How can hardware and home furnishing retailers make online sales profitable? On average, delivering a piece of furniture to a home costs the retailer more than it yields. Yet, consumers increasingly take it for granted.
More costs than revenue for online orders
E-commerce is a losing game for most furniture and hardware retailers, yet they can no longer afford to go offline. During the lockdown, e-commerce adoption in the home furnishing industry peaked. Deloitte expects online commerce will continue to play an important role beyond the pandemic, especially if the new customer experience is better than the previous one. Until 2023, the European furniture market is expected to grow by 6 per cent annually, with 16 per cent already taking place online in the Netherlands.
However, the average cost of home delivery of a large item, such as a washing machine or an armchair, results in a loss of 1 to 5 per cent for the retailer. If the turnover is 290 euros, the average transaction costs are 300 euros. Home delivery is a real margin killer: for small products, the extra cost is usually 8 to 12 per cent, for large items this could be 11 to 19 per cent. Especially the ‘last mile’ is expensive: 17 per cent of total sales, Deloitte calculated.
This is the online paradox explored by Deloitte in a new report: can online be profitable in the home furnishing and hardware industry? It can, believes Mark-Jan Grootenboer, head of online fulfilment at Deloitte in the Netherlands, but it will require a lot of effort and focus. Besides the evolving competitive landscape (with direct sales from manufacturers, pure online players and international giants), the hardware and furniture industry has to deal with a wide variety of product types. Consumers want simplicity, but “one size fits all” solutions are impossible within the home segment.
Let consumers cooperate or pay
The role of the store and the webshop within the online strategy is best determined by product category. For example, the showroom may be important for more expensive and larger products, but could also function as a distribution and fulfilment point for online orders. “The online assortment and the offline assortment should be aligned to ensure a seamless experience, but each product segment exhibits different (profitability) dynamics. It is therefore important to make the consideration segment by segment”, says Grootenboer.
Then, the next step is to optimise both your commercial model and the operational model. On a commercial level, the consultant recommends stimulating click and collect. That will reduce costs considerably as the expensive ‘last mile’ is eliminated. Click and collect increases profitability by 2 to 4 per cent per order for smaller items and 10 to 15 per cent for large items. Besides, delivery or returns do not have to be completely free: by making the consumer pay a “fair” contribution, at least, parts of the additional costs are compensated.
To increase the value of the total shopping basket, it is certainly advisable in the home and hardware industry to work in a project-based rather than a product-based way. In addition to the mere selling of (standard) products, there are many opportunities in offering services, such as installation services or, for example, interior design advice. Services do not only increase the customer experience but also the margins.
Use different shipping locations
The operational model can also be optimised. By segmenting the assortment, retailers gain insight into product complexity, and it is possible to improve the online fulfilment strategy. For example, some items are best delivered from the store, while large but standardised products could get delivered directly from the supplier.
Deloitte, therefore, advocates hybrid allocation: by diversifying the shipping location, the retailer creates an optimal balance between picking and last-mile costs. The factors that retailers should take into account are the distance to the consumer, the market density and the look of the supply chain per assortment category.
To achieve profitable e-commerce growth as a home-retailer, it ultimately comes down to two key questions: “(1) how do you ensure that the consumer pays their share, and (2) how do you ensure that the additional costs remain as low as possible,” concludes Mark-Jan Grootenboer.
