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Who has lower costs? Online e-commerce (JD.com) and offline entities (Suning, supermarkets) essentially both deliver goods to users, but what are the differences in efficiency and the steps involved in this delivery process?
The table below selects several typical standard products to show the distribution costs across JD.com, Suning, and supermarkets.
The above data comes from multiple sources, such as JD.com's 2011 annual report, where delivery costs account for 6.67% and management costs 1.5%. Suning Appliance's 2011 annual report shows rental costs accounting for 3.88% of labor, advertising 1.29%, delivery and promotion 1.29%, and total costs 12.39%. A chain supermarket where the author worked had a gross margin of 18% and overall operating costs of 14.3%, with labor costs at 6% and rental costs at 4.5%.
From the table, we can see that for refrigerators, JD.com's cost share is 6.5%, while Suning's is 9.9%, indicating JD.com is more efficient than Suning.
From the manufacturer to the central warehouse, delivery is centralized by the manufacturer; from the merchant's warehouse to the user's home, it is delivered by the merchant. In these two steps, JD.com and Suning have essentially no cost difference. The main difference arises because Suning has store and labor costs, accounting for about 6%, while JD.com's online store labor and technology costs are only 1.8%.
For rice cookers, JD.com's cost share is 10.3%, and Suning's is 9.9%, showing little difference in efficiency. JD.com's largest cost is still delivery from warehouse to user, at 4.4%; Suning sells rice cookers in stores without home delivery, saving the last-mile delivery cost, but store costs account for 7.2%.
Suning's store cost for refrigerators is 6%, but for rice cookers it is 7.2%. The difference is because Suning stores carry inventory of rice cookers, increasing the cost share.
Now consider shampoo: JD.com's cost share is 18.9%, while supermarkets have 15.5%. JD.com's operating costs are slightly higher than supermarkets.
Browsing JD.com, you'll notice it doesn't sell low-priced shampoo because the gross margin cannot support the cost. The cost from JD.com's warehouse to the user includes delivery and packaging, accounting for 10.8%, while supermarket store allocation costs reach 13.5%.
JD.com's warehouse costs are higher than supermarket warehouses because shampoo from supermarket warehouses to stores is managed and delivered in full cases without splitting. In JD.com's warehouse, shampoo needs to be split and picked, so warehouse costs are higher.
JD.com does not sell single bottles of cola; if it did, the cost share would be 28.6%, far higher than supermarkets' 16.7%.
Supermarkets sell large volumes of cola with high turnover; the higher the sales volume, the lower the store allocation cost, so they only need to allocate 8.33% for store costs. For e-commerce, delivery and packaging costs have limited room for compression; no matter how high the sales volume, delivery and packaging costs are unlikely to fall below 10%.
Like shampoo, cola has higher management costs in e-commerce warehouses than in supermarket central warehouses because cola needs to be split for management in e-commerce warehouses.
From the above analysis, the parameters affecting efficiency include:
- Offline has higher store costs than online, while online has higher delivery costs than offline;
- For high-turnover products, especially FMCG, offline is more efficient than online. The reverse is true for low-turnover items;
- Full-case management is more efficient than split-case management;
- More centralized delivery leads to lower costs. Delivery costs from manufacturer to warehouse and warehouse to store are minimal.
Therefore, for JD.com, 3C products have the lowest costs, followed by general merchandise, with FMCG having the highest costs. JD.com's expansion from 3C to other categories will increase its overall cost share.
Can online eat into FMCG business? The advantages of selling 3C online are obvious, but will FMCG online retail efficiency ever surpass offline?
According to the table, the online delivery and packaging cost shares for refrigerators, rice cookers, shampoo, and cola are 2.8%, 4.5%, 10.8%, and 17.9%, respectively, basically reaching or exceeding half of total costs. Optimizing delivery and packaging costs has a significant impact on overall costs.
There is still considerable room for improving online delivery efficiency. For example, at JD.com, a courier responsible for Zhongguancun can deliver 200 orders per day, while one in a remote area can only deliver 35 orders, showing a large difference in courier efficiency.
If online sales continue to grow and consolidate, assuming last-mile delivery and packaging costs can be halved, from the table, online shampoo and cola cost shares would be 14% and 21%, while supermarket shampoo and cola are 15% and 16%. It seems that unless online delivery and packaging costs are reduced by more than half, online efficiency cannot surpass traditional stores for FMCG.
Large supermarkets are mature retail formats, and costs are hard to lower further. Ignoring other factors, if the number of households each large supermarket covers is stable, its efficiency and gross margin remain stable. If these households consume more online, supermarket turnover decreases, forcing them to raise gross margins to compensate for lost profits. At that point, offline supermarkets become less competitive.
But even so, online efficiency may not necessarily beat offline for FMCG. Qualitative analysis cannot yield precise results, and factors beyond efficiency also matter. We can only be certain that as online sales grow, online efficiency improves, and online will continue to take share from offline.
The Future of Retail Currently, for FMCG, offline retail has an efficiency advantage; for long-tail products, online retail has an advantage. There are three possible future outcomes.
First, online retail efficiency continues to improve, costs keep falling, and eventually become lower than supermarkets, replacing offline formats like supermarkets.
Second, online retail efficiency can still be optimized, but ultimately cannot be lower than supermarkets, so online and offline coexist. In the future, JD.com and hypermarkets are both mainstream retail formats, with online handling long-tail products and offline handling FMCG.
Third, a new retail format emerges that handles both FMCG and long-tail products. In FMCG, it is more efficient than traditional supermarkets; in long-tail products, it is more efficient than traditional online platforms.
This new retail format combines the strengths of online and offline:
Offline stores become online warehouses, supplying only FMCG items in stock at the store. Nearby users order FMCG online; if the store has stock, it ships from the store, reducing logistics costs and speeding up delivery. This combination only covers high-efficiency, densely populated areas, abandoning sparse areas. Only centralized delivery can reduce costs and increase turnover. This combined format covering only high-efficiency areas will be more efficient than online platforms covering all areas.
Offline stores become online experience centers. For products where inventory is hard to manage and experience is needed, stores only display them; after users order, they wait for delivery. For example, clothing comes in different sizes and colors. To avoid stockouts or missing sizes in each store, there would be excessive inventory. Clearly, a store experience and online ordering model can reduce inventory.
Overall, combining online and offline can improve efficiency, reduce costs, and enhance customer experience. Some form of this combination may become the mainstream of future retail, rather than simply online replacing offline.
This article was written by Zhang Chenyong, Weibo @张陈勇, WeChat public account csdso2o, focusing on retail O2O research and practice.
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