E-tailers may struggle to compete in logistics

BI Intelligence

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Traditional logistics providers seem poised to maintain their stronghold on the shipping and delivery industry, according to comments Frank Appel, CEO of Deutsche Post, made to CNBC.

For context, Deutsche Post is a key logistics firm in the European market, similar to FedEx or UPS in the US. E-commerce tech players, like Amazon, are “important partners” for these firms, according to Appel, but they won’t be able to challenge them, at least not in the short term. That could indicate that, for now, legacy logistics players will continue to dominate the market and see gains from e-commerce.   

Strong logistics operations are absolutely critical for retailers.

• Retailers and marketplaces must keep up with increased shipments driven by the popularity of digital buying. This is critical because fulfillment can significantly impact customer loyalty — standards for “fast shipping” are rising, and not meeting them could lead to attrition. As a result, e-tailers are increasingly reliant on traditional logistics firms to ensure that they meet customer needs, while processing larger volumes of packages.
• But fulfillment operations are expensive, which has led tech giants to look for ways to disrupt the process. Logistics costs are high, and with consumers putting an emphasis on free shipping, e-tailers are unwise to try and pass them on. In order to cut costs and better meet customer speed standards, larger firms like Amazon are investing in their own fulfillment mechanisms in order to improve the process. That’s resulting in initiatives like the e-commerce giant’s drone program and pickup locations. And it’s also pushing some of these firms to invest billions now in order to try to save later.

Appel believes that these investments aren’t enough to allow e-tailers to challenge traditional logistics providers, which could leave legacy firms with runway to continue to capitalize on growth in the e-commerce market. Appel thinks that, despite investment, these firms have underestimated the complexity of the logistics business, not realizing how tough it is to send packages or bring them back while maintaining a high level of quality. He also believes that human intervention is necessary in the process. If he’s right, that heavily favors traditional logistics firms, which have faced struggles but are seeing overall volume increases from the e-commerce boom. In fact, these providers could be poised for considerable success as e-tailers look to find a system that is affordable, can meet consumer needs, and doesn’t hit regulatory roadblocks.

The parcel delivery industry — a segment of the shipping sector that deals with the transportation of packages to consumers — is booming thanks to e-commerce growth, and players outside the industry want a piece of the pie. 

BI Intelligence, Business Insider's premium research service, has compiled a detailed report on the future of shipping that looks at efforts by Amazon, Alibaba, and Walmart to handle more of their own shipping and concludes that big retailers are well positioned to disrupt the parcel industry.

Here are some of the key points from the report: 

• Transportation and logistics could be the next billion dollar opportunity for e-commerce companies. The global shipping market, including ocean, air, and truck freight, is a $2.1 trillion market, according to World Bank, Boeing, and Golden Valley Co.
• There is much at stake for legacy shipping companies, which have seen a boom in parcel delivery as e-commerce spending has risen. Twenty different partners currently share the duties of shipping Amazon's 600 million packages a year, with FedEx, USPS, and UPS moving the most.
• Amazon, Alibaba, and Walmart have so far focused on building out their last-mile delivery and logistics services but are increasingly going after the middle- and first-mile of the shipping chain. 
• Amazon has already made major moves across each stage of the shipping journey. It launched same-day delivery service, which it handles through its own fleet of carriers, cutting out any third-party shippers. The company also recently began establishing shipping routes between China and North America.
• Walmart's interest in expanding its transportation and logistics operations is almost purely related to cost-savings. It's begun leasing shipping containers to transport manufactured goods from China and is making greater use of lockers and in-store pickup options to cut down on delivery costs.
• Alibaba has begun leasing containers on ships, similar to Amazon's Dragon Boat initiative. This means that Alibaba Logistics can now facilitate first-mile shipping for third-party merchants on its marketplace.

In full, the report:

• Sizes the market for the shipping industry.
• Explains how the industry operates in broad terms.
• Suggests why major e-commerce retailers should disrupt the space.
• Outlines the shipping initiatives of Amazon, Walmart, and Alibaba.
• Concludes how these moves might impact traditional carriers.

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