How e-commerce companies are changing the logistics business
In a trend that started a decade ago, global e-tailing giants such as Amazon, Alibaba and eBay continue to make bold forays into logistics. The e-tailing landscape is replete with examples. eBay bought UK-based courier service Shutl in 2013 in an attempt to expand its same-day eBay Now service using Shutl’s infrastructure and IT. Amazon Fulfillment Services signed a deal with Air Transport Services Group (ATSG), the world's largest owner and operator of converted Boeing 767 freighter aircraft, to operate an air cargo network.
Closer to home, Alibaba spearheaded the establishment of Cainiao Network, a logistics data platform company comprising China’s top logistics firms such as S.F. Express and Shentong Express in 2013. According to company information, Cainiao processes more than 70 percent of all packages delivered by China’s logistics industry, or more than 33 million packages a day. Cainiao Network offers same-day and next-day delivery across nearly 700 cities in China.
Steven Li, director of strategic partnership of cross-border logistics, Cainiao Network, says: “There were hundreds of smaller logistics players and we stepped in to streamline the process.”
What is compelling e-tailers to move into logistics?
The Asian consumer wields a buying power that cannot be ignored. For the first time, retail e-commerce sales in Asia-Pacific garnered a majority share – 52.5 percent – of global digital retail spend in 2015, while e-commerce sales in the region saw an almost 35.7 percent jump from 2014.
A middle class with a voracious consumerist appetite – particularly in countries such as China, India and Indonesia – an exploding mobile phone penetration rate and a pervasive social media culture has led to increased online shopping. According to estimates by Temasek and Google, the e-commerce market in Singapore alone is expected to be worth US$ 5.4 billion by 2025.
The immense growth of e-commerce opens up new opportunities for e-tailers that are savvy enough to seize them.
Logistics as a source of competitive advantage for e-tailers
It is inevitable that e-tailers want a fairly high degree of control over logistics as it is an extremely vital part of their business, both from a cost and a customer experience standpoint.
According to Dinesh Khanna, senior partner and managing director at Boston Consulting Group, e-tailers are faced with two choices – to either orchestrate the logistics and fulfillment through third-party players or to do this on their own.
Khanna says: “Driven partly by the realisation that this is a critical source of competitive advantage and by the lack of logistics players who can fulfill their needs, e-tailers are getting into logistics and trying to take control of critical bottleneck assets such as warehouses.”
In terms of the strategy to deploy, different e-tailers are choosing their own paths to profitability.
Cainiao Network espouses the partnership model (as opposed to self-owning the delivery system) in order to control costs and increase geographic coverage. This allows the company to draw on partners’ resources such as manpower, warehousing and distribution, without investing in these all by themselves. It also helps Cainiao Network and Alibaba to scale up overnight during major sales events, such as Singles Day, an annual online shopping event in China. Such a scale up is possible due to the geographic reach of their partners. Without such strategic partnership, this would be almost impossible for e-tailers to implement solely on their own in countries as vast as China.
In a different industry, HappyFresh, an Indonesian grocery e-tailer is deploying an asset-light model, relying heavily on partnerships with local supermarkets instead of investing in infrastructure. Since the grocery e-tailer doesn’t have any warehouses and fulfillment centres, pickers collect groceries from local supermarkets to deliver to customers. Such a strategy keeps infrastructure costs in control and allows the company to invest in attracting customers through gimmicks such as discount coupons.
This is in complete contrast to grocery e-tailer Singapore-based RedMart that is investing in warehouses and delivery trucks. Likewise, Singapore-headquartered e-tailer Lazada has an aggressive expansion strategy that entails investing in warehouses across the region. The Southeast Asian retailer currently has 10 warehouses and expects to have a total of 20 warehouses over the next few years.
Investing in their own warehouses allows RedMart and Lazada to better control of the supply chain, from procurement to final delivery, thereby allowing them to control costs and improve customer experience.
How should traditional logistics companies respond?
E-tailers have brought the competition to the backyard of traditional logistics players. “Traditional logistics companies have to be prepared for a world where, possibly, they are only responsible for functioning as a low-cost channel of delivery and leave customer acquisition and experience to the e-tailers,” says Khanna.
To operate in this world where they are facing pressures on all fronts, it is imperative that traditional players cut costs and innovate constantly.
Khanna explains: “The overall profit pool in the industry will increase – driven by volume growth in the region – but the pressure on profit margins will also increase as e-tailers relentlessly drive down costs. Indeed, the overall share of logistics-only players may well decrease as a substantial amount of the new growth is captured by e-tailers’ captive fulfillment.”
Companies such as TNT Express (now a part of FedEx) are relying on a digital transformation to improve efficiency and cut costs as well. Raja Ramachandran, regional digital marketing manager – Asia, Middle East & Africa, TNT Express, says: “We are creating a range of digital tools that not only allow our customers to book shipments and track these online, but also enable us to leverage the power of digital data to report, analyse, and help organise data better and avoid costly mistakes.”
Indeed, a study by CapGemini Consulting states that “97 percent of shippers and 93 percent of 3PLs agreed that improved, data-driven decision making is essential to the future success of their supply chain activities and processes. “ Given this reality, traditional companies need to keep a digital transformation at the centre of their strategy.
Some traditional players have chosen to respond with an aggressive plan to capture e-commerce growth. Singapore Post (SingPost) started vPost in 2003, a delivery service that allowed consumers to shop from US websites that do not accept international orders. In 2013, it took its e-commerce strategy a step further with SP eCommerce, a complete one-stop e-commerce solution for businesses that includes creating and maintaining web stores for global brands to managing warehousing and delivery, leveraging its existing network.
Equally important is improving customer experience to stay competitive by investing in initiatives such as reverse logistics and improving last-mile access for the customer. UPS Access Point is one such example of an efficient delivery and a returns management model. The model allows consumers to pick up parcels – or return a parcel – from a retail outlet such as a newsagent or grocery store. The company has partnered with Shell, giving customers anytime access through 7-Eleven outlets at its petrol stations across Singapore. This partnership also gives the company a cost-efficient way to deal with missed deliveries.
For industry clients, improving customer experience requires bespoke solutions such as DHL’s strategy to offer completely sanitised rooms for the life sciences industry and specialised infrastructure for aerospace operations at a new Singapore facility, the Advanced Regional Center. Other examples of such solutions include customised storage solutions for managing service parts for technology customers.
Leveraging emerging opportunities
At the same time, smaller logistics players – startups – have been quick to step in and take advantage of the fragmented logistics landscape in Asia. Last-mile deliveries and pickups for e-commerce companies in the region is one such market opportunity waiting to be grabbed.
Cainiao’s Li says: “We expect that there will be a growing segment of logistics companies that will cater just to the e-tailers.” And this is what startups such as Singapore-based Ninja Van are doing.
With multinational logistics players facing competition from innovative startups as well as e-tailers expanding into their space, they will need to step up to handle the scale, sophistication and geographic coverage demanded by e-tailers and do all this under a very different cost structure.
With Amazon working on a ninth generation drone prototype for deliveries that could potentially solve the last-mile problem, it looks like the industry is bound for a rocky yet exciting ride.