As e-commerce transforms the retail industry from a brick-bound behemoth to a fast-moving, multichannel enterprise, retailers, parcel carriers and logistics providers are devising new products and services to deliver goods faster and cheaper.
Amid a torrent of companies entering the e-tailing realm and surging sales via mobile device, innovation is taking e-commerce into uncharted territory. UPS, FedEx and Amazon, three of the main pillars of e-tailing, are rolling out new options for pickup and delivery of goods sold online. They’re experimenting with same-day fulfillment — the Holy Grail of e-commerce — and locating distribution centers closer to consumers.
All the innovating is aimed at giving consumers more choices and greater control over the online shopping experience, while transforming supply chains and forcing transportation and logistics providers to undergo a strategic rethinking.
In short, the traditional package delivery model — be there when it arrives or wait until tomorrow — could be going the way of the milkman.
E-commerce is driving growth at UPS, the world’s largest package delivery company with 2011 revenue of $53 billion. The percentage of packages delivered to residences, which corresponds with e-commerce sales, has grown from 20 percent of all UPS deliveries in the U.S. and Canada in 2000 to close to 40 percent in 2011.
UPS is sharpening its focus on its business-to-consumer segment as it looks for new ways to reduce barriers between buyers and sellers. The company’s new and existing delivery options hit on all price points, from premium, same-day services to free, three- to five-day shipping. UPS is investing in companies that offer same-day delivery services and provide convenient pickup locations for consumers who don’t want to wait.
“E-commerce has changed our logistics and fulfillment philosophy,” said Jerry Del Gaudio, vice president of corporate strategy. “We are refocused on multiple customers.”
You can’t be in retail today without an online presence, said Casey Chroust, executive vice president of retail operations for the Retail Industry Leaders Association. “It has to be a staple of your business,” he said. “Multichannel retailing is here to stay.”
In a sign of e-commerce permanence, Amazon is one of only five pure e-commerce sellers among the Top 25 on Internet Retailer’s rankings of the Top 500 business-to-consumer sellers in the U.S. and Canada. The Top 25 rankings are dominated by old-school retailers that have become adept at multichannel selling, including Wal-Mart, Staples, Apple, Dell, Target, Sears, Gap and Sony.
E-commerce sales in the U.S. topped $200 billion in 2011 and are forecast to rise to $327 billion by 2016, accounting for nearly 9 percent of total U.S. retail sales, according to Forrester Research. That represents a compound annual growth rate of 10.1 percent for 2011-16.
Consumers are choosing e-commerce for a variety of reasons, including better deals, more payment options, aggressive marketing, loyalty and rewards programs and growing use of mobile devices for online shopping.
Amazon, the world’s largest online retailer, is building fulfillment centers on the outskirts of New York, Los Angeles and San Francisco, positioning itself for expanded same-day and next-day service options. Amazon offers same-day services in 10 cities: Baltimore, Boston, Chicago, Indianapolis, Las Vegas, New York, Philadelphia, Phoenix, Seattle and Washington.
Amazon added 17 fulfillment centers in the U.S. last year and previously announced plans to add 18 more in 2012. Some of the new sites are in states where Amazon previously withheld development in spats over sales tax collection. In a dramatic turnaround, the company has abandoned its long battle with numerous states over the issue.
Amazon’s shipping costs are falling as it inches closer to consumers. Worldwide net shipping costs totaled $585 million in the second quarter of 2012, representing 4.6 percent of net sales, compared to the previous quarter, when shipping costs totaled $668 million, or 5.1 percent of sales.
Citing economic conditions, Tom Szkutak, Amazon’s chief financial officer, said in a July earnings call that Amazon has no immediate plans for a systemwide rollout of same-day delivery services. “We don’t see a way to do same-day on a broad scale economically,” he said.
Along with Deutsche Post DHL and other parcel carriers, Amazon is rolling out delivery lockers at drugstores and other locations from which customers, using a code, can retrieve packages.
There are indications plenty of people will gladly pay more for faster parcel service. Amazon Prime, which offers free, two-day shipping on millions of items for a $79 annual membership fee, is now more popular than Amazon’s Super Saver option, which offers free but slower shipping on orders of more than $25.
Online auction giant eBay has emerged as a major e-commerce player, enticing retailers such as Barnes & Noble, Best Buy, Aeropostale and Neiman Marcus to establish storefronts on its Web site. In August, eBay announced it was testing a same-day delivery service called eBay Now with Target, the second-largest U.S. retailer.
Like Amazon, eBay, has an app for mobile devices that allows customers to purchase items with a single click. In an August interview with the New York Times, eBay President and CEO John Donahoe said the company’s white-hot growth is being driven by mobile retailing and PayPal, the company’s online payments division.
More than 90 million people have downloaded eBay’s mobile app. In the second quarter of 2012 alone, 600,000 people made their first purchase using a mobile device. “Mobile continues to be a game-changer,” Donahoe told the Times.
While same-day fulfillment eventually could render in-store shopping a relic, for now it remains a premium service made expensive by inventory constraints, congestion and other challenges that make last-mile, business-to-customer deliveries such a headache. “If same-day or next-day delivery were free, everyone would want it,” Del Gaudio said. “The question becomes what kind of trade-offs exist between cost and service.”
In 2011, UPS rolled out My Choice, which provides customers with delivery alerts and options for routing and scheduling packages. At least 1.6 million customers have signed up for My Choice since its launch last October.
In February, UPS announced the acquisition of Kiala, a Belgian company that allows e-commerce customers to choose between delivery options and pickup points. Kiala has more than 7,000 pickup points in the countries where it operates, including Belgium, France, Luxembourg, the Netherlands and Spain.
UPS markets Kiala directly to retailers, who in turn provide that option to customers on their ecommerce Web sites.
UPS also has invested in Shutl, a U.K.-based Web service that gives shoppers the option of receiving their online purchases within 90 minutes — depending on proximity to fulfillment centers — or within a one-hour window on a day of the customer’s choosing. Shutl plans to debut in the U.S. next year.
In 2011, UPS introduced SurePost, a contract-based economy ground service designed for Internet retailers and other high-volume business-to-customer shippers. UPS retrieves packages at retail locations and transfers them to the U.S. Postal Service for last-mile residential delivery.
“A growing segment of our customers want free shipping, so retailers are looking for lower level of visibility and service to reduce price points,” Del Gaudio said.
Parcel is the new X factor in transportation networks with e-commerce channels, said Fab Brasca, vice president of global logistics for JDA Software. “When you’re dealing with online consumers, service is more important than ever,” he said.
Instead of treating parcel as a stand-alone element, JDA’s transportation management software incorporates parcel capabilities into a single domain that also includes business analytics and transportation management. The integrated approach gives retailers the ability to compare trade-offs in postponement and fulfillment, to manage exceptions and to understand and analyze trends.
The role of third-party logistics in the parcel-heavy sphere of e-commerce isn’t totally clear yet, said Jeff Ward, partner and vice president with consultants A.T. Kearney. 3PLs are likely to capture a big share of the non-conveyable market, which includes goods too big for parcel from retailers such as Home Depot and Best Buy. They can operate dedicated or multiclient warehouses for e-tailers, help with high volumes and leverage transportation to reduce shipping costs.
“The transportation and logistics services market is changing and is ripe for innovation,” Ward said.
To succeed as a 3PL in e-commerce requires a compelling and effective service proposition. Providers must highly automated, capital-intensive warehouses, and must possess strong last-mile business-to-customer capabilities, CEVA Logistics CEO John Pattullo said.
The growth of e-commerce and Amazon’s success have raised service level expectations across the logistics landscape. “The important thing is to have top-class capabilities and not try to force feed e-commerce fulfillment into existing logistics networks,” Pattullo said.
Amazon’s foray to the gates of New York and Los Angeles reflects the maturing of the company’s network and distribution model, said Kris Bjorson, managing director of retail distribution and e-commerce for the Americas at real estate services provider Jones Lang LaSalle. Amazon operates by far the most extensive and sophisticated e-fulfillment network in the U.S.
New e-commerce companies usually locate their first fulfillment centers in secondary hubs such as Louisville, Indianapolis, Columbus or Cincinnati, giving them one- to two-day access to major swaths of the population. As they expand, they look to secondary hubs in the Southeast or West.
Jones Lang LaSalle’s retail clients are looking for help with network design, site selection and e-commerce strategy. All of them are addressing e-commerce with a sense of urgency, if not desperation, Bjorson said.
E-commerce fulfillment differs from traditional retail fulfillment and demands different network and facility designs. A traditional 500,000-square-foot distribution center typically requires 100 to 150 workers, whereas a similarly sized e-fulfillment center needs three times that many.
Site selection criteria likewise are different for e-fulfillment. With an eye to cutoff times, e-commerce companies need proximity to FedEx or UPS hubs, while brick-and-mortar fulfillment relies on outbound trucking.
A new generation of e-commerce companies such as Gilt Groupe, Newegg.com and Fab are becoming big players in the industrial real estate market. They’re turning to real estate services providers such as CB Richard Ellis for help in transportation planning, site selection, strategic network design and economic incentive positioning, said Scott Belfer, CBRE’s senior vice president and e-commerce group leader.
Multiple factors, including labor, taxes and transportation costs, must be considered when designing an e-commerce fulfillment network. Strategic network design is an exacting science and is highly company-specific. After extensive analytical and design work, one of CBRE’s e-commerce clients recently leased a 700,000-square-foot warehouse in Columbus, Ohio, and 200,000 square feet of additional warehouse space in McCarran, Nev.
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