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Pay Close Attention to the Rising Costs of Online Customer Fulfillment



 The added costs for fulfilling online orders are likely to increase over the coming months because of the current boom in overall demand for large-scale distribution and warehouse space across the United States as well as other regions.

Reuters reports that real estate investment trusts (REITs) that weight their portfolios towards warehouse and distribution real estate holdings have now become the favorite of Wall Street interests because of the current pent-up demand for additional space from retailers. The report specifically mentions logistics real estate services provider Prologis, which counts Amazon as its largest customer, as raising rents a record 20 percent in the first three months of this year. The report cites Morningstar data as indicating that fund ownership in real estate investment firms such as Prologis and Duke Realty Corp. has increased 30 percent or more in the last quarter.

The trend was further reinforced by a recent announcement from the world’s largest commercial real estate services and investment firm, CBRE Group that indicated that- “Voracious global demand for e-commerce fulfillment centers fueled a 2.8 percent year-over-year increase in prime logistics rents globally, led by double-digit percentage gains in U.S. coastal markets.”

According to a recent CBRE report, six of the top 10 markets with the fastest growing prime logistics rents globally were within the United States. Among what CBRE ranks as the Top 10 Global Logistics Hubs by Prime Rent Growth:

  1. Oakland
  2. New Jersey
  3. Inland Empire
  4. Midlands, United Kingdom
  5. Santiago Chile
  6. Ciudad Juarez Mexico
  7. Los Angeles- Orange County
  8. Dallas- Fort Worth
  9. Seoul South Korea

The Wall Street Journal recently published an infographic indicating current areas of warehouse space under construction across the U.S… That mapping indicates the largest double-digit increases in construction of warehouse space focused in the Dallas-Fort Worth and Houston areas, Los Angeles and Inland Empire, Chicago, Atlanta and Greenville/Spartanburg SC areas.  From our lens, that data would indicate broad geography coverage for online fulfillment needs.

And, cost increases are not just confined to warehouse and distribution space.

We have brought reader attention to increasing rate increases by the major parcel transportation and delivery firms, including added surcharges and handling fees. As consumers continue to purchase online items that are larger, more bulky and heavier, there has been increasing demand for logistics delivery services. That is providing opportunities for traditional less-than-truckload (LTL) carriers who are increasingly being called on to provide additional delivery services to support online purchases of hard line goods. This will likely require some LTL providers to invest in augmented technology and logistics assets, which will add to rates charged.

As we have further highlighted, the largest high profile retailers such as Amazon and Wal-Mart continue to aggressively invest in more internal and owned resources in augmenting their own parcel transportation, logistics and last-mile delivery networks under the banner of premium, free shipping services. That is obviously part of the reason for the current building and investment boom underway. A continued competitive battle fueled by multi-billion investments adds to the supply-demand imbalances and speculators to drive up costs further.

However, other retailers with limited financial resources are now faced with the realities of even more increasing cost challenges associated with online customer fulfillment. No doubt, something will have to give.  Either retailers will become more creative in prime, no-cost free- shipping membership programs that can offset the effect of added fulfillment costs or the largest retailers with financial scale will become more dominant retail fulfillment platforms.

Our takeaway for retail and B2C focused supply chain organizations and procurement services teams is to up your game in supply chain network modeling and strategy implications.  Insure that you factor the real possibilities of more added costs in distribution, logistics, transportation and inventory carrying costs. The coming months may well be very challenging, including the upcoming 2016 holiday online fulfillment surge which will more than likely test limited capacity in certain key areas, forcing teams into more costly alternatives.  Be wise, be pro-warned, and conduct rigorous scenario based planning.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


An Online Retailer Reinventing Post Luxury Goods and Tapping New Consumer Buying Sentiments


We recently ran across a commentary outlining the efforts of a rather innovative, Boston based online retailer of luxury class goods, who’s CEO indicates that serving a need in an underserved market segment can be accomplished with the combination of leveraging innovative sales practices, advanced technology and a modern supply chain.

The Bloomberg Businessweek article, Satisfying the Fetish For Italian Shoes, describes the efforts of M.Gemmi, a 15 month old online retailer addressing a challenging and lucrative market that has struggled to reinvent itself. The mission of this B2C online retailer is to sell beautiful and well-constructed high-end footwear without the luxury price tag in what the CEO describes as a “post-luxury” online business model to addresses a new shift in consumer attitudes toward luxury goods..

Citing the Bloomberg descriptor of capabilities:

Armed with a team of data scientists, 15 Italian factories, and $32 million in venture capital, Boston-based M.Gemi wants to shake up the luxury shoe market much like Brooklinen unmade the posh world of 1,000-thread-count bedsheets or Warby Parker upended the business of fashion eyewear.”

This online retailer offers shoes that generally retail from anywhere from $500 to $2000 in price offerings from traditional luxury goods retailers to M.Gemmi prices ranging from $128 to $498.

To accomplish this goal while meeting financial performance needs, the two co-founders invested a year in developing relationships with smaller, family-run Italian cobblers, most of who had been abandoned by other luxury goods retailers in favor of cheaper, Asian based suppliers. Somewhat similar to apparel and fashion goods retailer Zara, new and different shoe styles are introduced each week and retired after three months. According to Bloomberg, the online retailer’s design staff can move from sketch to sale in 60-90 days. Further, production is continually calibrated to match customer product demand by closely monitoring buyer responses to various footwear designs.

The article notes:

Within three hours of going live with its line of summer espadrilles in April, it knew the slip-on style was a hit but the lace-up version was a dud. So it revved up production of one and dialed back the other.”

From our Supply Chain Matters lens, that is a good example of responsive retail supply chain capability.

The firm’s talented CEO, Ben Fischman, is no stranger to the apparel and footwear industry, having founded retailers Lids and Rue La La. He indicated to Bloomberg that current online consumer demand has exceeded initial projections, with M.Gemmi expected to reach $60 million in revenues this year. Once more, the online retailer’s customer count has grown 500 percent in one year with half of those customers being repeat buyers who spend an average of $1000 per year.

While primarily focused on a U.S. based online market, Fischman indicated to Bloomberg his belief of the need to have presence in all retail channels with the retailer now looking at potential expansion into Europe and Asia, as well as the opening of two pop-up style physical retail stores in New York and Los Angeles.

We wanted to bring M.Gemmi to Supply Chain Matters reader attention because it manifests the new style of retail leadership, one that balances addresses underserved market segments with integrated product design and supply chain wide responsiveness capabilities. Notice also that the emphasis is not solely on growth and scale, but rather growth in conjunction with existing and future business process and supply chain response capabilities.

Bob Ferrari

Amazon Reportedly Shopping for an Airport

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Since last November, Supply Chain Matters has highlighted developments indicating how Amazon is rolling out a strategy for managing and controlling its own logistics, transportation and customer amazonfulfillment capabilities. They have included the long-term leasing from ATSG of dedicated air cargo aircraft, Amazon branded semi-trailers and advanced logistics sortation facilities.

Now social media and industry outlets are echoing a report from a German-language newspaper indicating that the online retailer may be negotiating a deal to buy the Frankfurt-Hahn Airport in Germany.

The focus of these reports emanates from a German language daily, Sueddeutsche Zeitung. A Tech Insider posting echoing this report indicates that the German report did not indicate what the discussions might have been about or how recently they occurred, but that three airport acquisition offers from unnamed parties were made for the airport. A posting on Geek Wire added that the subject Hahn airport is located near Koblenz where Amazon currently owns a large fulfillment center.

We would add that is the same pattern demonstrated when Amazon initially executed the lease of air cargo aircraft from ATSG last fall, electing a U.S. airport that was close by existing large Amazon customer fulfillment centers. Further, a published Seattle Times report in January indicated that the online retailer would begin competing directly with longtime partners United Parcel Service, FedEx and DHL in Europe, with pieces falling into place to make such competition a potential in the U.S. as well in time.  That report might have indicated that Europe would have been the initial target.

Thus, if or when this potential acquisition of a European based airport does come to pass, it will be another stepping stone toward rolling out a global customer fulfillment capability totally managed by Amazon. Whether its Hahn airport, or another opportunity, the signs point to an active investment and deployment strategy underway, and online retailers and producers had better pay attention.

A Sobering Declaration by Alibaba

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At the conclusion of its fiscal year ending in March of this year, Chinese online retailer Alibaba declared this week that it has officially become the world’s largest online retail platform with trading volume exceeding 3 trillion yuan ($475.9 billion) according to a report from China Daily.

While the online retailer apparently did not formally disclose what is termed as total gross merchandise value (GMV) for the recently completed fiscal year, it did reveal that its online retail marketplace platforms have already surpassed the 3 trillion yuan milestone.

The report makes a comparison to Wal-Mart’s $482 billion in total retail revenues for its latest fiscal year, and that in 13 years, Alibaba has demonstrated that world’s largest retail marketplace has shifted from physical brick and mortar (offline) to online.

Just for comparison sake, Amazon’s 2015 revenues amounted to $107 billion.

Whether readers agree or disagree with this comparison, the report does provide a sobering indication of the scale of China’s online marketplaces in 2016.

Alibaba has set its sights to be a business platform serving 2 billion consumers by 2024, not to mention demonstrating leading-edge big-data and predictive analytics capabilities.

They are an online provider to be watched and admired and one that will continue to make news in the months to come.


China Based Cainiao Secures Investment Funding for Strategic Investments

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Prediction Nine within our 2016 Predictions for Industry and Global Supply Chains (Available for complementary downloading in our Supply Chain Matters Research Center) predicts that online customer fulfillment providers Alibaba and Amazon, by virtue of playing the role of industry disruptor, will expand their presence in direct customer logistics fulfillment. Of late, we have featured a number of commentaries pointing to evidence that Amazon has initiated efforts to be its own air cargo provider as well as efforts focused in last-mile logistics fulfillment. We would be remiss without amplifying efforts related to China based Alibaba.

This week, Tech blog Tech Crunch featured a posting concerning Cainiao, the noted under the radar logistics fulfillment arm of Alibaba, specifically efforts to secure new external funding to expand its logistics capabilities.  Alibaba itself has a business model that does not include holding inventory, and that is where its logistics arm provides such capabilities. Specifically, while any details of the funding have not been publically disclosed, Tech Crunch indicates the external funding round involved four Asia based investment firms and further cites Caixin, an Asia financial news site as indicating an estimated funding round of upwards of 10 billion yuan or $1.54 billion. Alibaba has already recorded the largest U.S. IPO in history, and its current reported $7.7 billion valuation provided leverage for Cainiao to secure funding. Reuters reported that is Cainiao’s first funding round since Alibaba founded it three years ago. Bloomberg in-turn reported that the company is angling toward a public offering to bankroll its expansion, envisioning the ability to support daily package deliveries of 200 million.

What should be of more interest is the context of a cited interview among Cainiao President and Freight Week last year indicating a long-term plan to invest $16 billion over the next 5-8 years to deliver goods not only in China but also worldwide. Tech Crunch observes: “Further, Cainiao’s efforts to build a global network are aligned with Alibaba’s own focus on growing its retail network outside of China.”

Obviously, upwards of $1.54 billion in financial resources can provide the means for for a lot of additional logistics and fulfillment capability investments as well as strategic partnerships with other global transportation and logistics players. China is a huge country with significant logistics challenges needing to be overcome but Cainiao has already proven that it can meet a significant fulfillment surge as witnessed by last year’s Singles Day holiday fulfillment event across China. Thus, Supply Chain Matters anticipates that some of Cainiao’s investments will emphasize broader global logistics support.

There have also been multiple media reports indicating that Alibaba itself is seeking $3-$4 billion in additional funding from external Asia based and other banks to fund further expansion of operations.

Couple Alibaba and Cainiao investment resources with Amazon’s ongoing efforts as transportation and logistics industry disruptor and our prediction has already taken on significance. As we declared, the industry dynamics of B2C online customer fulfillment are about to change.

Bob Ferrari

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