COLUMBUS, Ohio — The mammoth stacks of shelves in a distribution center in nearby Lockbourne are full of Star Wars light sabers, electric-guitar T-shirts and other gadgets waiting to be stuffed into cardboard boxes and shipped to customers who have ordered the various whimsical products sold by the online retailer ThinkGeek.
The 65,000-square-foot warehouse is part of a trend already rippling through the bricks-and-mortar retail industry that promises to shake it up a lot more in years to come — the growth of online ordering.
“Online has taken market share from every sector,” said Sucharita Mulpuru, vice president and principal analyst at Forrester Research, at a seminar here on e-commerce. The U.S. online business, which generates $200 billion in revenues today, will reap $300 billion by 2016, a 50 percent growth in just three years. “Multiply that by a factor of three, and you get the full impact on the economy,” she said.
Online ordering, which has been growing rapidly in the U.S. over the last decade, is growing even faster in Europe and Latin America now, although from lower bases.
“Retailers need to figure out the best way to manage the transition to online, because we expect to see a big shakeout in the mall business over the next 10 years as retailers shrink their stores,” she said. “There will be less inventory in stores, as retailers shift to online.”
One sector that has already figured it out and is poised to grow dramatically as the online business expands further is the logistics industry, which fulfills all those online orders.
The Lockbourne warehouse that fulfills ThinkGeek’s orders is operated by Exel, the supply chain division of Deutsche Post DHL. The growth of the online business has also been a boon to the air-freight business of Exel’s parent, which owns the global air cargo giant DHL Express. The online business is one of the factors that have helped it continue to increase its global volumes even as the advent of the Great Recession in 2008 led many shippers to cut costs by shifting cargo from air to ocean shipment.
“There is a shift from air freight into ocean freight and into express,” said Frank Appel, CEO of Deutsche Post DHL. “For the middle products the benefit is going into ocean and express. Why is that? Because the customers are saying: ‘If the growth is slow, we can afford to put it on a vessel because the time constraints are not that high,’ but if they have misread the sale of the products, they then use express to recover and not run out of stock.”
At the ThinkGeek DC operated by Exel, 85 percent of the orders are domestic, and the remaining 15 percent are international. But the inventory that fills the towering shelves must first come in from overseas suppliers, which ship mostly by ocean freight to the Lockbourne facility. At this time of year, there is little danger that the DC will run short of products, which is why about 40 employees staff the automated facility today, but the workforce grows to 1,200 in the busy months leading up to the year-end holidays, when ThinkGeek’s 48 million customers place orders for its totally non-essential gifts, unless, of course, you need a light saber. Most of the U.S. orders are delivered by U.S. express delivery services like FedEx and UPS, but not DHL, which exited the parcel delivery business in the U.S. in 2008.
Whether or not inventories maintained by online or mall-store retailers are stocked by sea or air, Deutsche Post DHL is seeing the volumes it handles grow. “As the largest air freight company we have a presence in 220 countries, and as the second-largest ocean forwarder, we benefit from the ocean, and, of course, we benefit in the express business,” Appel said. “We are not just dependent on one business. We have a good balance across our entire portfolio.”
Mulpuru said the biggest trend in the retail business today is the growth of online ordering over smart phones, which are already in the hands of half of U.S. consumers. The volume of orders over smart phones has doubled in the last 10 years to more than 20 percent of all online orders. The trend is happening so fast that “[w]e don’t even know what we don’t know about mobile orders,” she said.
The shift to online order fulfillment is posing an enormous challenge to traditional mall stores, because consumers who are used to being able to buy anything they want online are turning away from traditional mall stores if they don’t have the products they want on their shelves.
Mulpuru said retailers need to embrace three solutions to keep customers coming to their stores:
- The “endless-aisle” strategy enables consumers to order out-of-stock products in store for delivery to their homes. At Macy’s and Nordstrom’s, point-of-sale ordering of products that are out of stock now accounts for 30 to 50 percent of their business.
- The “ship-from-store” strategy enables consumers to order out-of-stock items from another store than the one where they are shopping. Under this strategy, retailers locate their inventory in all stores, and every store in a retail chain becomes a DC.
- A third strategy enables consumers to place orders at their local retail outlet and pick it up there because it is convenient and the place they are used to shopping.
Amazon.com, which does not operate any retail outlets, has an entirely different strategy. It is building 80 DCs close to large urban markets around the country. “Amazon is the single biggest factor shaking up retail in the last decade,” Mulpuru said. “It has 25 percent of all retail orders. It has a bigger share of the online business than Wal-Mart has of off-line.”