‘There’s no other option:’ Costco, Gap and other retailers sweeten online offerings, but it’s coming at a cost

Online shopping has been a boon for some retailers during the Covid-19 crisis. It has been a lifeline for others. But for nearly all companies, it’s brought a slew of new challenges. 

Many retailers were already expanding their e-commerce offerings prior to the coronavirus pandemic. The global crisis, though, has added greater urgency to that effort. With shuttered stores and customers holed up at home, online shopping suddenly became the only sales option for stores such as Macy’s, Kohl’s and Gap. And even at retailers that stayed open, such as grocery stores and pharmacies, it became many shoppers’ preference. 

The shift of sales online, through either curbside pickup or store-to-door delivery, is testing retailers and forcing them to change how they operate and train employees. It is also adding new costs that cut into their profits. 

“There’s no other option,” Jan Kniffen, a consultant to investors in retail companies and a former retail executive, said in an interview. “Otherwise, you let someone else take your market share, or you let someone else have your business. That’s why even Costco … TJ Maxx … are going online.” 

Demand for online shopping has clearly shot up. 

U.S. e-commerce sales have been up an average of about 49% daily from April 1 to April 23 compared with a baseline period of March 1 to March 11, according to data from Adobe Analytics. And as consumer spending in the U.S. tumbled a record 16.4% in April, nonstore sales, which includes online retailers, saw growth in their category of 8.4%. 

Some retailers have responded to the trend by adding new options. 

Walmart accelerated the development and launch of Express Delivery, a new service that delivers online purchases such as groceries, toys and electronics to customers’ homes in less than two hours. Nearly 1,000 stores offered the service as of early May, and the retailer plans to add hundreds more stores, according to a news release. 

Walgreens launched a new online offering, too. Customers can buy items online and pick them up at their local pharmacy’s drive-thru window. The service is available at more than 7,000 stores. 

The drive-thru windows have been typically used for prescription pickup. Now, customers are getting a wider variety of items, including cans of soup and cleaning products, said Stefanie Kruse, Walgreen’s vice president of digital commerce. 

Kruse said the idea was born early on in the pandemic. 

“We realized that we were going to need to be able to offer safer, more convenient alternate ways for people to get things from us that allowed us to promote social distancing,” she said. 

She said the company had “teams coding day and night for weeks” to speed along the drive-thru option. It’s seen online traffic jump by about 160% during the pandemic, as customers look up store hours, check items’ availability and shop online, she said. 

The drugstore chain also expanded on-demand delivery to more than 7,000 stores in late March through third-party service Postmates. 

Still, the online services come at a cost. Companies are having to do tasks traditionally done by customers, such as picking an item off a shelf and transporting it to a person’s home. 

“For most retailers, the fact remains that online is more expensive,” said Jill Standish, Accenture’s global head of retail. “If you had done 15% of your business online and now all of a sudden you’re doing 50% of your business online, boy, that’s a cost of doing business that you didn’t plan for. You might see a lot of volume, but you’re not going to see a lot of profitability.” 

The most profitable sales are the ones customers make when they walk into a store and pick something off the shelf. In most cases, the second-best option is having a customer pick up an online order in stores, where they may add another item to their basket. Curbside pickup limits the odds of additional sales, but trims down transportation costs. The most expensive sale for a retailer is an online order that must be packed up and shipped to someone’s home. 

And then, with an influx of digital orders, there will inevitably be more returns. People often order extra sizes of clothing online, for example, not knowing which one will be the perfect fit. And returns become another costly burden for retailers. This is even more true during the pandemic, when merchandise is being touched by multiple people and the threat of the coronavirus lingering on surfaces remains a concern.

To fulfill online orders, companies also need to train employees for different kinds of roles, such as picking and packing. 

At Walmart, for example, the retailer said it has 74,000 personal shoppers. Some were specifically hired for Express Delivery, though the company declined to say how many. 

Walmart is charging $10 per order for the speedier service, on top of typical delivery charges — an acknowledgment of its higher cost. 

Kruse said Walgreens knew it would face new challenges with the drive-thru pickup option and wanted to make sure it could deliver a reliable and positive customer experience. To do that, she said, it limited the service to about 100 items, so stores can make sure they’re in stock. She said orders are usually ready in under two hours, but it’s chosen not to guarantee a turnaround time for customers. 

“With e-commerce, you have to wait a couple of days to get your order typically — particularly in today’s environment, where even the fastest retailers are having delays from a shipping standpoint and not able to meet capacity,” she said. 

The drugstore chain’s large footprint of stores, with their inventory and workforce, has given it an edge, she added. 

Walmart and Target have used their many stores as fulfillment centers, too. They’ve also nudged customers toward picking up orders curbside, to try to lower delivery expenses. 

As lockdowns lift in many states, America’s department stores and clothing chains have started to reopen for business with curbside pickup, too — but it’s been a new model for many of these shops, where consumers often prefer to visit and try items on. 

Tapestry, the parent company of Coach and Kate Spade, said 300 of its shops in North America are now open for curbside or in-store pickup only. Gap is offering curbside pickup at dozens of stores. So is Nordstrom. 

“The consumer wants to meet us in a lot of different ways,” Tapestry Chief Executive Jide Zeitlin told CNBC in a phone interview. “The line between digital and physical is increasingly blurry.” 

Still, some analysts remain skeptical the curbside trend will stick — especially for clothing retailers. About 84% of all retail purchases were made at brick-and-mortar stores prior to the pandemic, according to Forrester Research. People may prefer to shop in stores again over time. And companies may focus on stores again, too, after seeing the curbside service cut into profits. 

“This is a forced change in consumer behavior,” said Brendan Witcher, a principal analyst at Forrester. “We cannot assume it is permanent.” 

He said curbside pickup makes more sense for some retailers than others. It’s been popular with grocery orders, for example, allowing busy parents to order what they need, pull up in a car and keep the kids buckled in the backseat. 

For now, though, entire malls and shopping centers are rallying behind curbside pickup, hoping they can help their tenants win at least some sales. 

Kimco Realty, which owns more than 400 shopping centers and other mixed-use developments, has rolled out permanent designated curbside pickup spaces to all of its properties. Mall owner Macerich said many of its properties have retailers and eateries handing off online orders curbside. 

But it’s unclear if people will use curbside service for clothes, shoes or handbags — items often advertised as “try before you buy.” 

“If you are driving all the way to the clothing store, you would rather feel the product before you buy,” GlobalData Retail Managing Director Neil Saunders said. “With apparel, there is still this need to touch and feel.” 

Curbside pickup has other trade-offs, too. Retailers miss out on impulse buying opportunities, where customers might be tempted to buy something else in store after looking at displays, visiting a fitting room or interacting with salespeople. 

When customers come inside a store to pick up an online order versus picking up an order curbside, 35% of those people will buy something else, according to Forrester research. 

“Curbside, at the moment, is kind of a contingency option,” Saunders said.

At the end of the day, he said, “it’s not as good as having people come in the store to buy.”