Store location Same-day coverage of relevant population, Amazon vs disguised omnichannel fashion retailer by type of competition, % 28 stores across Germany, covering 5 of Ongoing testing and buildup of Germany’s 20 biggest cities ship-from-store capabilities Retailer Competition area Area at risk monopoly area (Amazon and retailer) (Amazon only) (retailer only) Hamburg Population 22 16 7 Berlin Purchasing 23 17 7 power coverage 1 Relevant population areas dened as high density (>750 inhabitants/km²) and/or high income (purchasing power >€21,900 per capita); viable market coverage dened as area within 30 minutes driving time from respective retail location. Cologne Source: Alteryx; BKG; ESRI ArcGIS; MB-Research; McKinsey analysis Warehouse coverage Viable market coverage for same-day delivery via ship from store % 60 Inhabitants >1,000,000 Munich 50 >500,000–1,000,000 >200,000–500,000 40 30 20 Retailer same-day o ering in top 20 cities 10 Amazon vs top 20 non-food and top 13 grocery retailers 0 0 10 20 30 40 50 Retail and Consumer Packaged Goods Stores Retail optimization 1 Relevant population areas dened as high density (>750 inhabitants/km²) and/or high income (purchasing power >€21,900 per capita); viable market coverage dened as area within 30 minutes driving time from respective retail location. By Manik Aryapadi, Tim Ecker, and Julia Spielvogel Source: Alteryx; BKG; ESRI ArcGIS; MB-Research; McKinsey analysis A “new normal” has emerged when it comes to the delivery speed that customers expect in ordering online. The standards have been re-set by the likes of Amazon and several other market leaders, placing increasingly more pressure on incumbent players to respond accordingly. We conducted a broad effort in which we took stock of the current situation, focusing on Europe and particularly, Germany, from both a market and consumer perspective. Our analyses show that although the pressure on incumbent players may appear to be overwhelming, we believe that retailers have a strategic asset they can leverage in the future: their dense store network, which provides them proximity and (potentially) quick access to their customers. But to fully benefit from their network, omnichannel retailers will need to consider changing gears in four areas: the local fulfillment network, quick and integrated IT systems, new store layouts and processes, and a rethink of business economics. January 2020 1 Urban More time-constrained Same-day delivery: +4 p.p. +5 p.p. willing to pay €3 extra for Younger willing to pay €3 to €5 same-day delivery extra for same-day Ready for takeoff base delivery choice delivery +13 p.p. mainly on speed and reliability In the past 20 years there has hardly Amazon’s free delivery time been any business success story like >9 days ~8 days ~5 days ≤2 days e-commerce. And as online sales have surged, shipping durations have gone down. 2,945 1 Percentage point di¡erence vs overall sample of 4,700 survey respondents across the United States, China, and Germany. 1,546 Testing Scaling Market standard 775 Same-day delivery promise 343 2014 2015 2016 2017 2018 2019 100 0 1994 2000 2005 2010 2015 2020F Alibaba US e-commerce market size China Index (2000=100) JD.com Today, people expect to receive their Long delivery times are named one of parcels by the next day. And their the key reasons to shop in stores Western Europe Amazon shopping decisions increasingly instead of online by depend on shipping time. 46% abandoned a shopping cart due to a United States Amazon shipping time that was too long or not provided 34% of respondents Source: UPS Source: KPMG Product selection by delivery speed Relative pricing But consumers are still not satisfied. General willingness to pay extra for same-day delivery Number of SKUs for 3 exemplary product categories Out of 122 products analyzed Up to half state a general interest in Share of consumers in percent, n=4,700 respondents 100% Competitors Amazon cheaper same-day delivery, despite limited 458 Batteries cheaper willingness to pay > €1 surcharge United 53 States 67 for that service. 20 Non-same-day 15 46 226 on Amazon Screw guns Germany 34 145 10 Amazon same-day Sanding 93 Same-day 9 52 Willingness to pay > €1 surcharge machines 136 Top 3 competitors— on Amazon for same-day delivery China 34 non-same-day 19 Source: Amazon; McKinsey analysis 2 Retail optimization Especially attractive segments that are Urban More time-constrained young, urban, and time-constrained are demanding same-day delivery. +4 p.p. +5 p.p. willing to pay €3 extra for Younger willing to pay €3 to €5 same-day delivery extra for same-day base delivery choice delivery +13 p.p. mainly on speed and reliability Amazon’s free delivery time >9 days ~8 days ~5 days ≤2 days 2,945 1 Percentage point di¡erence vs overall sample of 4,700 survey respondents across the United States, China, and Germany. 1,546 For this reason, e-commerce super- giants Alibaba, JD.com, and Amazon Testing Scaling Market standard are committed to pushing same-day 775 delivery into the mass market now. Same-day delivery promise 343 2014 2015 2016 2017 2018 2019 100 0 1994 2000 2005 2010 2015 2020F Alibaba US e-commerce market size China Index (2000=100) JD.com Long delivery times are named one of the key reasons to shop in stores 46% instead of online by Western Europe Amazon abandoned a shopping cart due to a United States Amazon shipping time that was too long or not provided 34% It is the next building block in their bid to of respondents win consumers on selection, price, and Source: UPS Source: KPMG convenience. Product selection by delivery speed Relative pricing General willingness to pay extra for same-day delivery Number of SKUs for 3 exemplary product categories Out of 122 products analyzed Share of consumers in percent, n=4,700 respondents 100% Competitors Amazon cheaper 458 cheaper United 53 Batteries States 67 20 Non-same-day 15 46 226 on Amazon Screw guns Germany 34 145 10 Amazon same-day Sanding 93 Same-day 9 52 Willingness to pay > €1 surcharge machines 136 Top 3 competitors— on Amazon for same-day delivery China 34 non-same-day 19 Source: Amazon; McKinsey analysis Retail optimization 3 Retail stores: The return Store location of a strategic key asset Same-day coverage of relevant population, Amazon vs disguised omnichannel fashion retailer by type of competition, % The one central requirement for same- 28 stores across Germany, covering 5 of Ongoing testing and buildup of Germany’s 20 biggest cities ship-from-store capabilities day delivery is simple, yet challenging: a dense network of warehouses. In Retailer Germany, for example, it would take Competition area Area at risk monopoly area 11 well-placed warehouses that stock the (Amazon and retailer) (Amazon only) (retailer only) Hamburg same assortment and are able to move it from click-to-ship in two hours or less Population 22 16 7 to cover all tier-1 and tier-2 cities. Berlin Purchasing 23 17 7 power coverage 1 Relevant population areas dened as high density (>750 inhabitants/km²) and/or high income (purchasing power >€21,900 per capita); viable market coverage dened as area within 30 minutes driving time from respective retail location. Cologne Source: Alteryx; BKG; ESRI ArcGIS; MB-Research; McKinsey analysis Warehouse coverage Viable market coverage for same-day delivery via ship from store % 60 Inhabitants >1,000,000 Munich 50 >500,000–1,000,000 >200,000–500,000 40 Amazon has a very dense delivery network, putting the industry leader far ahead of almost all other major Western retailers with 30 their same-day offering. For these retailers to catch up, the obvious option would be to invest hundreds of millions of euros or dollars to match Amazon’s footprint one to one. 20 Retailer same-day o ering in top 20 cities 10 Amazon vs top 20 non-food and top 13 grocery retailers 0 0 10 20 30 40 50 Amazon’s same– The average Stores day shipping large retailer 1 Relevant population areas dened as high density (>750 inhabitants/km²) and/or high income (purchasing power >€21,900 per capita); viable market coverage dened as area within 30 minutes driving time from respective retail location. promise covers all covers only 2 Source: Alteryx; BKG; ESRI ArcGIS; MB-Research; McKinsey analysis 20 of Germany’s largest cities 4 Retail optimization But there is a better and much cheaper option for today’s fast-growing Store location but still moderate market volumes: retailers should shift the rules of the game and use their existing store networks for same-day shipping. Same-day coverage of relevant population, Amazon vs disguised omnichannel fashion retailer by type of competition, % 28 stores across Germany, covering 5 of Ongoing testing and buildup of Germany’s 20 biggest cities ship-from-store capabilities Retailer Competition area Area at risk monopoly area (Amazon and retailer) (Amazon only) (retailer only) Hamburg Population 22 16 7 Berlin Purchasing 23 17 7 power coverage 1 Relevant population areas dened as high density (>750 inhabitants/km²) and/or high income (purchasing power >€21,900 per capita); viable market coverage dened as area within 30 minutes driving time from respective retail location. Cologne Source: Alteryx; BKG; ESRI ArcGIS; MB-Research; McKinsey analysis Warehouse In Germany, connecting 30 stores to the coverage Viable market coverage for same-day grid would be enough to reach almost delivery via ship from store half the population and come close to % matching Amazon’s current service offer.