on the enterprise system is. [A channel launch] affects all the other parts of the system - it affects all other front end demands, it affects all the delivery uncertainties, where you want to put inventory, when you want to move it to other places etc.” 32 Dr Corey Billington, Head of Research & Development e3 Associates “[retailers need to work at]...defining their audience, defining the products and the lifecycle of those products, not just the marketing of the products but also the sourcing, the timescale of the sourcing, the availability and the visibility.” 42 Nigel Spooner, Non Food Retail Business Development DHL Supply Chain Plan: Retailers should involve both suppliers and logistics providers at a very early stage in the decision making process. It may be that significant advantages can be gained in collaborating with them through greater visibility of the supply chain and additional expertise. “When you are designing your distribution channel it is so important that you bring your suppliers in... They might be able to do something at very minimal cost or disruption or delay that means subsequent handling in the processes become so 43 much easier.” Kim Sainsbury, Head of Business Development – EMEA DHL Supply Chain Pilot: Once a launch strategy is identified, a pilot approach to actually entering the market can be advantageous. This pilot might be by geographical region – only offering the new channel in one locality, or it might be by product range – initially only selling selected products. This enables the retailer to test their systems, identify potential problems and iron them out before they have an opportunity to cause significant damage to the brand. If, alongside this, they satisfy orders from an existing supply chain solution, investments can be made incrementally in a more informed way.

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“The companies that have been most ‘burned’ by the process have been those that have tried to do everything at once. ... Make sure you start off small and then build up, but plan that build up. Trial everything for six months, learn your lessons and then add a second phase where you roll out the rest.” 41 Ian Clay, IS Director, Fashion Division DHL Supply Chain Case Study – UK Fashion retailer Build up from one product Having experienced the challenges associated with launching a new channel in the US market, one retailer recently launched their UK e-com offering in a phased pilot approach. Initially, just one product line was offered through the channel. This enabled the retailer to ensure the proposed logistics concept would work, trial how the delivery supply chain would operate and test how goods would come out of their existing supply chain into their DHL operated fulfilment centre. Following this, they piloted selling apparel items online. Once the required changes to their internal systems had been made, the retailer was able to successfully extend their offering across a much wider selection of products and is likely to be selling all product lines online by the end of 2010.

4.3 Aligning for a truly multi-channel approach United we stand, divided we fall The cornerstone of a successful cross-channel supply chain strategy is having a united approach across the organisation. Deloitte states that inflexible organisation structures and processes that are based on channel and not brand is one of six key barriers that UK retailers need to overcome in order to ‘provide visibility and consistency across all channels’.7 This need for unity is true generally, but particularly when launching a new channel: “[Retailers need to] make sure that they have complete buy in from all parts of the business. And that would encompass anything from the buying and merchandising teams... IT... logistics director...third party contractors... You are going to have to make sure that all of them really understand how the new channel is meant to work.” 44 Jim Cannon, Head of Solutions Design - EMEA DHL Supply Chain Achieving continuity will affect every level of the business, starting at the very top. Even the way that a Board of Directors is structured can have a significant impact on an organisation’s ability to achieve channel alignment. If Board members are aligned to, and focussed on, specific channels (e.g. e-com director, store operations director), there is the danger of internal conflict. On the other hand, if Board members are focussed on the brand as a whole, they are able to focus on delivering a consistent service to the customer irrespective of channel. Furthermore, it is important that the supply chain is represented at Board level. Cascading down from the top, staff training needs to equip staff to think in a cross-channel way. Staff induction needs to ensure that all staff, especially those in customer facing roles, are fully aware of the brand’s multi-channel offering and how those different channels interact with each other.

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Figure 6: How a brand focused approach enhances customer experience through facilitating key elements of multi-channel service

Source: FreshMinds

4.4 Stock availability issues – how to respond Fronting up to stock availability issues is essential to protect the brand As highlighted by FreshMinds’ online survey of retailers, multi-channel retailers have been feeling the pressure to ensure that stock is available to meet consumer demand across different channels (45% see stock availability as the most significant issue they have faced in the last 12 months). Not only is this a major issue for the revenue of the retailer, but it also has a direct impact on consumer experience. If stock availability issues are not prevented, consumers will, at best, shop elsewhere. At worst, fulfilment promises are broken, consumers are left with bad experiences and severe damage is done to the retail brand.

Real-time visibility of the back-end is crucial to avoid the over-promise Behind many poor customer experiences related to stock availability is an over-promise on behalf of the retailer. From a consumer’s point of view, if a product is advertised online they expect that product to be available and ready to be shipped. However, stock advertised by the retailer at the front-end often isn’t actually physically available in their fulfilment centre. This may be because the stock has been sold via another

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channel before the website could be updated, or because the retailer does not want to lose sales for products that are temporarily out of stock. The result is that, although the retailer may well win that sale, the customer ends up receiving their purchase later than expected, damage is done to the brand and the customer is unlikely to return. Retailers need to find a way to communicate stock levels accurately and honestly. “You have to be honest with people about whether a product is in stock or not. Most people order over the web because they, in the main, want it in a relatively short period of time. If it is not available, they order it and then get an e-mail back saying “sorry out of stock, not available for 3 weeks”. They have gone from: very pleased 42 that they’ve ordered the goods to very annoyed with you as a retailer.” Nigel Spooner, Non-Food Retail Business Development DHL Supply Chain The principal challenge is to ensure that front-end stock information is updated in real-time as orders are made across several different channels. A solution is to implement a Warehouse Management System (WMS) that enables a real-time, perpetual link with the web front-end. “The link between the fulfilment system and the web front-end needs to be far more dynamic. In most cases, the link between the front-end and the fulfilment system tends to be a daily feed. There needs to be a much more regular update between what the current warehouse management inventory is and what the web front-end thinks it’s got. It makes much more sense that when an order is made a dynamic 41 check is also made on the WMS.” Ian Clay, IS Director, Fashion Division DHL Supply Chain Arguably, the benefits that clear stock visibility brings to customer experience and to the brand as a whole, in terms of honesty of communication, outweigh the impact of missed sales from customers who decide not to order because the product is listed as out of stock.

Demand forecasting kills two birds with one stone It remains preferable to avoid missing any sales due to a lack of product availability whilst maintaining an ‘honest’ communication with the customer. Given the costs and risks associated with holding large stock pools, any solution must involve accurate demand forecasting. This is significantly harder for retailers operating across several channels, each with their own demand pattern. One key aspect to demand forecasting is to know existing customers well. This can be done in channel specific ways. On the high street, for instance, in-store market research can be beneficial. Online, analytics software enables the retailer to trace the steps of website visitors around the web front-end, providing a deeper understanding of how online consumers are acting and behaving. In deciding which channel to prioritize with stock, point-of-sale software (in-store and online) is available that analyses orders, and models whether, and how, inventories for each channel should be adjusted. The integration of business silos at the information level will assist in forecasting. Sales feedback from retail and e-commerce channels can be integrated to inform demand forecasting across both channels.

Agility in the supply chain helps to respond to unexpected demand spikes Even with accurate forecasting procedures in place, unforeseeable demand spikes have the potential to leave retailers short of stock. Therefore the need exists to effectively react to such circumstances quickly to ensure a consistent offering to consumers.

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It is important that retailers build agility into their manufacturing supply chains. This can be achieved in several ways: Firstly, the retailer’s choice of supplier will be paramount in their ability to effectively manage stock levels. “If [retailers] can tap into a well-established, well-disciplined supplier base they have an advantage.”44 Suppliers need to be chosen that are not only consistent and reliable, but also flexible. This sometimes comes with size; the ability to supplement standard stock with the option of accessing the extra holding stock of large suppliers is a real benefit. The geographic location of suppliers will also have an impact; although there are huge financial benefits in sourcing products from areas such as the Far East, it does result in a long supply chain with limited agility. In such circumstances, a “near and far sourcing policy” 45 is beneficial, whereby retailers select a mix of both long distance and close proximity vendors. Done well, this effectively gives the retailer the best of both worlds, better cost effectiveness with a rapid response capability built in. Another solution is to use logistics suppliers, with operations across the globe that are able to implement an end-to-end supply chain at short notice. Clear supplier communication and control are paramount to reacting effectively to unexpected demand, especially for retailers of continuous goods: “Retailers...need to have a good supply chain in terms of vendor management principles; you need to be very much in control of your replenishment process. You need to be able to balance the product that you’ve got; either if in your warehouse or in the process of being shipped to you or if it’s sat back at the supplier’s warehouse. [This ensures] that you have got the consistency of availability... Depending on what the product is, your control over your suppliers of that product and the visibility of the 43 product and the availability of the product is also a key element.” Kim Sainsbury, Head of Business Development – EMEA DHL Supply Chain Further to this, contracts made with suppliers should have built in flexibility for further demand. This may increase the per item cost to the retailer, but will help to mitigate against missed sales and dissatisfied customers. “Rather than, say, buy 100 items because you know that you can get them for a pound each, buy 100 with an option for another 20 or buy 80 with an option for another forty at £1.02.” 46 Gerry Jones, Global Sector Head DHL Supply Chain

Build flexibility into stock pools to react to demand Even after multi-channel retailers have ensured that they have access to sufficient stock they have yet another question to address: which channel do they allocate that stock to? As previously highlighted, a number of retailers are facing issues balancing stock levels across their channels. The extent to which a retailer is influenced by these issues is dictated by their approach to stock pooling. It is important to realize that there is no ’one size fits all’ stock approach. A solution that is suitable for one retailer may be totally inappropriate for another. Retailers require bespoke solutions that take into account numerous aspects of their business; company size, product type, product lifecycle, demand patterns and much more. Their legacy infrastructure will also be very significant. The approaches available to retailers lie on a spectrum between two options; a “Single Stock Pool Approach” and a “Segregated Stock Approach”. Each approach has its respective advantages and disadvantages. Single Stock Approach

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At the extremity of this end of the spectrum, one pool of inventory is used to fulfil all orders regardless of channel. Stock is not ring-fenced for channels, either physically or electronically. One advantage of this approach is that, if required, you are able to reduce your inventory easily because you haven’t got as many over-runs/overstocks. In addition, this approach makes it easy to react to demand and to recycle stock. It is also much easier to manage from a systems perspective. The disadvantage is that it is harder to prevent conflicts of interest from occurring between channels, i.e. a stock pull for store replenishment could leave no stock available for guaranteed e-com sales. Segregated Stock Approach At this end of the spectrum, stock is allocated to specific channels and separated entirely with little or no cross-channel capability. Operationally this is a more simplistic approach and there is less risk of a conflict of interest between channels. However, it does tend to lead to a higher inventory possession with more cash tied up in stock. In addition, retailers can be left with excess stock in one channel that could have been sold through another or even no stock available for one channel, whilst there is plenty for another. Solutions often implemented and recommended are hybrid approaches that allow for lateral resupply. Like the segregated approach, stock is allocated to specific channels, either physically or electronically. However, a dynamic inventory management system is implemented that has the ability to balance and reallocate stock across the different channels. This approach enables the retailer to both ’ring-fence’ stock for particular channels and also to reallocate stock to reflect demand requirements in the event of sudden unexpected fluctuations on a real-time basis. “I agree with what is called lateral resupply - where you are supplying from the echannel stock to the store front stock or reverse. It will be superior to two different stocks that are unconnected in terms of inventory performance. If you manage it right, 32 it can also be superior to the single stock approach.” Dr Corey Billington, Head of Research & Development e3 Associates

Hybrid approaches require formal stock balancing procedures Dr Billington highlights that hybrid approaches require the balancing of stock between channels to be approached in a very “analytical and formal way.” In particular, “multi-echelon inventory theory” can be used to analytically set rules that dictate optimal inventory movements. “There are mathematical approaches that one can use to optimise [stock balancing]... The lateral resupply rules have a material effect in terms of the inventory delivery performance in the supply chain. If people are not doing it mathematically, then typically they will have between 25 and 50 percent more inventory than they need”32 Dr Corey Billington, Head of Research & Development e3 Associates

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Figure 7: Stock pool spectrum

Source: FreshMinds

FreshMinds’ online survey highlighted that 34% of retailers operating across e-commerce and bricks and mortar do not use an integrated warehouse and distribution network. These retailers may benefit from further integration as they seek to grow their various channels.1

Work closely with suppliers to streamline the distribution of products One consideration often overlooked by retailers trying to fulfil stock from a single stock pool is the structural difference at the ‘pick face’ between store replenishment and e-commerce order fulfilment. Store replenishment often involves picking and sending a bulk box of items, whereas online order fulfilment often involves picking and dispatching one item from within that box. Although this seems like a trivial difference, in actual fact, it can cause significant complications in the warehouse, increased cost and therefore impact on customer experience. In order to address this problem, consideration should be given to how the product arrives in the retailer’s warehouse. If a supplier is aware of how a product is going to be dispatched from the retailer’s warehouse, they may be able to make inexpensive changes to their own packaging design which will make significant time and cost savings further down the supply chain.

Challenges are escalated in food retail Retailers of perishable goods face additional challenges in fulfilling multi-channel orders. Firstly, delivery windows are even more critical in consumer’s eyes, and unmet delivery promises are unacceptable. Further to this, if a missed delivery window results in a failed delivery there is the potential for the retailer to incur significant costs. It is difficult for

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perishable stock to be recycled back into the supply chain quickly and efficiently and it may have to be disposed of without any opportunity for cost recovery. Stock availability is also even more critical for food retailers than for other retailers. 34% of food retailers indicated stock availability as their primary area of investment over the last three years; this figure was 22% for non-food retailers.1 Many multi-channel food retailers chose to fulfil e-commerce orders from the shelves of local stores using personal shoppers. One advantage of this model is that it removes the need for further infrastructure to operate the e-com channel. However, with this approach it is near impossible to keep stock availability dynamically updated at the web front-end. The continual removal of products from the shelves of local branches by in-store shoppers is very difficult to reflect on a national web front-end. To account for this, where products ordered are unavailable many food retailers will deliver a ‘nearest replacement’ product. However, with this service customers expect to be able to refuse replacements if they are deemed unsuitable. This means that the selection of the replacement and the recycling of products back into the supply chain is critical. Interestingly, in order to reduce the impact of its e-commerce operation in certain stores and address space constraints, Tesco launched a first dedicated e-commerce facility in 2008 (to serve the Aylesford area). In freeing up retail sales space, improving traceability and reducing product damage, Tesco feels it is heading towards a good return on investment. A second ’Dot Com Only Store’ is due to become operational in 2010. 47 “As a major food retailer, our online delivery option relies on in-store fulfillment, and customers’ expectations are met through our ability to deliver a full-store range availability and a team of drivers to hit a one hour delivery window, which is a demanding commitment to make to customers who wait in for their deliveries, and for whom our goods are often seen as essentials.” 1 Deputy Store Manager, food retailer

4.5 Delivery issues – how to respond Delivering on deliveries As has already been shown, successfully addressing issues regarding deliveries is crucial to ensuring a positive customer retail experience. It has been argued that a customer’s impression of the brand is formed by whether or not expectations for convenience, quality and value are met. It has also been shown that as expectations increase, multi-channel retailers are failing to ’deliver on deliveries’. This section aims to highlight some practical considerations that, if implemented, could give multi-channel retailers delivery advantages.

Retailers should only offer services they can deliver on Ensuring that the delivery offering presented to consumers is in line with expectations is very important. However, even more important is ensuring that the promises made to customers are actually kept. This means that retailers need to ensure that the front-end visibility of the back-end is up-to-date and accurate. But it also means that retailers should be realistic about the delivery options that they offer customers. In a bid to maximize competitiveness there is a risk that retailers are over ambitious on the services they advertise (e.g. guaranteed next day) and end up over promising. If this happens, there is only one likely set of outcomes: dissatisfied customers and a damaged brand. Instead, retailers should err on the side of caution and only offer what they are confident that they can deliver. What is true with regard to stock availability is also true for delivery services; retailers need to be up-front and honest about what they can offer.

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“It is often better to say the customer can have something in six weeks and deliver it in four ... than say the customer can have it in four [weeks] and delivering it in six.”45 Jonathan Chadburn, VP of Global Retail Sector DHL Supply Chain

Retailers need to be strategic with carrier selection Overzealous promises are by no means the only reason that retailers fail to meet services offered. Another possible cause is poor carrier selection or management. It needs to be remembered that from a customer’s perspective the carrier represents the retail brand; a poor performance by a carrier equates to a poor performance by the retailer. Carriers should therefore be selected by experience and reputation. In addition to this, retailers should ensure that they set stringent Service Level Agreements (SLAs) with every carrier and continually monitor delivery performance against them. What is true with regard to logistics suppliers generally is also specifically true of carriers; “Take a partnership approach with your suppliers... To make your channels effective, you need to have suppliers who understand your business and are engaged with you and are motivated in such a way that the success of your business is the success of 48 their business.” Simon Phillips, E-commerce General Manager DHL Supply Chain When it comes to choosing carriers, selecting a single supplier is rarely advisable; retailers should aim to reap the benefits of a multi-carrier operation. The ability to select carriers according to their strengths/weaknesses (be it by service type or geography), is a huge advantage. Essentially, it gives the retailer the ability to tailor and optimize their ‘final mile’ offering to ensure customers receive the highest standard of services available. As will be discussed later, this also has financial benefits. To assist the operation of a multiple carrier logistic solution, Carrier Management Software integrated into the Warehouse Management Software is available. This software is able to access order data and chose the optimum carrier based on; cost, the service selected by the customer and the product characteristics (e.g. size). It is then able to ensure that labels printed for the package comply with the carrier’s requirements.

Keeping it together: the challenge of ungrouped deliveries Unless products have significantly different delivery requirements, customers expect that orders placed together will arrive together. Fragmented deliveries are inconvenient for the customer, difficult for the customer to comprehend, and expensive for the retailer. Our mystery shopping exercise revealed that some retailers are not meeting this basic requirement. Ungrouped deliveries can be the result of numerous supply chain factors. Firstly, it might be that different goods are being dispatched from different locations. This highlights the benefit of having one central distribution centre from which all orders are fulfilled. It also highlights the benefit of collating stock from suppliers before despatching to consumers, despite the added time and cost incurred. Alternatively, carriers with effective systems management are able to co-ordinate dispatches such that various shipments will arrive on the same delivery van at the same time. Another cause of ungrouped deliveries, once again, is poor front-end visibility of stock availability. If one item is in the warehouse but another is out of stock it makes sense to dispatch them separately. However, the retailer needs to ensure that the customer is fully aware that this will be the case when the order is placed. Going one step further, it is even possible for the retailer to give the consumer the choice of receiving goods grouped together or as soon as they are available.

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Even when a retailer is operating from one stock location and all stock is available, ungrouped deliveries can still occur. However, modern sorting systems are available that will minimize the risk of this occurring. These systems reference the original customer order data and notify the packer to await further items before shipping a package.

Ensuring it arrives in one piece: the challenge of damaged goods There are no winners if an order is delivered in a damaged condition; retailers therefore need to prevent it occurring wherever possible. This can be achieved through three considerations: carefully selecting which items to sell for home delivery, careful carrier management and careful packaging. It might be that a retailer decides that some items are not suited for home delivery. The risk associated with sending expensive fragile items for instance might outweigh the benefit to sales. “The first consideration that I would say to any [retailer] is; consider the products that you are actually going to sell [for home delivery]...because some products will require specialist distribution or handling. Now if you don’t want to go down that route, why don’t you exclude those products from your main offering through certain 48 channels?” Simon Phillips, E-commerce General Manager DHL Supply Chain If the potential sales opportunity for a product does outweigh the risk of broken goods, the retailer needs to give consideration to how they fulfil these orders. This will involve carrier selection and management. On occasion, as mentioned above, specialist distribution or handling may be required. However, more generally, retailers need to have “incentivized SLAs with good robust logistics suppliers”. 49 These quality carriers will often have the ability to track packages throughout transit, allowing for quality control at each stage of the fulfilment process. Packaging is a crucial consideration in preventing damaged goods. Retailers need to balance protecting their goods with ensuring they meet packaging legislation, and customer environmental consciences. Packaging is discussed in further detail later in the report; however, in short, retailers should:  

Cater for fragile objects in generic packaging design. Negotiate how goods are packaged when received from suppliers.

Controlling costs Retailers are under growing pressure to offer free delivery to consumers and incur the cost themselves. Whether they chose to do so is a strategic decision rather than purely a logistics issue. This having been said, if a logistics solution is cost effective, the retailer is in a stronger position to meet demand for low delivery charges. This section aims to explore areas in which potential savings can be made by retailers.

Getting it right first time: the cost of missed deliveries If a customer misses a delivery, significant costs are incurred and margins decrease rapidly. Not only have resources been used for an unsuccessful drop, but even further resources have to be employed as the whole delivery process is restarted and repeated. Retailers therefore need to minimize the frequency of missed deliveries. This can be facilitated by ensuring that clear and convenient delivery appointments are made with the customer. Ensuring that the delivery appointment is clearly communicated with the customer need not only take place at the point of sale. Retailers have the option of advanced text messages and calls to confirm timings with customers, ensuring customers have availability to receive the delivery before a driver is dispatched.

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The more convenient an appointment is, the less likely it is that a customer will miss it. If possible, delivery windows should therefore be both “as flexible and as prescriptive as possible”.43 In other words, the customer should ideally be able to choose a brief window at a time that is most convenient. Further to this, convenience is greatly increased for the customer if, rather than just having a “next day” option, there is the option of specifying a specific day for the delivery to be made (e.g. next Wednesday). In the event of a missed delivery there are innovative solutions that retailers can take in order to reduce costs incurred. One such solution is to operate a drop-off point network. This means that rather than returning the goods to the distribution centre, they are deposited at trusted nearby localities (e.g. stores, petrol-stations). The customer is then able to pick their purchases up at their next opportunity. This not only reduces costs but also increases customer convenience. Alternatively, vans can be re-routed to different delivery locations, but this is complex and requires real-time visibility and routing capability.

Deal or no deal: approaching carrier contracts Ultimately, the contract that a retailer secures with their carriers will be a dominant factor in dictating the price charged for deliveries. In order to make sure that contracts maximize competitiveness, retailers should ensure that the approach to tender is geared around the commodity-driven carrier market. “[The carrier industry] is a high volume, low margin industry... What you have got to do is approach your tender so that you are engaging as many parties as possible [in order to] encourage competition. In addition you have got to be very clear in your tender process around what services you want to purchase... sometimes the cheapest isn’t the best and you have to balance [cost] with proposition.” 48 Simon Phillips, E-commerce General Manager DHL Supply Chain In this approach, retailers should always engage with more than one carrier. Not only does this provide a backup and mitigate risk in the event of a carrier facing issues, but it also puts the retailer in a stronger negotiating position. “[In order] to maintain competitiveness, you want to play one carrier off against another...Make sure that you have got alternatives...and that it is... very easy to switch carriers and switch volumes.” 48 Simon Phillips, E-commerce General Manager DHL Supply Chain It is also important that contracts are not tied to volumes. “You don’t know what your volumes are going to be and you don’t want to get tied into [a set volume.]” 48 Simon Phillips, E-commerce General Manager DHL Supply Chain

4.6 Returns process issues – how to respond “The returns process is really critical because your brand protection is affected at that point. If you don’t get your people and processes embedded and properly executed your brand is affected, your customer relations are affected and then, of course, your profitability is affected.” 40 Hugo Patten, IT Director for UK and Ireland DHL Supply Chain

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The demand for a cross-channel returns policy is not effectively met As customers expect to return an item through any channel they wish, retailers need a uniform and consistent cross-channel returns policy. However, many multi-channel retailers do not provide this service effectively because reverse logistics have not been integrated into their company’s philosophy. This is evident in three service failings: customer and stock information is not collated efficiently; staff members have an inadequate knowledge of their company’s returns policies; and there are no returns departments in-store. In some cases, the retailer does not offer an in-store returns service for items purchased online at all, though they have both store and online channels.

Bricks and clicks retailers must make use of their stores To offer a fully integrated cross-channel service, retailers must take advantage of their stores. Customers should be incentivized to come into physical outlets to return an item free of charge in order to encourage up-selling and avert pick-up costs. If a retailer has a sufficient distribution network of retail outlets, then most returns can be handled in-store. A logistics supplier, with both online and store experience, could implement and run returns departments in every store and train the retailer’s staff in completing the process quickly and efficiently. “To reduce the cost of returns retailers should incentivize people to return in-store, which they could do for free if they have very good store coverage in the UK. All the returns are handled in stores. This is something the logistics supplier can help with by 50 providing a returns department in every store.” Oliver Baker, Operation Director for the Shared Use of Fashion Network DHL Supply Chain

Multi-channel returns tracking is a must for customer convenience To offer an integrated cross-channel returns service, a retailer must implement customer management software that provides the same visibility of an order across all channels regardless of how the order was made. This would require a single source of customer data which is easily accessible in-store, over the phone (requiring integration of call centres with the system and processes), or online. Data needs to be centralized, so that the issues created by a return, such as the repatriation of funds to the customer and the checking of items to assess their condition, are manageable. Such a system can also be monitored to determine if any products are generating significantly more ‘noise’ in the reverse logistics process, and therefore also inform product channel choice going forward. Effective use of this information will reduce the number of returns in itself by withdrawing more frequently returned products.

Staff training is vital to a successful returns processes “Retailers think about the process but actually they’re not investing enough into the training to deal with people returning to the store, especially those retailers with a big presence in the high street. The training of the store staff needs to be invested in. If you get that right the customer experience will be very positive because you’re getting the same message irrelevant of whether you’re using store or web.” 42 Nigel Spooner Non Food Retail Business Development, Home Delivery and E-commerce Development DHL Supply Chain

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The aim of staff training should be to both familiarize staff with the integrated IT system and to encourage them to respond to customers who are returning goods in a helpful and knowledgeable way. Such training must be in the context of the brand as a whole, and staff must therefore be well-versed in the returns policies of those channels other than the specific channel in which they work. To make the process as smooth as possible, it is essential that staff have a clear understanding of the returns process, and what actions they are responsible for within that framework. “It’s more about ensuring you have the right processes so that in the event that somebody wants to return something you educate and train your staff to behave in 40 certain ways and they follow the processes that you put in place.” Hugo Patten, IT Director for UK and Ireland DHL Supply Chain For those retailers who do not have this level of coverage or who are just starting out in the multi-channel environment, a phased approach may be required. Return in-store might not be offered immediately as a service for cost reasons but can be implemented gradually as the new channel makes significant returns on investments.

Retailers under-invest in returns because they see it as a cost The cost of operating returns processes can prohibit retailers from doing the job properly, particularly for a retailer who is entering a new channel and is therefore unfamiliar with the characteristics of returns in that channel. In launching a new channel, retailers need to be prepared for losses in the start-up phase. This reality may explain both the lack of investment in the returns process and why, in some cases, the service has not been offered all. It also explains why customers have had to be charged for the service.

Through early investment in the supply chain infrastructure, many pitfalls can be avoided In order to cut costs in the long-term, a retailer must invest adequately in returns when a channel is launched. A recent study from Stockshifters.com identified the average return rate in e-Retail is 22 % (ranging from clothing at 34% to home and garden furnishing at 3%). 51 So, rather than seeing returns as an inconvenience and issue, they should expect and plan to process them within their business models. “Accept that in the formative start-up there is going to be an imbalance in terms of cost and returns but to establish the service you might just need to invest in the future.” 52 Paul Eden-Smith, Sector Leader for Consumer Retail DHL Supply Chain The investment in returns should pay off as customers who buy and return successfully will have a good experience and stay loyal to the retailer.

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Figure 8: Returns: cost and investment – two sides of the same coin

Source: FreshMinds

Processing items quickly back into the system relies on strong relationships with a logistics supplier Inefficiencies in the returns processes are particularly damaging as stock accrues cost and no profit, so retailers need to prioritize processing each return as quickly as possible. Retailers must have a strong relationship with a logistics supplier who can be trained in quality control of returned products and the management of items in order to put them back into the stock system quickly. At the point of fulfilment, the retailer’s systems should be prepared to accept that item back as a return into the reverse logistics loop. If logistics suppliers are entrusted with wider responsibility for the returns process, including completing repairs and undertaking quality assurance work, this can greatly improve the returns system. “What logistics suppliers can do is process returns very quickly and put them into a saleable position. Retailers should therefore give 3PLs more freedom to do quality assessment work or repair work to make those items re-saleable again. So returns is 50 the area they need to work most closely with their provider.” Oliver Baker, Operation Director for the Shared Use of Fashion Network DHL Supply Chain

Control and streamline the process to keep costs down Returns should be simple, to keep costs down for both the retailer and the customer. To reduce costs, the retailer must control the returns process with regards the customer, through setting the conditions for a sensible level of returns – finding ways to restrict choice while still serving customer demands. For example, a retailer could offer a return in-store option but give a time window in which customers will have to return their item. Alternatively, it may be necessary for it to charge customers to return items that they have decided they don’t want, whilst still offering the free return of faulty goods. Tweaks at the front-end can also reduce returns. For example, retailers can give customers a chance to check that the items that they have ordered are the correct ones to avoid the costs to both the retailer and customer of having to return an unwanted item. They can also provide

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clearer pictures, product descriptions and sizing information so that the customer has an accurate idea of what they are ordering. Companies can also innovate to reduce returns. For instance, Sarenza, a French shoe retailer, offers a premium delivery service in Paris whereby two sizes of shoes are delivered so that the customer can try the shoes on when they arrive and then choose the pair they want. 53 The unwanted items can then be processed back into the system directly without having to send a courier to pick up the items on a separate journey.

4.7 Packaging issues – how to respond Impractical packaging hurts the brand Impractical packaging inconveniences the customer either by being a chore to open or dispose of, or through being unnecessarily large. This can negatively impact upon a customer’s shopping experience and the brand image, particularly to the modern, environmentally conscious consumer for whom excessive packaging is seen as wasteful.

Use IT systems to choose between flexibility and cost A retailer must strike a balance between two alternative strategies with regards to packaging options. Retailers could stock a wide range of different sizes and types of packaging in order to make each package order specific. The problem with this process is that as the range of packaging option increases, so does the cost and complexity (of sourcing and stocking materials). Alternatively, a retailer could only hold a limited number of different packaging types and then fill any excess space in the package with foam or other materials. The problem with this process is that it has a negative impact on the environment as well as the practicality and aesthetic presentation of the order. The key to effectively striking this balance is to implement a system that has access to realtime information about the individual orders, an accurate picture of stock levels and detailed profiles of the product qualities that influence packaging. Such a system can then specify the exact packaging required for each order, helping the retailer to minimize the packaging costs of servicing the eclectic demands of a single-order channel such as e-commerce. “There are systems that can actually provide you with real-time information about what stock you have, where it is based, what packaging you use to actually bundle goods into a box. Dependent on weight, size and dimensions, the system can select different packaging for different SKU [stock keeping unit] ranges that you purchase and it can do that real-time. The 40 ability to select packaging after the order has been accepted by the retailer is critical.” Hugo Patten, IT Director for UK and Ireland DHL supply Chain In some countries such a system might be highly labour intensive, but in the UK it is possible to implement an IT system that will automate the entire process. This system will not only ensure that the right packaging is selected, but also ensure the right item is ‘picked’ (through providing clear instructions to staff) and that brochures, flyers and returns instructions are included. It is also crucially important that staff are well-trained in utilizing the system that is implemented.

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Unbranded packaging is an opportunity missed Where the nature of the goods allows for branded packaging (i.e. not high value goods) failure to do so is a missed opportunity to promote the brand at a key point in the customer journey and differentiate the retail experience from competitors. This is a quick win which many bricks and clicks retailers are failing to take advantage of because they lack the expertise and experience of pureplay retailers in e-commerce fulfilment, and do not appreciate the value branded packaging can add. The simple solution is for the retailer to source branded packaging. In designing these packages the retailer must consider providing space for labelling, and be aware that repackaging may be required for returns. Any new packaging sourcing initiative must also take into account the retailer’s requirements for providing recyclable packaging. One way to improve the branding associated with an order, without changing packaging altogether, is to incorporate flyers by default within the package which promote the brand. Such flyers could be tailored to the specific order and customer type. This process could be automated and controlled by the IT system used to co-ordinate picking and packing. Retailers may also want to consider how to incorporate a personalized gift service.

Tying together data strands gives total visibility for consumer and retailer alike The need for management of information is a constant across the supply chain and we have identified a number of ways in which centralized data management can provide solutions to specific elements of the back-end. Through greater visibility and control of their stock, customer, supplier and carrier data, retailers can reduce their costs and enhance their service levels. The more a retailer can draw these separate strands together in an integrated IT system, the greater its ability will be to effectively manage cross-channel back-end fulfillment and provide consumer satisfaction. Improved visibility of information can also serve the expectations of the consumer directly. Increasingly, the flow of information itself is becoming a key driver for sales as consumers come to expect visibility throughout the retail journey – including during delivery. As with the retail process itself, so consumers expect convenience in access to information and demand real-time access to stock availability information, delivery progress and returns status. As this expectation becomes standard for UK consumers, so an integrated IT approach will be essential for the new generation of retailers.

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4.8 Case Study: Home Retail Group exemplifies a holistic, customer centric multi-channel approach Home Retail Group Home Retail Group (which owns the Argos and Homebase retail brands) is a market leader in multi-channel retail. Argos is the UK’s second largest internet retailer, in addition to operating 745 stores. In 2009, multi-channel sales contributed to 43% of Argos’ sales. 54

Home Retail Group’s customer centric multi-channel strategy Home Retail Group’s success is underpinned by a company philosophy that prioritizes customer convenience or as David Rose, General Manager for Home Delivery, puts it: “to make it as easy as possible for a customer to be able to order any product by any means”. 55 From this foundation, Home Retail Group (HRG) is, in many ways, exemplifying best practice in its provision of back-end processes to support its channel strategy. This is particularly clear in the range of service promises it has implemented to make customers’ lives easier: HRG offer ‘total’ cross-channel fulfilment Orders placed through one channel can be fulfilled through any other channel. Last year, 22% of Argos’ total sales were customers using online ‘check & reserve’ for store collection. Further to this, 40% of home delivery sales orders were placed by customers in-store. “We want to make it very easy for the customer to find what they want very quickly, have really [good] quality information and then be able to chose the 55 route that they want [it] delivered through.” David Rose, General Manager for Home Delivery Home Retail Group HRG prioritize delivery convenience Customers choosing the 2-man home delivery service are given the option of three time slots (am, pm, and lunchtime). However, to increase the convenience for the customer even further, once the delivery routes have been planned (24hrs in advance) a text is sent providing a more accurate two hour time window. HRG have enabled returns across channels Centralized information systems allow returns to be aligned to orders regardless of the channel through which the goods were purchased or fulfilled.

Achieving best practice: The Home Retail Group way In order to deliver these services, HRG has taken a number of practical steps to optimize the supporting supply chain processes. HRG focus on both the back-end and the front-end In order to provide a consistently convenient experience for their customers, Home Retail Group has placed equal emphasis on their front-end and back-end processes. “We want the front-end to be slick for the customer, and we want the backend working to its maximum efficiency so that it can actually deliver the customer experience.” 55 David Rose, General Manager for Home Delivery Home Retail Group

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HRG don’t overlook upstream considerations They recognize that the ability to offer consumers flexible and convenient services hinges on the selection of quality suppliers able to match Home Retail Group’s own high standards. HRG have built flexibility into a segregated stock pool Careful thought has been put into the supply chain structure to facilitate a multichannel offering. Argos operates a segregated stock system; distribution centres for their store network and home delivery network are separate. However, one central supply team manages both networks and the Warehouse Management Systems are aligned to each other. This hybrid system mitigates against overstocking with the flexibility to move stock between channels if required. “We have had to build, in essence, a distribution centre warehouse system that can match up to a stores system... [This required] lots of system enhancement, and adjustments to processes and stock levels in order to 55 match customer expectation.” David Rose, General Manager for Home Delivery Home Retail Group HRG train staff to think multi-channel “The biggest issue that we have found in an organization of our size is ensuring everyone [staff] has an understanding of the full multi-channel offering.” 55 In order to ensure a seamless offering to customers across channels, Home Retail Group prioritizes staff training. Firstly, representatives from every channel are involved with writing the training/induction plans of every other channel. Secondly, “Multi-channel Forum Meetings”55 act as a key focal point to ensure the channel offerings are aligned and no conflicts of interest are occurring. Actions from these meetings are then filtered down throughout the business. HRG keep in touch with their customers In order to keep up to speed with customer demands and expectations Home Retail Group operate a process of ‘continual review and change’. A major aspect of this involves gathering feedback from customers on every aspect of their service offerings; call centres are continually contacting customers, online surveys operate, professional bodies are employed to do further research and employees are encouraged to feedback their experience of shopping with the brand. “Every single week we survey a sample of customers to get feedback on the service. [We find out] what are the things they’re looking for, how could we achieve a better service for them... from the way that they place the order, to the way that they receive confirmation, to the way that they receive the 55 goods.” David Rose, General Manager for Home Delivery Home Retail Group

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5. Conclusion – finishing the journey The modern retail customer exists in a democratic environment in which they expect retailers to make their lives as easy as possible when shopping and in which the internet has brought near-total visibility of price and quality across the board. Customers also exist in a ‘multi-channel’ world which continues to change and develop as it makes advances into the fabric of our lives and across which the modern consumer expects to have the freedom to conduct shopping activity (be it through research, purchasing or even returning). Developing a multi-channel strategy is an imperative for many retailers. However, this carries risks, as well as rewards. Done badly, a retailer operating several channels will find that each channel can act to the detriment of the others as consumers tend to associate negative performance of any one channel within the context of its overarching brand. Brand continuity can only be achieved if all elements of service offerings are working well. Done correctly, however, each channel will reinforce the others, both by supporting a strong brand image and by facilitating cross-selling. To be successful in this environment, retailers need to offer a satisfying customer experience that maximizes ease for their customers. As we have seen, retailers have work to do in order to bring the back-end processes in line with the front-end customer facing elements. Essentially, retailers must now focus on providing a perfect ending to the customer’s journey. There are a number of practical steps that retailers can take to overcome the challenges presented by this objective, focusing on the centralization of information, building agility into stock control and sourcing processes, and emphasising the opportunities of investment over and above short-term costs. Many UK retailers have already embarked on this mission and some with considerable success; others have work to do to meet the expected standards of service. All will have to react as the multi-channel environment continues to grow and adapt in the future.

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6. Appendix 6.1 Methodologies used in this report As part of this research a survey was conducted with 500 manager and senior manager level professionals from UK based retailers. Error! Reference source not found. indicates the retail sub-sectors from which these respondents have been drawn.1 Figure 9: What retail sector does your organisation predominantly operate in?

Base: 500 Source: FreshMinds

FreshMinds also conducted a mystery shopping exercise profiling the fulfilment and returns processes of 30 UK retailers with an e-commerce arm.1 There is further detail on this process in section 3.3.

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1

FreshMinds primary research, 2010 “How the online revolution transformed retail in a decade,” Sara McCorquodale, Retail Week, January 8 2010, http://www.retail-week.com/multichannel/online-retail/how-the-onlinerevolution-transformed-retail-in-a-decade/5009346.article 3 “Borders UK collapses into administration,” Lisa Berwin, Retail Week, November 25 2009, http://www.retail-week.com/retail-sectors/entertainment/books/borders-uk-collapses-intoadministration/5008306.article 4 “IMRG/Capgemini Sales Index,” IMRG, May 15 2009, http://www.imrg.org/8025741F0065E9B8/(httpPages)/FAE5B4EDA9020E448025744F0038D 60B?OpenDocument 5 “IMRG/Capgemini Sales Index,” IMRG, January 2010 http://www.imrg.org/8025741F0065E9B8/(httpPages)/FAE5B4EDA9020E448025744F0038D 60B?OpenDocument 6 “E-Retail storms ahead through recession,” UK e-retail 2009, Verdict, May 2009 7 “United Kingdom: Multi-Channel Retailing Just a Click Away”, Deloitte, September 11 2009, http://www.mondaq.com/article.asp?articleid=85918 8 “Online retail sales grow 13% in February,” Lisa Berwin, Retail Week, March 22 2010, http://www.retail-week.com/home/online-retail/online-retail-sales-grow-13-infebruary/5011520.article 9 “Stores remain key driver of multichannel customer satisfaction,” Retail Technology, September 29 2009, http://www.retailtechnology.co.uk/news/stores-remain-key-driver-multichannel-customersatisfaction 10 “Figleaves trials move from pureplay with concession in Allders,” Lisa Berwin, Retail Week, March 19 2010, http://www.retail-week.com/stores/figleaves-trials-move-from-pure-play-withconcession-in-allders/5011410.article 11 “Amazon in secret plan to open high street shops,” Jenny Davey, Times Online, December 6 2009, http://business.timesonline.co.uk/tol/business/industry_sectors/retailing/article6945922.ece 12 “Amazon says no plans to open physical stores,” Kate Holton, Reuters, December 6 2009 http://www.reuters.com/article/idUSTRE5B50KG20091206 13 “Crafting Integrated Multichannel Retailing Strategies,” Jie Zhang and John W. Irvin and Thomas J. Steenburgh and Paul W. Farris and Tarun Kushwaha and Barton A. Weitz, Harvard Business School, 2009-2010, p. 9, http://www.hbs.edu/research/pdf/09-125.pdf 14 “M-commerce definition”, Bitpipe.com, http://www.bitpipe.com/tlist/mCommerce.html 15 “Retail iPhone apps: Mobile commerce on the move?’, Joanna Perry, Retail Week, March 12 2010, http://www.retail-week.com/multichannel/mobile-commerce/retail-iphone-appsmobile-commerce-on-the-move/5011248.article 16 “RWC2010: Ebay to launch specialist fashion channel,” Martin Stabe, Retail Week, March 4 2010, http://www.retail-week.com/retail-week-conference/rwc2010-ebay-to-launch-specialistfashion-channel/5011028.article 17 “Forrester Forecast: Online Retail Sales Will Grow To $250 Billion By 2014,” Erik Schonfeld, TechCrunch, March 8 2010, http://techcrunch.com/2010/03/08/forrester-forecastonline-retail-sales-will-grow-to-250-billion-by-2014/ 18 “Retailers too complacent about their multi-channel models,” Glynn Davis, The Retail Bulletin: The Complete Retail News Resource, March 18 2010, http://www.theretailbulletin.com/news/retailers_too_complacent_about_their_multichannel_m odels_18-03-10/ 19 "Can showing competitors' prices online ever work?", Graham Charlton, Econsultancy Digital Marketers United, February 25 2010, http://econsultancy.com/blog/5463-can-showingcompetitor-s-prices-work 20 “25% of consumers now happy to spend £1,000 or more on a single product online,” Sarah Clark, Internet Retailing, November 20 2009, http://www.internetretailing.net/2009/11/25-ofconsumers-now-happy-to-spend-1000-or-more-on-a-single-product-online/ 21 ‘Exceeding Customer Expectations’, Mark Mearns, p. 29, September 2009, http://www.unipartlogistics.co.uk/Portals/3/Exceeding-Customer-Expectations.pdf 2

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“Multi-Channel Mayhem: Tapping the Customer Experience for Competitive Advantage,” Martha Rogers, Better Management.com, November 12 2008, http://www.bettermanagement.com/seminars/seminar.aspx?LibraryID=14860 23 “E-retailers deserve their bumper Christmas sales as research shows the best online customer journey ever,” eDigitalResearch News, February 5 2009, http://www.edigitalresearch.com/news/item/nid/849753604 24 “E-retail index reveals that the battle for the high street moves on as traditional retailers prove a match for pureplay,” eDigitalResearch, April 30 2009, http://www.edigitalresearch.com/news/item/nid/755404609 25 “Marks & Spencer unveils new-look website and extends ‘Shop Your Way’ service,” Marks and Spencer Press releases, October 12 2009, http://corporate.marksandspencer.com/media/press_releases/company/NewLookWebsite 26 “M&S Tops Latest eRetail Benchmark Study from eDigitalResearch,” NewsGuide.us, March 20 2010, http://www.newsguide.us/business/consumer-research/M-S-Tops-Latest-eRetailBenchmark-Study-from-eDigitalResearch/ 27 “The next generation of e-tail,” Joanna Perry, Retail Week, July 17 2009, http://www.retailweek.com/multichannel/online-retail/the-next-generation-of-e-tail/5004596.article 28 “New Look vows to become top multichannel fashion retailer,” Amy Shields, Retail Week, March 26 2010, http://www.retail-week.com/multichannel/new-look-vows-to-become-topmultichannel-fashion-retailer/5011634.article?referrer=RSS 29 eBay fashion site http://fashion.ebay.com/ and green site http://green.ebay.com/ 30 eBay forums, http://forums.ebay.com/db2/topic/Ebay-Stores/Another-EbaySub/510201135& 31 “Multichannel retailers need multichannel returns policies,” Graham Charlton, Econsultancy Digital Marketers United, February 15 2010, http://econsultancy.com/blog/5403-multichannelretailers-need-multichannel-returns-policies 32 FreshMinds conversation with Dr. Corey Billington, Former IMD Professor, Current Head of Research & Development, e3 Associates, June 1 2010 33 “IBM Survey: Tech-Savvy Shoppers Setting The Pace For The Future; Retailers Must Follow Their Lead,” Press Release, IBM, January 10 2010, http://www-03.ibm.com/press/us/en/pressrelease/29161.wss 34 “The Retail Challenge,” Nick Allen, The Supply Chain Standard, February 1 2010, www.supplychainstandard.com 35 FreshMinds email correspondence with Andrew Starkey, Delivery Director, IMRG 36 IMRG Consumer Delivery Survey, 2010 37 “Online Returns Report 2009,” Snow Valley, The Snow Patrol blog, March 5 2009, http://snowpatrol.snowvalley.com/2009/03/05/online-returns-report-2009-out-now/ 38 “Research finds that stores remain key driver of customer satisfaction in multi-channel retailing,” Press Release, Sterling Commerce , September 23 2009, http://www.sterlingcommerce.co.uk/about/News/PressReleases/2009_09_23_PressRelease_I psos_Mori_2nd_Release.htm 39 “Customer Satisfaction with E-Retail Rebounds, Sets New High for Online Holiday Shopping,” Foresee Results, December 30 2009, http://www.foreseeresults.com/Press_HolidayTop40US_Dec09.html 40 FreshMinds conversation with Hugo Patten, IT Director for UK and Ireland, DHL Supply Chain, April 28 2010 41 FreshMinds conversation with Ian Clay, IS Director, Fashion Division, DHL Supply Chain, April 26 2010 42 FreshMinds conversation with Nigel Spooner, Non-Food Retail Business Development, DHL Supply Chain, April 21 2010 43 FreshMinds conversation with Kim Sainsbury, EMEA Head of Business Development, DHL Supply Chain, April 21 2010 44 FreshMinds conversation with Jim Canon, Head of Solutions Design- EMEA, DHL Supply Chain April 21 2010 45 FreshMinds conversation with Jonathan Chadburn,VP Global Retail Sector, DHL Supply Chain, April 27 2010 46 FreshMinds conversation with Gerry Jones, Global Sector Head, DHL Supply Chain, April 21 2010

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“Tesco builds “Dot Com Only Store” for grocery home shopping fulfilment,” Retail Technology Review, Nov 12 2009, http://www.retailtechnologyreview.com/absolutenm/templates/retail_internet_retailing.aspx?ar ticleid=837&zoneid=13 48 FreshMinds conversation with Simon Phillips, E-commerce General Manager, DHL Supply Chain, April 29 2010 49 FreshMinds conversation with John Boulter, Managing Director, Non Food Retail, DHL Supply Chain, April 28 2010 50 FreshMinds conversation with Oliver Baker, Operations Directot for Shared Use Fashion Network, DHL Supply Chain, April 23 2010 51 “Online shopping creates returns meltdown for retailers,” The Retail Bulletin, May 19 2010, www.theretailbulletin.com/news/online_shopping_creates_returns_meltdown_for_retailers_19 -05-10/ 52 FreshMinds conversation with Paul Eden-Smith, Sector Leader for Consumer Retail, DHL Supply Chain, April 22 2010 53 Sarenza Retail Site, www.sarenza.com/Garanties-livraison-gratuite 54 Home Retail Goup PLC, Full Year Results, April 28 2010, www.homeretailgroup.com/home/media/hrg/news/2010/2010-04-28/2010-04-28.pdf 55 FreshMinds Conversation with David Rose, General Manager for Home Delivery, May 5 2010

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