Supply Chain Digest Entry: February 8, 2019 (here)
My predictions for 2019 focus on e-commerce and the changing retail landscape. Whether we realize it or not, we are living in a unique period of history that is profoundly impacting our world in several important ways.
The backdrop: today's busy consumer no longer has time to shop. People of all age groups, especially young people, are spending inordinate amounts of time on their mobile devices. Consumers order merchandise on-line with little or no thought given to what is involved to make this happen behind the scenes. With the headlong rush to satisfy changing consumer demands, retailers are abandoning rational logic to minimize loss of market share to Amazon.
The rate of change taking place in the retail landscape is unprecedented. Retailers are pushing backwards onto their suppliers for faster service levels and shared e-fulfillment capabilities to support their endless aisle offering. As such, online shopping is causing a subsequent domino effect that is impacting companies in the manufacturing and wholesale distribution sectors. These impacts are most pronounced in North America but they are beginning to also take shape in in many emerging economies.
With this in mind, I predict six important challenges for private industry and governments in 2019. They are:
- Few people realize that in 2018, Amazon surpassed Walmart in terms of their U.S. distribution footprint. At year-end 2018, we estimate that Amazon operates 141 million square feet of distribution and logistics infrastructure in the U.S. versus Walmart’s 132 million square feet. As importantly, it took Amazon only 22 years to build their empire as compared to 49 years for Walmart. Furthermore, in 2019 – 2020, we estimate that Amazon will be adding in excess of 34 million square feet of distribution and logistics infrastructure in the U.S. alone. Walmart on the other hand is retrenching and selling off rest of world assets (e.g. In 2018, Asda Stores with annual revenue of £21.67 Billion was sold to Sainsburys in the UK for £7.3 Billion). The bottom line is that Walmart will likely continue to spin off under-performing rest of world assets to better defend its core North American business against rival Amazon. In particular, Walmart will focus significant resources on strengthening its on-line grocery business to better compete against Kroger and other regional supermarket chains.
- While the e-commerce percentage of retail market share is pronounced in the United States, he rest of the world is not far behind and is in some markets it is further ahead. These are not the best of times for retail brick and mortar stores and shopping mall real estate owners, particularly in major metro markets. The traditional retail mall is in need of an overhaul and logistics will play a role in the mall of the future. Shopping malls need to be equipped with logistics hubs to support online shopping for their stores. If retailers can allocate inventory for online orders directly from stores positioned closest to their customers, then they can better compete against Amazon and other e-tailers. The shopping mall “logistics hub" can play a key role in this process by providing services such as picking up inventory at the stores throughout the day, such as packing, shipping and last mile delivery services - for all retail stores within the mall. Think of the logistics hub as a shared resource for outbound order fulfillment, last mile delivery, customer pickup and returns drop off functions. The retail mall logistics hub - its time has come.
- It seems that two-day service level is no longer enough to compete in the online shopping marketplace. With Amazon continuing to raise the bar, other retailers are now seeking ways to accelerate service levels to consumers. Hence the notion of micro-fulfillment centers that are quickly emerging across the country in the back yard of major metro markets that account for half of the US population. These fulfillment centers are beginning to blur the lines between a retail store and a distribution center. They are facilities which are small in footprint but are highly automated to minimize human labor requirements. The goal is to enable same day service levels to customers with a combination of home delivery or click and collect options. This trend will pose new challenges to an automation industry that has historically generated income from mega projects in large distribution centers located in farm fields. These micro fulfillment centers need lower cost cookie-cutter solutions that can be installed and replicated quickly with minimal customized engineering services.
- There is a perfect labor storm happening and it will only get worse. Consider these three points:
- On-line shopping is increasingly contributing to the pronounced shortage of blue collar distribution labor resources. Shipping retail units instead of master cases requires hundreds of thousands of warehouse workers and delivery drivers to fulfill and deliver the merchandise to the consumer. After all, the consumer takes care of this work when they go to the store and shop.
- The aging population will cause the US labor pool to shrink to its lowest level by 2030. Despite a projected population increase to 363 million people by 2030, the percentage of the US population aged 65 or older will increase from 14.5% to 20.3%. If most of these people retire from the labor force then this implies a proportional drop of 5.8% of the available labor pool. Imagine flipping a switch tomorrow and the unemployment rate drops by 5.8% and you get the picture.
- Lastly, consider that the forthcoming generation of young people are far more technologically advanced than any preceding generation in the history of mankind. Young people simply do not aspire to ‘work in a warehouse ‘ with so many other options to choose from.
The bottom line is that the ability to attract, recruit and retain quality labor resources will increasingly be challenged by this perfect labor storm. The implication is that there will be an explosive increase in the demand for distribution automation technology over the forthcoming decade. The US market is now moving towards population demographics that Western Europe has been contending with for over 20 years. The high levels of automation in Europe are the direct result of labor scarcity and the consequent high cost of labor. The time to pursue automation is now and not when everyone else is jumping on the bandwagon as we quickly approach 2030.
- Further to the labor shortage point, the massive escalation in online shopping is causing a corresponding increase in the demand for delivery drivers. This is putting tremendous pressure on Amazon, USPS, UPS and FedEx to support a B2C delivery system whereby the package to delivery ratio is 1:1. Amazon is now going so far as to provide financing assistance to entrepreneurs willing to start-up courier companies dedicated to supporting Amazon’s growth. By our estimates, if Amazon grows retail sales by 22% in 2019 then this will generate an additional 1.6 Billion packages in the U.S. alone. Assuming an average of 150 deliveries per driver per day, this implies an increase of over 29,000 full-time drivers required in 2019 just for Amazon. This implies an increase of roughly 60,000 delivery drivers to support online shopping in 2019 given that Amazon has roughly half of the online market share. This is a significant increase given that we are already facing a labor shortage in the transportation sector.
- Lastly, governments will be challenged with the transportation apocalypse already being created by online shopping and the projected increase in the number of delivery vehicles congesting city streets. The lure of unlimited free shipping is causing far more traffic volume than cities were ever designed to support. With projected annual growth rates of online shopping in the range of 20+%, we will effectively double the number of delivery trucks over the next five years and this is entirely unsustainable. These projections imply massive problems ahead in terms of packaging waste, traffic congestion, fuel waste and greenhouse gas emissions from trucks and cars. When cars are moving slower than a horse and cart, governments have to step in and legislate changes. As such, governments will increasingly determine new ways to divertdelivery vans away from city cores during peak daytime traffic hours. The city of London, England has already imposed multiple restrictions and fees to reduce core city traffic during daytime hours and my prediction is that more cities will start taking action to restore quality of life.
Marc Wulfraat is the president of MWPVL International Inc. He can be reached by clicking here. MWPVL International provides supply chain / logistics network strategy consulting services. Our services include: supply chain network strategy; distribution center design; material handling and automation design; supply chain technology consulting; product sourcing; 3PL Outsourcing; and purchasing; transportation consulting; and operational assessments.