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.