White paper Cross-border e-commerce: Rethinking distribution networks
White Paper. Cross-border e-commerce: Rethinking distribution networks 2 Table of content Cross-border e-commerce is on the up 3 Evolution of the distribution network 4 Obstacles limiting cross-border e-commerce 5 Complex returns logistics 5 Online payments 6 Closed borders 6 Pricing: VAT systems and import taxes 6 Eliminating supply chain inefficiencies 8 Unstoppable change 9 Sources 10
White Paper. Cross-border e-commerce: Rethinking distribution networks 3 Cross-border e-commerce is on the up Currently, around 2.7 billion people 39% of the total world population have Internet access 1. Increasingly, those 2.7 billion people are making online purchases every year. The Central Board of Excise and Customs (CBEC) expects both internal and domestic e-commerce will generate global revenues of 1.4 trillion dollars this year. Cross-border e-commerce will represent a significant chunk of this. In 2012 alone, global revenue from cross-border e-commerce was 300 billion dollars 2. This number is expected to double by 2018. The United States, United Kingdom, Germany, Australia, Brazil, and China are the six most important markets today when it comes to online shopping. Where do these online shoppers buy online if they shop cross-border? The United States is the most popular country for buying online goods (45%), followed by the United The revenues generated by cross-border e-commerce in these markets alone are set to reach approximately 307 billion dollars in 2018, three times more than the global amount in these markets in 2013 3. The Boston Consulting Group expects that by 2025, the Asian market will account for around 40% of the revenues generated by cross-border e-commerce, making Asia the global epicenter of e-commerce 4. The strong growth of cross-border e-commerce is creating an unprecedented opportunity for e-tailers. However, an efficient and flexible distribution network is required in order to fully reap the rewards of this growth. The e-tailers that will be successful in the future will be those that are capable of optimizing their distribution networks and challenging the barriers of crossborder e-commerce 5. Kingdom (37%), China (26%), Hong Kong (25%), Canada (18%), Australia (16%) and Germany (14%). 45% of online cross-border shoppers buy from the USA, which makes this the most popular country for buying online goods. 14% 16% 18% 25% 26% 37% 45% Germany Australia Canada Hong Kong China UK USA
White Paper. Cross-border e-commerce: Rethinking distribution networks 4 The e-tailers that will be successful in the future will be those that are capable of optimizing their distribution networks and challenging the barriers of cross-border e-commerce. Evolution of the distribution network Retail logistics has rapidly evolved over the past forty years. In the 1970s, most e-tailers were stocked directly through suppliers or wholesalers. In the 1980s, e-tailers began to centralize their inventories by means of distribution centers. In the 1990s, the global procurement policy entered the equation, allowing e-tailers to establish import centers in order to process imported goods and distribute them. E-commerce began its rise in the 2000s, when solely internet-based e-tailers appeared on the market, leading to the establishment of e-fulfillment distribution networks 6. E-fulfillment requires rethinking traditional distribution networks. Traditional network design models have become largely insufficient due to the variables involved in internet logistics, such as the number of deliveries and collection points. This makes it very different from bricks-and-mortar logistics. It is important for e-tailers to determine the optimal location for their Internet Order Fulfillment Centers (IOFC), as well as the number of IOFCs they want to have. The required storage space, the number of orders, and the profiles and addresses of the consumers are important considerations in this. Other factors also play a role, including the availability of items, accessibility, and delivery times 7. E-commerce also stimulates the demand for certain kinds of e-commerce facilities: mega e-fulfillment centers, parcel sorting centers (hubs), local parcel distribution centers for last-mile supply chains, local city logistics depots, returns centers, and e-fulfillment centers for online food purchases. Furthermore, Jones Lang LaSalle (JLL) expects a merging of these e-fulfillment centers with urban logistics, since most online consumers live in cities. E-fulfillment requires rethinking traditional distribution networks. With cross-border e-commerce, e-tailers stand to significantly increase their turnover by tapping into new markets. But there are many barriers involved in playing in new markets, and this is where
White Paper. Cross-border e-commerce: Rethinking distribution networks 5 international e-fulfillment often poses a challenge. Unfortunately, there is no perfect model that can be applied by every organization. Some e-tailers opt to develop a global network with local distribution centers, while others prefer to work with third parties 8, or work with logistical operators that not only offer delivery but also provide fulfillment solutions Landmark Global, for example. The importance and the complexity of returns logistics cannot be underestimated. Data from Kurt Salmon, a management consulting firm, shows that online consumers return between 20% and 30% of clothes and other soft goods bought online and a little less than 10% of the hard goods, such as toys and products for home use 9. Obstacles limiting cross-border e-commerce Although cross-border e-commerce is expected to grow up to 75% by 2020, only one in four Europebased e-tailers is selling across borders. This has to do with the barriers that still discourage e-tailers from selling internationally 10. Complex returns logistics As many as 47% of European e-tailers claim to be discouraged by the different legislations with respect to product returns, and 44% cite the complexity of processing returned cross-border e-commerce orders as a reason for holding back 11. In Europe there s a legislation that guarantees a 14-day return period during which consumers may decide to cancel their online purchase 12. A quick look online shows that international online transactions are still handled differently from e-tailer to e-tailer. For the consumer, the only solution is to carefully read the returns policy. With some e-tailers, cross-border e-commerce orders can be returned free of charge, while others demand that the purchaser pay the shipping cost as well as the tax and customs charges if goods are returned. International postal operators put initiatives in place to make cross-border returns just as transparent and easy to use as domestic returns. Many retailers also decide per product category whether a product can be returned or not. International postal operators put initiatives in place to make cross-border returns just as transparent and easy to use as domestic returns, with the use of a postage paid label and a track-and-trace service, among other means 13.
White Paper. Cross-border e-commerce: Rethinking distribution networks 6 In order to make buying online more attractive to consumers in target markets, e-tailers have to be familiar with local payment preferences. Online payments In order to make buying online more attractive to consumers in target markets, e-tailers have to be familiar with local payment preferences. Credit cards may be the norm in some countries, while in other countries this may be a completely unfamiliar option 14. In Russia, it is still very common to pay in cash upon receipt of the goods, whereas this rarely happens anymore in Western economies. Brazilians prefer to make their purchases in interest-free installments (the online consumers borrow from the e-tailer and pay back in installments, instead of paying the total amount in once) instead of paying for online orders using traditional credit cards 15. An increasing number of payment options are now available, such as e-wallets and mobile payment methods. E-tailers also face the challenge of managing the different payment methods, which can vary greatly from region to region. Another factor that can have a direct effect on an e-tailer s profits, and influence fulfillment decisions, is the cost incurred in converting prices to local currencies. Closed borders If there is a clear benefit attached to purchasing products across borders, consumers are prepared to wait longer for their orders 17. Similar to domestic purchases online, the customer expects faster, more precise delivery within a more reliable timeframe. For this reason, unpredictable customs checks can be a thorn in the side of many e-tailers 18. The World Economic Forum estimates that lowering the supply chain barriers between countries barriers such as customs formalities would increase cross-border e-commerce by 60% to 80% 19. Online consumers also want insight into the status of their delivery process. Presently, many e-tailers fail to provide online consumers with sufficient insight into the overall delivery process for cross-border purchases. In recent years, there has been a lot of investment in track-and-trace solutions. The Internet of Things also opens up new possibilities. Lowering the supply chain barriers between countries barriers such as customs formalities would increase cross-border e-commerce by 60% to 80%. Pricing: VAT systems and import taxes The lack of a Europe-wide VAT system is one of the greatest obstacles for cross-border e-commerce within Europe. The complexity of the
White Paper. Cross-border e-commerce: Rethinking distribution networks 7 various VAT systems and import taxes worldwide is slowing the growth of e-commerce. It is often difficult for customers to estimate what the ultimate cost of the product will be when making a crossborder purchase online 20. We are slowly seeing examples of e-tailers who go the extra mile to make pricing as transparent as possible for consumers. This is to the advantage of both the e-tailer and the consumer. The e-tailer will see fewer customers bowing out before the end of the purchasing process 21. To make pricing more transparent, e-tailers can offer their customers a «total landed cost price». This price includes the total cost of shipment, including delivery, taxes and duties. Atlas is Landmark Global s plug-and-play landed cost solution tool. The responsive Atlas application seamlessly integrates more than 40 currencies and 150 payment methods. Presenting the right currency along with the familiar local payment methods and calculating the customs and excise duties is done automatically based on the ordering location, which is identified using the customer s IP address. To make pricing more transparent, e-tailers can offer their customers a «total landed cost price». This price includes the total cost of shipment, including delivery, taxes and duties.
White Paper. Cross-border e-commerce: Rethinking distribution networks 8 Eliminating supply chain inefficiencies Online consumers are becoming more demanding and aren t as deterred by geographical limitations. They re only concerned about one thing: getting their product. These consumer expectations influence supply chain operations in significant ways, such as by creating a greater focus on near-sourcing, omni-channel, and faster transport solutions 22. The trend toward an e-commerce world that is not limited by physical borders will ensure that specific routes will be optimized to meet the demands of the online consumer. Today, for example, if Australian consumers purchase goods from an e-tailer based in the United Kingdom, the products will first be sent from China to the United Kingdom before finally arriving in Australia. These unnecessary and expensive routes will disappear in the future 23. The increasing complexity of global trade means that distribution decisions have to be more strategic and efficient. In some countries, such as Brazil, the cost of re-exporting goods that have been brought into the country can be enormous. In such cases, the redistribution of goods to other countries is no longer an option. Partnerships with logistical operators with knowledge of the domain in question can offer an invaluable solution 24. For online e-tailers, it comes down to finding the right balance between cost and speed of delivery. This is where efficient distribution networks hold the key. For a consumer that values fast delivery above all else for example, the flexibility of the distribution network is the most important. Large companies often adopt a more segmented approach with centralized warehouses for slow-moving goods and a more local distribution model for fast-moving products 25. Different parties are coming forward to respond to the differing requirements of the consumer in the cross-border e-commerce ecosystem. There are integrators who provide an end-to-end service, but partnering with postal operators can also create opportunities, allowing e-tailers to take advantage of their well-developed door-to-door networks. Online consumers are becoming more demanding and aren t as deterred by geographical limitations. They re only concerned about one thing: getting their product.
White Paper. Cross-border e-commerce: Rethinking distribution networks 9 Unstoppable change Cross-border e-commerce will continue to grow in the coming years, due to the gradual removal of barriers to entering the market and the fast growth of e-commerce as a whole. The more logistical e-commerce models continue to develop, the more changes we will see in the physical distribution networks. One of the tendencies currently gaining momentum is that e-tailers are starting to have their own physical stores and are delivering directly to the online consumer from these stores instead of from national warehouses or regional distribution centers 27. If the obstacles holding back cross-border e-commerce can be removed, it won t matter to the consumer whether they purchase from their own market or across the border. This represents a golden opportunity for e-tailers to rethink their business models. Instead of organizing their businesses by region, they could, for example, organize based on customer requirements, the products sold, and the services provided, without specifically taking the location into account. Ultimately, e-tailers won t be able to ignore the figures: it is expected that cross-border retail will grow at least twice as fast as domestic retail. To get a piece of the pie, it s crucial to have an efficient and flexible distribution network. Long-term partnerships with distribution partners stand to add significant value in realizing this ambition. The e-tailers that manage to jump the hurdles standing in the way of cross-border retail have the advantage in the global market 29. If the obstacles holding back cross-border e-commerce can be removed, it won t matter to the consumer whether they purchase from their own market or across the border.
White Paper. Cross-border e-commerce: Rethinking distribution networks 10 Sources 1 E-commerce boom triggers transformation in retail logistics, JLL, November 2013 2 http://www.crossborder-ecommerce.com/ international-expansion, cbec 3 Modern Spice Routes, The Cultural Impact and Economic Opportunity of Cross-Border Shopping, PayPal, 2013 4 Cross-border e-commerce makes the world flatter, The Boston Consulting Group, September 2014 5 18th Annual Third-Party Logistics Study, Capgemini Consulting, 2014 6 E-commerce boom triggers transformation in retail logistics, JLL, November 2013 7 http://www.logisticsresearch.nl/index.php/networkdesign/overzicht 8 E-commerce boom triggers transformation in retail logistics, JLL, November 2013 9 https://www.internetretailer.com/2013/05/29/ reducing-rate-returns 10 Retailers attitudes to cross-border trade and consumer protection report, European Commission, 2011 11 European Cross-border E-commerce, The Challenge to Achieving Profitable Growth, Accenture, 2012 12 http://europa.eu/youreurope/citizens/shopping/ shopping-abroad/returning-unwanted-goods/ index_nl.htm 13 http://www.bpostinternational.com/en/content/ tips-handling-international-returns#sthash. ufw40nxz.dpuf 14 http://www.entrepreneur.com/article/239203, November 2014 15 http://www.digitalriverpayments.com/news/full/ avoid-hitting-the-bric-wall-local-payments-key-toentering-emerging-markets 16 http://www.entrepreneur.com/article/239203, November 2014 17 E-commerce and delivery, EU, Copenhagen Economics, July 2013 18 Cross-border e-commerce makes the world flatter, The Boston Consulting Group, September 2014 19 Cross-border E-commerce Trade-Engine for Growth, GEA, November 2014 20 Position Paper Cross Border e-logistics, Ecommerce Europe 21 Offer your customers what they want, when they want it, bpost International, 2014 22 Adapting your supply chain for the future now, Inbound Logistics, November 2014 23 Cross-border e-commerce makes the world flatter, The Boston Consulting Group, September 2014 24 18th Annual Third-Party Logistics Study, Capgemini Consulting, 2014 25 Re-engineering the supply chain for the omnichannel of tomorrow, EY, February 2015 26 Cross-border e-commerce makes the world flatter, The Boston Consulting Group, September 2014 27 E-commerce boom triggers transformation in retail logistics, JLL, November 2013 28 Cross-border e-commerce makes the world flatter, The Boston Consulting Group, September 2014 29 http://www.entrepreneur.com/article/239203, November 2014