The meteoric rise of online retail has resulted in a need for businesses to make tough decisions about their distribution arrangements.

John Lewis has a cutting-edge logistics operation

In 2003, its first full year of online trading, John Lewis recorded total online sales of £21.2m. Five years later, the number hit £268.1m. The phenomenal surge reflected a revolution in retailing - the ecommerce era was well and truly born.

But another five years down the line, with etailing firmly established, there is a paradox. The engine of it all, logistics, is still a painfully complicated process for many, and a big question remains: should retailers have separate distribution centres for each arm of their business, online and in store, or bring it all under one roof?

The complexities of such decisions, according to John Lewis operations director Dino Rocos, mean that plenty of retailers are still trying to figure out the best way forward.

“I think that many retailers are still working through understanding what is right for them,” he says. “I don’t see as many retailers taking a strategic view of supply chains as they should be. It’s a difficult thing to achieve, but getting it wrong, as other retailers have, can bring a big risk for their business.”

So why does mystery still remain, and how can retailers avoid some very costly errors? The first step, says Rick Ballard, director of The Logistics Business, is for a retailer to work out its own retail/etail equation down to the finest detail before even thinking about what type of distribution centre most suits its requirements.

Ballard says: “It’s about defining what a retailer’s order profile is. They need to define their profile and ask whether they can combine their operations. Then they should look at their building needs.”

There are two basic options. A retailer can segregate its etail and retail arms and stock both individually based on their own needs, or the two can be brought together in one joint store replenishment and online order system serving shops and customers from under one roof.

Rocos is clear about which route John Lewis has taken, and its giant, cutting-edge distribution centre in Milton Keynes is the result.

He says: “We are very visibly bringing the two elements together. In the early days everybody thought it was either/or. But we’ve come to understand that it is John Lewis that matters - whether it’s online or in store is less important.

“We can deliver click-and-collect alongside store replenishment. There are huge benefits of efficiency to merging the two together. And we have total control over it all.”

Whereas traditionally a retailer could more or less predict when and where stores would see the busiest trade, and distribute accordingly, the online shopper is a free agent.

And, in practical terms, says Rocos, by having all stock delivered to one place there are simple savings to be made.

“It means you have to make decisions when segregating where you’re going to send stock,” he says. “As soon as you do that you’re compromising the efficiency of that stock. You risk overpopulating stock in both distribution centres or having one of the centres understocked.

“For us there’s no movement between our distribution centres - the customer is in control.”

Gary Marshall, director of operations at Lakeland, explains it is not how shoppers shop, but who they shop with that counts. “You have to make sure that what you’re offering in one channel is what you’re offering in another.

You’re offering a range of services and it’s up to the customer to decide what’s right for them,” he says.

“It’s difficult to drive a customer to a channel. If you don’t offer the channel that they want you will lose business.”

With origins in the mail order business, Lakeland is a veteran of multichannel distribution. The kitchenware retailer grew from mail order into a bricks-and-mortar retailer, and now, with online, it has returned to its home shopping roots. It has done this all from one - albeit recently expanded - multichannel distribution centre in Kendal, Cumbria.

Marshall says: “The stock is not dedicated to a channel. The idea is to keep a central stock for any means. It’s not dedicated for store or home shopping needs. If you split the two you have to carry the safety stock to make sure each has enough.

“It’s a trade-off of complexity and cost, but most retailers are not fully integrated for multichannel.”

But while John Lewis, Lakeland and many more agree with an omnichannel distribution approach, that doesn’t mean the debate is finished.

Research published by property agent Savills in March showed that more than half of retailers are considering opening a dedicated e-fulfilment centre from which to run their ecommerce operations alone, compared with 36%opting for a mixed distribution centre.

Savills director of commercial research Steven Lang says this overall picture takes into account the many small and medium-sized retailers that are getting to grips with etailing as a standard part of the business model, but don’t need the cutting-edge centres that can manage everything together.

Lang says: “I think the key is that there’s a range of distribution networks out there at the moment and that’s going to remain. I think it’s still in an evolution phase. There’s no one-size-fits-all solution. Most retailers think that there will be an evolution of big UK e-fulfilment centres.”

The report also showed that there is a tipping point at which a dedicated centre becomes necessary for retailers with a smaller but growing ecommerce arm, and clothing brands are more likely to fall into this category. This point is reached, the research suggests, when a retailer is sending out 200,000 parcels a year.

In the UK, the job of managing distribution for either model is easier than elsewhere for two reasons. Firstly, the appetite is clearly there.

In January, Morgan Stanley published its Ecommerce Disruption: A Global Theme report, which showed that British shoppers had the highest online spend of any country in the world in 2011 - a massive $723 (£477.30) per head.

And geographically Britain is - in theory - small enough to reach a densely packed population quickly. The opportunity is there and the retailers that have the right systems in place are already reaping the benefits.

Goodman Logistics managing director Charles Crossland says: “The UK is well designed for internet spend.

There is a dense population on a small island. As consumer confidence improves we’ll see retailers taking decisions. They’ve sat on their hands a bit and I think that will change.”

Whether a retailer decides on the mixed distribution centre or dedicated e-fulfilment centre approach is in many ways less important than making the decision itself, doing enough homework, and doing it promptly.

Online spend is high in the UK, and there is already big money at stake. When the economy does begin to pick up, and if the right delivery foundations are laid now, the only way is up.