DHL OMNI-CHANNEL DAY 2017 Profitability in the Omni-Channel Era Sabine Müller, CEO DHL Consulting Innovation Center, Troisdorf, 4 May 2017

2

2007 2017

Retail industry is changing

3

Customer behavior is changing

C&C

Source: DHL Consulting, Barclays, Accenture, Kibo Commerce, Emarketer, Business Insider, Statista

• 93% of shoppers buy both online and offline

• An omni-channel shopper spends on average 3.5x vs. single-channel shopper

• 59% of online shopping time spent on mobile devices

• 66% of shoppers research online before visiting store

• 35% of online orders expected to be collected in store

• 56% of shopping carts abandoned due to unexpected costs, e.g. shipping

4

Omni-channel is already a common expectation

Source: DHL Consulting, Barclays, Accenture, Kibo Commerce, Emarketer, Business Insider, Statista

84% of customers expect stronger integration across channels

54% of customers value ‘Buy Online Pick-up in Store’ (BOPIS) and ‘Buy Online Return to Store’ (BORTS)

71% of customers value online visibility on in-store inventory

70% of the customers want retailers to predict their demand

24% of customers already expect same-day option

5

Technology advancements change retail – Omni-channel

Source: DHL Consulting

Manufacturing Warehousing Shopping Experience Last Mile Delivery

Collection points Robots Internet of things 3-D printing

Crowdsourcing Trunk delivery Face Recognition

Drones Fulfillment at stores Body scanner Fulfillment by robots

AR & VR

Autonomous driving

Near-shoring & automation

6

One channel is no longer enough: e-commerce and B&M are merging

Pure e-commerce players investing into B&M footprint

B&M retailers are investing into omni- channel capabilities, leveraging stores

Source: DHL Consulting, Euromonitor, Forrester research, Asia Distribution and Retail, Accenture

B&M

e-comm

2021

14.9

85%

15%

2020

14.6

86%

14%

2019

11%

2016

13.1

90%

10%

2015

12.8

91%

9%

2014

12.5

92%

8% 14.2

87%

13%

2018

13.9

88%

12%

2017

13.5

89%

Share of e-commerce rising steadily, but B&M is not being replaced

IndoChino stores Amazon stores

Birchbox SoHo Miao Street (Alibaba) In-store kiosks for online/ out-of-stock products

Visibility on in-store inventory BORTS / BOPIS1)

Geo-messaging/ real-time promotions

TRILLION EUROS | TOP 80 E-COMM COUNTRIES

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Large retailers are driving change by setting high service standards as well as introducing innovative models

Source: DHL Consulting, Nike, Amazon, Tesco, Toms, Clinique;

Treasure Truck – browse daily deals nearby and arrange a pick-up time

Shop with me – machine learning for suggestions based on browsing patterns

Virtual subway grocery stores – shop on the go to save time!

Try on and customize own products in store

Synchronized online and in-store omni-channel consultation

Virtual subway grocery stores –

Source: DHL Consulting, Nike, Amazon, Tesco, Toms, Clinique;

Try on and customize own products in store

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Most retailers are investing into omni-channel fulfillment capabilities

Source: eMarketer 2016

33%

38%

40%

41%

52%

36%

40%

37%

27%

31%

Reserve online/ purchase and pick up in-store

Buy via mobile app/ pick up in-store

Buy online/ pick up in-store

Buy via mobile app/ deliver to home

Buy via in-store kiosk/ deliver to home

Currently implemented Plan to implement

65% of leading retailers allocated more than 30% of commerce budget to digital and mobile commerce expansion in the last year

Σ

83%

77%

67%

75%

73%

9

Profitability becomes a challenge

Source: DHL Consulting, PWC, E&Y, Supply Chain Digest

High delivery and return cost • Next-day/ same-day expectations • Fragmented delivery modes

Increased fulfillment complexity • Piling up inventory • Increase in SKUs • Inventory required closer to demand

High IT investment • Full visibility across channels at all inventory locations

(store, warehouses, etc.) • Integration need to enable services like as track and trace

High delivery and return cost High delivery and return cost • Next-day/ same-day expectations • Next-day/ same-day expectations • Fragmented delivery modes • Fragmented delivery modes

Increased fulfillment complexity Increased fulfillment complexity • Piling up inventory • Piling up inventory • Increase in SKUs • Increase in SKUs • Inventory required closer to demand • Inventory required closer to demand

High IT investment High IT investment • Full visibility across channels at all inventory locations • Full visibility across channels at all inventory locations

(store, warehouses, etc.) (store, warehouses, etc.) • Integration need to enable services like as track and trace • Integration need to enable services like as track and trace

• 19% of retailers say they can fulfill omni-channel demand profitably

• 36% retailers consider their omni-channel initiatives diluting margin

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High delivery and return costs drive unprofitability

Source: DHL Consulting, Amazon, Invesp, Zalando

2011 2012 2013 2014 2015 2016

5

10

15

20

0

-44%

Shipping revenue Outbound shipping costs

Amazon continues to make significant net losses from shipping

50%

30%

9%

Zalando return rate

B&M return rate

E-commerce return rate 58% expect hassle-free, “no questions asked” return policy

79% of customers expect free returns

USD bn

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Executives believe that supply chain is key to improving omni-channel profitability

Current Supply Chains are not fit for purpose to deliver a successful omni-channel offering 86%

Supply Chain transformation rather than incremental change is required to succeed in an omni-channel 81%

Survey results of Retail Supply Chain Executives

Source: DHL Consulting, E&Y 2015

BUT HOW TO DESIGN THE BEST-FIT OMNI-CHANNEL SUPPLY CHAIN?

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To develop a profitable omni-channel supply chain strategy, companies need to return to thinking from the top

Source: DHL Consulting

Front-end design

Back-end design

Organization KPI IT Risk Management Processes

Strategic positioning

Channel objectives

Same/ complementary

positioning x-channels

Differentiated positioning by channel

How does SC complement and ensure delivery of our propositions?

Which factors enable an effective end-to-end supply chain?

What does our company stand for and what are our USPs?

What is the role of each channel in the delivery of our USPs?

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Front end/ customer-facing design choices will imply the right back-end design; iteration may be needed after modeling supply chain costs

Channel Assortment Delivery Options Return Options

Common across channels

Home delivery

Store collection

Pick-up points

Inventory management

Fully integrated

Cross allocation

Completely separated

Fulfillment & storage

E-com fulfillment ctr.

At supplier

Store

Last Mile Delivery

Dedicated fleet

Special provider

Crowd sourcing

Reverse Logistics

In store

In specialized facility

Local parcel provider

Express provider

Differen-tiated

Free Paid

Same Day

Next Day

2-4 Days

To Store To parcel network

Home Pick-up

Hybrid DC

Dark Store

At supplier

Fron

t end

des

ign

Bac

k en

d de

sign

Source: DHL Consulting

Differentiated Membership Free Paid

Differentiated Membership

Instant

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Faster service offerings require a more extensive infrastructure footprint

Source: DHL Consulting

Optimum facility count for required service levels in USA (to cover 90% of population)

80-100

~90 miles

Same day

40-50

~150 miles

Next day

~5

~650 miles

2-3 days

# of facilities needed

Radius covered by 1 facility

Target service level

Current trend: next day and same day delivery

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Inventory pooling Service

E-commerce fulfillment

optimization

Cross- channel

optimization

Dedicated E-fulfillment

Integrated Fulfillment

Localized Fulfillment

Centralized Fulfillment

Each location in the supply chain can become an e-commerce fulfillment point to enable service offering and/or generate x-channel synergies

Supplier Hybrid DC Store Customer

E-commerce fulfillment center

“Dark Store”

Vs.

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Omni-channel stores will look different

Optimization of back-room to enable efficient picking

Click-and-collect pick-up and service area

Interactive devices to place orders or even configure products (e.g. kiosks, smart fitting rooms)

Education of store personnel to advise on and sell online items

Advanced labor planning to handle store sales and e-commerce fulfillment

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Cross-channel visibility is a crucial enabler for generating supply chain synergies across channels

Yes

19%

No

81% Unable to

Transfer 28%

Optimized Transfer

Manual Transfer

56%

16%

Cross-Channel Visibility Ability to transfer inventory across channels

Source: Gartner 2015; DHL Consulting

While most retailers have achieved cross-channel visibility, only 16% can seamlessly transfer inventory across channels

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Inventory pooling can reduce safety stock levels or improve service with the same inventory levels

-27%

Store Online

Integrated model

Separate model

Pooled Store sales Online sales

Separate model 98.0%

Integrated model 99.5%

+1.5%

OR

Reduce safety stock w/o impact on service

Improve service w/o impact on inventory

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We are in the omni-channel era

Omni-channel is the new industry standard

It is a journey to become true omni-channel champion

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