E-commerce Logistics and Increased Efficiency – Sector Watch August 2020

Innovation is making e-commerce logistics more profitable and more efficient. What impact are these changes having on processes and customers?

Attractiveness

In 2015, global retail e-commerce sales exceeded $1.5 trillion, and, this number is projected to reach over $6.5 trillion in 2023, at which point around 22% of all retail sales will be conducted online (up from 14% in 2019). E-commerce is carried out by a range of companies, from giants like Amazon and eBay, to small neighborhood shops looking to expand their market reach (or continue generating revenue during a pandemic

Large e-tailers with big R&D budgets are building out and updating their own technology solutions to improve efficiency, margins and customer satisfaction, but innovators are developing solutions to help smaller companies compete and capture a piece of the massive and growing e-commerce pie. From order fulfillment to demand prediction, there is plenty of opportunity for innovation along the value chain.

The traditional order fulfillment model (large, centralized distribution and fulfillment centers) is failing to meet customer expectations and the growing volumes and complexities of e-commerce deliveries in urban areas.

Innovation can:

  • Create a better experience for the customer, improving the likelihood of customers completing a purchase and increasing customer retention.
  • Reduce costs of same-day and next-day deliveries and thus increase profitability of e-commerce.
  • Improve efficiency along the entire supply chain.
  • Improves margins and profitability of last-mile and e-commerce deliveries, particularly in sectors where this has historically been challenging, such as online grocery.

Scaling down, improving unit economics

A key challenge of e-commerce, particularly in sectors like grocery delivery, is to operate an on-demand supply chain, and the business models that have developed to fulfill orders faster and cheaper are:

  1. Instacart: the delivery service owns none of the inventory and contracts couriers to pick up and deliver goods as orders come in.
  2. Ocado: a traditional grocery store that has built out an entire tech platform and online grocery business, based on huge and centralized fulfillment and distribution centers, which they are licensing to other grocers.
  3. A hybrid model: localized fulfillment and distribution centers that are closer to consumers with dedicated delivery operations.

The third model is becoming more attractive, as it offers better unit economics, from lower labors costs, than the first model, and faster delivery times and lower carbon footprint than the second model.

Bond is a New York-based startup providing delivery and distribution centers for e-commerce companies. The company got started as a Tel Aviv-based online grocery delivery service called Shookit. After encountering logistical issues with this model, such as high delivery costs and delays from shipping from centralized distribution centers, the founders came up with the idea for Bond. The company’s model gives D2C brands access to an on-demand delivery network with distribution centers closer to customers, allowing SMEs to better compete with e-commerce giants and tap into a network with more scale than could be developed in-house. In January, the company raised a $15 million dollar Seed round from Lightspeed Venture Partners, MizMaa Ventures and TLV Partners to open six more nano distribution centers in the NYC metro area and expand to more neighborhoods and cities.

Fabric, also based in New York with operations in Tel Aviv, have combined micro-fulfillment centers with factory automation to move fulfillment closer to customers while improving unit economics of last-mile, on-demand delivery. Scaling down the size of distribution centers and moving them into city centers has allowed Fabric to reduce delivery times to just hours, but higher real estate prices and labor costs in urban areas negatively impacts the unit economics of delivery services. To combat this, Fabric has leveraged factory automation to reduce labor costs and increase throughput to more than what could be done in a manual factory.

Sample image of Fabric’s automated fulfillment centers
Ground robot and lift robot at Fabric distribution center

Competition

While e-commerce giants continue to dominate and leverage their vast logistics infrastructure, scale and R&D investments to offer shipping times from two days down to two hours, new business models and technologies are helping innovators carve out a piece of the pie. In e-commerce, a positive customer experience is key for customer retention, and optimizing operations and reducing costs are key to improve margins. Operating models like those of Bond and Fabric, and enabling technologies like AI and robotics, allow small e-commerce companies to provide consumers with similar shipping times as larger firms without building out the same scale or diminishing margins.

Keep an eye out for…

Continuing automation along the supply chain, autonomous driving and more sophisticated use of real-time data around inventory location, route optimization and demand prediction could change the game for e-commerce logistics. These innovations are currently being developed and used in piecemeal fashion, creating incremental efficiency improvements. More dramatic gains will be made, and new business and operating models will emerge, as these technologies are combined and used in innovative ways.

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