E-retailing Project. E-retailing - An Exciting Opportunity for the Logistics Sector

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1 E-retailing Project E-retailing - An Exciting Opportunity for the Logistics Sector May 2012

2 Goodman E retailing Research Report About Transport Intelligence Headquartered in the UK, Ti is one of the world s leading providers of expert research and analysis dedicated to the global logistics industry. Utilising the expertise of professionals with many years experience in the mail, express and logistics industry, Transport Intelligence has developed a range of market leading web based products, reports, profiles and services used by all the world s leading logistics suppliers, consultancies and banks as well as many users of logistics services. Transport Intelligence products and services include: Ti's news and analysis briefing service, Logistics Briefing Exclusive access to Ti s extensive research output through the ground breaking Global Supply Chain Intelligence portal Dedicated research through Ti Consulting Market and competitor monitoring Industry leading research reports including trend analysis, market sizing, market share, forecasting and ranking across global logistics markets In depth intelligence on the world's leading logistics providers through Supply Chain Leaders Intelligence Ti Conferences and seminars All rights reserved. No part of this publication may be reproduced in any material form including photocopying or storing it by electronic means without the written permission of the copyright owner, Transport Intelligence Limited. This report is based upon factual information obtained from a number of sources. Whilst every effort is made to ensure that the information is accurate, Transport Intelligence Limited accepts no responsibility for any loss or damage caused by reliance upon the information in this report. 2 May 2012 Transport Intelligence Ltd

3 Ti / Goodman White Paper May 2012 The Logistics of Online Shopping Where the Real Opportunities Lie At a time when retail sales in many markets have been sluggish internet retailing has grown rapidly and this shift in consumer attitude has brought enormous benefits to the global logistics market. While estimates differ, it is believed that online shopping now accounts for almost a fifth of all purchases in developed markets and this figure is growing at a rate of between 15%- 20% a year. Growth is far higher in emerging markets, for example at around 75% a year in China, as technology advancements have allowed the more traditional bricks and mortar element of the sector to be overtaken, even before it has really developed. Whilst internet retailing is still in its infancy there are no signs of this rapid growth slowing. However, at the same time, the market is enduring a number of growing pains. According to Goldman Sachs, the global e-commerce market could be worth around $1 trillion in The US is currently the largest e-retailing market in the world with 170 million users spending on average $1,000 each a year. Forrester Research estimates that the US e-retail market could be in the region of $279 billion by China, with more than 150 million online shoppers, spending on average $200 -$250 per annum each, is set to become a major e- commerce market, due mainly to an increasing number of middle class consumers bringing new found wealth and a greater demand for western products. The Boston Consulting Group believes that this could be worth $305 billion by It is not just the emerging markets however, that are witnessing high levels of growth. A number of research studies predict that Europe s online market will grow substantially in 2012, with some reports estimating growth of 16% in the year. Forrester have estimated that the European market could be valued at $184.6 billion by The online shopping model means that consumers' trips to the shops are being substituted by delivery direct to customers homes and this is having a direct impact on how retailers manage their logistics functions. Retailers are currently experiencing a switch from traditional retailing to online sales at a rate of some 10% in the short term with most forecasts anticipating e-retailing to continue to replace conventional channels in the future, with some analysts expecting longer term substitution of up to 30%. This change in mind-set is proving to be an exciting opportunity for many companies whilst, at the same time, representing challenges. Preconceived logistics doctrine is being questioned as retailers are increasingly developing systems to serve multi-channel environments, which often have contradictory operational requirements. All the participants in the industry are facing fresh challenges. For the pure play e-retailers in developed markets there are problems of continually expanding product lines and increased competition with big brand retailers who are now entering the internet space. For new entrant retailers there are problems of adjusting distribution patterns to serve multiple channels. For the existing logistics and service companies there are problems of adapting premises, equipment and vehicles to cope with specific e- retailing requirements. Postal providers and deliverers, providing final mile delivery, are facing increasing volumes, the problems associated with home delivery and a requirement to enhance the customer delivery experience all at a competitive cost. In less developed countries, such as China, both retail and internet selling are growing fast, however the distribution infrastructure has not developed at the same rate. At this stage of the development there are no single solutions or industry norms, with a range of different approaches being used with no clear view emerging. 1

4 Transport Intelligence May 2012 The growth in internet sales is resulting in a greater demand for dedicated e-fulfilment centres, at the expense of traditional physical outlets. This places a greater emphasis on operational tasks such as fulfilment and last mile delivery, functions that have historically been undertaken by customers themselves. The former requires a far higher level of personnel than standard store based warehouses while the latter, the last mile delivery element, presents opportunities for postal and express parcel companies. These two factors have been cited as being among the most important for retailers when it comes to designing and locating e-fulfilment centres, with the region in which the company operates also determining the strategy adopted. In the more developed markets such as the UK, where minimum wage legislation exists and employment costs comprise a significant proportion of overhead, retailers have tended to site e-fulfilment centres in close proximity to a pool of willing and available staff. The high level of staff required for the manual sorting of products in these centres is, however proving costly for some players, with fulfilment costs increasing at a faster rate than sales. Today s e-retail market is highly competitive and the fulfilment and delivery aspects of the sales process have to be both cost effective and customer friendly to maintain competitiveness. Another determining factor can be local or national assistance. Most of the European e-retailers are essentially national companies, reflecting the fact that Europe remains a collection of national markets. Distribution patterns, therefore, tend to be national systems. Due to EU wide minimum wage legislation labour costs within countries are similar, but both the EU and the member states tend to provide assistance to support major developments. With wages similar and effective distribution systems, it seems that the availability of official assistance is as big a factor as any in any major development. The Amazon development in South Wales is a case in point. It is located well away from the centre of the distribution system, but had an abundant supply of low cost labour and support from local authorities. The situation is very different in emerging markets however, where cheap labour is plentiful. In China, the lack of infrastructure and limited provision of logistics are the key factors. Logistics costs are in excess of 20% of GDP, more than double that in Europe, and outside of the major cities logistics offerings are almost non-existent. This has led to e-retailers developing a far wider network of facilities, aiming to get closer to the customer. Alibaba, which owns the dominant player in the market, Taobao, has responded to this by investing $4.6bn to develop its own logistics network in the country. In developed countries logistics infrastructure is more sophisticated although the strategies to service customers differ. In some countries, such as the UK, it is possible to reach all the main parts of the country overnight. This means that goods despatched from a retailer s distribution centre in the South West of the UK can be delivered in the North East the following day. In larger geographic areas, such as France and the US, distances are greater and e- retailers either have to duplicate inventory, offer 48 hour deliveries or use expensive air based systems. The most normal pattern is to have multiple distribution points and duplicate main inventory lines. Most internet goods are fast moving and are sold and paid for before the supplier is paid, so holding costs can be relatively low. This highly fragmented situation has led to retailers developing their own e-fulfilment centres, designed to accommodate local conditions, rather than relying on logistics companies. To date, these have largely involved the development of existing distribution centres, configuring the facilities to serve the specific needs of the e-retailer, however, dedicated purpose built properties are increasingly being demanded. As more sales switch to online this demand will continue to increase. The logistical requirements of e-retailers differ enormously and to date, no blueprint for an optimum e-fulfilment centre has been developed. Pure e-retailers, selling large volumes of very different products, have adopted a strategy of developing bespoke, in-house, manual fulfilment operations, using mezzanine floors supported by conveyor systems to make best use of high bay warehouses. On the other hand, retailers selling larger products can easily utilise their existing distribution facilities with both channels happily living side-by-side. Transport Intelligence Ltd

5 Transport Intelligence May 2012 Whilst this level of customisation can be problematic for logistics providers, who traditionally operate from fairly standard facilities, this represents a good opportunity for property development companies who can build specific facilities tailored to the precise requirements of individual e- retailers. There is no doubt that the online shopping phenomenon has given certain segments of the logistics industry a welcome shot in the arm. However, in many respects the sector is still maturing, with development issues on both the supply and demand side. These challenges may slow momentum temporarily, but even in developed markets, prospects for future growth are still exceedingly strong and the opportunities for companies providing bespoke e-fulfilment centres are vast. Transport Intelligence Ltd