The following blog was originally posted by Seth Patin, president and founder of Accelogix, a partner of JDA, on the Accelogix Insights blog. As you will see, Seth discusses four retail ecommerce trends that will force supply chains to become more efficient. Is the ecommerce operations model sustainable?
It is undeniable that ecommerce has forever changed the way consumers purchase and receive goods, but not everyone is happy about that. I have been theorizing privately for quite some time that the cost model of current ecommerce operations is not sustainable, and in the last few months, we are beginning to see more news to suggest this is true.
The most recent numbers coming out of Black Friday and Cyber Monday weekend are showing dramatically increased online shopping demand, with a staggering $3.1 billion in Cyber Monday ecommerce fueled by a 53% surge in mobile device spending according to research firm comScore. VISA reported that U.S. account holders increased their online shopping by 22% to $1.5 billion. Amazon.com’s revenue on Thanksgiving Day alone rose 29%. Meanwhile, brick and mortar retailers reported a consistent flow of shoppers, but nothing record setting. The trend here is undeniable: consumers like ecommerce and it’s here to stay.
What are the ecommerce trends forcing retail supply chain efficiency?
The real question at this point is not, “Should we be expanding our ecommerce offerings?”, but rather, “How can we expand our ecommerce offerings and still make a profit?” Four key trends are emerging that have the potential to impact ecommerce dramatically in the next year or two:
1. The days of 100% free shipping all the time are slowly fading.
As ecommerce has developed over the last several years, one of the primary enablers has been small parcel shippers such as UPS, Fedex, and USPS. These companies initially offered massive price discounts based on volume in an effort to woo ecommerce shippers. Unfortunately these incredible prices were somewhat of a perverse incentive. Shippers began sending items one at a time in boxes filled mostly with air because the cost of doing so was less than the cost of investing in order consolidation technologies. The small package shippers have seen a deluge of packages and realized their operating margins for this business are not acceptable, so they have decided to push back.
In the past few months, FedEx, UPS, and USPS have all announced rate structure changes targeted at improving their margins on ecommerce shipping. UPS recently introduced fees for retailers that allow their vendors to ship on their account for direct to consumer deliveries. USPS is seeking a 9.5% overall increase on commercial shipping rates. FedEx’s 2016 rate increase focuses more heavily on packages under 10 pounds and includes two highly relevant service charges that took effect immediately in November for the holiday season. In addition, in 2015 UPS and FedEx have both changed their calculations of dimensional weight, a calculation that increases the billed weight of a package if the package is oversized or unusually shaped. The end result is that shippers will be seeing freight costs rise in 2016, and that will drive straight to their bottom line.
The cost of small parcel shipping will only continue to rise, even as a glut of supply drives down the price of truck load shipping. Due to strong demand in ecommerce and shrinking transaction sizes, small parcel carriers will continue to have wide latitude to control prices. This trend is the reason Amazon is reportedly evaluating actions such as the creation of its own freight service and drone delivery. Brick and Mortar retailers will heavily market and even incentivize their Ship to Store programs in an effort to leverage their existing supply chains. In general, all ecommerce shippers will have to compensate with more intelligent supply chain systems across the board from web to truck by:
- Incentivizing consumers to buy more per order,
- Optimizing fulfillment planning for minimal freight spend,
- Executing the shipment flawlessly to both meet consumer expectations and still achieve the necessary level of order consolidation to maintain a decent profit margin.
2. The days of 100% free returns all the time are slowly fading.
With the advent of online shopping, etailers have raced to simplify returns at the request of consumers, but the pendulum may have swung too far as many companies are now being challenged by a rapidly increasing return rate. Unfortunately this trend will only get worse as shippers and reverse logistics processing facilities raise rates.
The cumulative cost of returns will continue to rise as consumers become increasingly more willing to buy it, try it, and ship it back. Brick and Mortar retail will win on returns because they can drive returns to stores where they already have infrastructure. Ecommerce shippers will begin experimenting with merchandising strategies in which consumers choose between discounts with restocking fees or smaller discounts with free returns to control their margins more effectively.
3. Last mile processing will begin to affect ecommerce shippers.
The ecommerce package deluge is beginning to take a toll on rental property management as well. Earlier this year Camden Property Trust, the 14th-largest U.S. apartment operator by number of units, stopped accepting packages on behalf of its tenants. Other apartment operators have followed suit or installed systems to help mitigate the cost of managing and storing the packages.
The ecommerce industry as a whole will see some push-back from property managers that are unable to cope with package volumes. This push back will come in the form of shipment refusals or surcharges to tenants for package handling. Either action will have an adverse effect on consumer sentiment. With consumers eventually expressing outrage at fees they were charged due to poor order management by a shipper, flawless shipment execution will be critical to keeping renters’ e-business. As property management pushes back, brick and mortar retailers will double down on marketing Ship to Store programs targeted directly at renters.
4. Amazon (and everyone else) cannot operate without margin forever.
The biggest winners in ecommerce over the next couple years will be the companies that figure out how to effectively drive up order size and reduce the number of boxes they ship (or in the case of Amazon, perhaps take over control of shipping entirely). This seems fundamental, but the complexities involved are anything but trivial. Retailers will have to form scalable strategies focusing on:
- Mastering human behavior via merchandising to incentivize larger order sizes,
- Mastering supply chain network optimization via distributed order management and transportation planning to achieve maximum shipment consolidation, and
- Mastering shipment execution via advanced warehouse management to achieve flawless deliveries.
Jet.com, an ecommerce startup founded by Marc Lore (who sold his first ecommerce business, Quidsi Inc., to Amazon for $500MM in 2012), has raised $770 million in capital with goals of developing into an ecommerce company that can master all three of those critical components. Jet.com’s strategy is to incentivize larger orders through the offering of targeted discounts for additional products that can ship from the same shipper at the same time based on items in your shopping cart. Considering the company has less than $30 million per month in revenue, it is clear to see that capital markets are looking to support an ecommerce platform that intends to focus on generating profitable orders rather than simply gaining market share.
Regardless of which trend will affect your company the most, it will be critical to leverage technology at all levels of the supply chain to remain competitive in ecommerce over the next several years.