BUSINESS CASE

Kiva Systems’ Robots versus Humans: The Challenge of Holiday Order Fulfillment

For those who tend to procrastinate when it comes to holiday shopping, the rise of e-commerce has been a welcome phenomenon, with some retailers offering same-day delivery for orders placed on the day before Christmas.

E-commerce retailers like Amazon and CrateandBarrel.com can see their sales quadruple for the holidays. With advances in order fulfillment technology that get customers’ orders to them quickly, e-commerce sellers have been able to capture an ever-greater share of sales from brick-and-mortar retailers. Holiday sales at e-commerce sites have grown by 40% from 2012 to 2015.

Behind these technological advances, however, lies an intense debate: people versus robots. Amazon has relied on a large staff of temporary human workers to get it through the previous holiday seasons, often quadrupling its staff and operating 24 hours a day. In contrast, CrateandBarrel.com only doubled its workforce, thanks to a cadre of orange robots that allows each worker to do the work of six people.

But Amazon is set to increase its robotic work force in the future. In 2012, Amazon bought Kiva Systems, the leader in order fulfillment robotics, for $775 million, with the hope of tailoring Kiva’s systems to fit Amazon’s warehouse and fulfillment needs.

Although many retailers—Staples, Gap, Saks Fifth Avenue, and Walgreens, for example—also use Kiva equipment, installation of a robotic system can be expensive, with some costing as much as $20 million. Yet hiring workers has a cost, too: during the 2013 holiday season, before it had installed an extensive robotic system, Amazon hired some 70,000 temporary workers at its 94 distribution centers around the United States.

As one industry analyst noted, an obstacle to the purchase of a robotic system for many e-commerce retailers is that it often doesn’t make economic sense: it’s too expensive to buy sufficient robots for the busiest time of the year because they would be idle at other times. Before Amazon’s purchase, Kiva was testing a program to rent out its robots seasonally so that retailers could “hire” enough robots to handle their holiday orders just as Amazon used to hire more humans.

QUESTIONS FOR THOUGHT

BUSINESS CASE

Shopping Apps, Showrooming, and the Challenges Facing Brick-and-Mortar Retailers

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In a Sunnyvale, California Best Buy, Tri Trang found the perfect gift for his girlfriend, a $184.85 Garmin GPS. Before mobile shopping apps appeared, he would have purchased it there. Instead, Trang whipped out his smartphone to do a price comparison. Finding the same item on Amazon for $106.75 with free shipping, he bought it from Amazon on the spot.

For brick-and-mortar retailers like Best Buy, customers who “showroom”—examine the merchandise in-store and then buy it online—threaten their very survival. The explosive growth of shopping apps that allow you to immediately compare prices and make a purchase (TheFind), give you access to thousands of coupons (Coupons.com), and alert you to discount sales at nearby stores (SaleSorter), has struck terror in the corporate offices of traditional retailers.

Before shopping apps, a traditional retailer could lure customers into its store with enticing specials and reasonably expect them to buy more profitable items with prompting from a salesperson. But those days are fast disappearing. The consulting firm Accenture found that 73% of customers with mobile devices preferred to shop with their phones rather than talk to a salesperson. In just four years, from 2010 to 2014, the use of mobile coupons has quadrupled from 12.3 million to 53.2 million.

But brick-and-mortar retailers are now fighting back. To combat showrooming, Target stocks products that manufacturers have slightly modified for them alone. Like other retailers, Target has been building its online presence, quadrupling the number of items on its website, sending coupons and discount alerts to customers’ mobile phones, and offering loyalty rewards. Walmart offers free in-store delivery for online purchases so customers can avoid shipping charges. And Staples will give you a discount on a new printer if you trade in your old one.

However, traditional retailers know that their survival rests on pricing. While prices on their websites tend to be lower than in the stores, these retailers are still struggling to compete with online sellers like Amazon. A recent study showed Amazon’s prices were about 9% lower than Walmart.com’s and 14% lower than Target.com’s. Best Buy now offers to match online prices for its best customers.

It’s clearly a race for survival. As one analyst said, “Only a couple of retailers can play the lowest-price game. This is going to accelerate the demise of retailers who do not have either competitive pricing or standout store experience.”

QUESTIONS FOR THOUGHT