TI Goodman White Paper may 2012 -...
Transcript of TI Goodman White Paper may 2012 -...
E-retailing Project
E-retailing - An Exciting Opportunity for the Logistics Sector
May 2012
Goodman E‐retailing Research Report
2
©May 2012 Transport Intelligence Ltd
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Ti / Goodman White Paper May 2012
1
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 2013. 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 2015. 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 2015. 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 2015.
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.
Transport Intelligence | May 2012
© Transport Intelligence Ltd
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 | May 2012
© Transport Intelligence Ltd
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.