Industry Insights: How Logistics is Changing
By Simon Wu & Costanza Carissimo
Amazon’s dominance in the e-commerce space is impressive, but the impact it has had on the logistics industry as a whole is even more powerful. With the FreightWaves conference taking place this last week in Chicago, the topic of innovation in the logistics industry is certainly top of mind.
Earlier this year, I wrote an article for TechCrunch titled, “How retailers can survive the Amazon era,” discussing how all retailers need to reinvent their logistics value chains to remain relevant and fulfill new omnichannel strategies. This means the way companies have been storing and delivering physical goods to their final destination will change profoundly in the next decade.
At Cathay Innovation, we see startups across the world developing solutions for the logistics and wider e-commerce space, solving for the many challenges retailers and shippers of all sizes are facing today. Given the amount of interest we’ve received on the topic, and with industry events bringing innovation in the space to the spotlight, we wanted to dive deeper into the current state of logistics and provide our thoughts on 3 particular areas of development we believe are shaping the future of the industry.
The Logistics Landscape: Current State of Affairs
The typical logistics supply chain, covering anything from transportation of physical goods from manufacturing facilities, to last mile delivery to consumers, has become increasingly complex. Functions of the supply chain that were previously seen as separate departments, such as sourcing, manufacturing, and post-sale customer service, are becoming increasingly intertwined.
Companies cannot remain competitive unless they consider innovating across the whole supply chain, and with a focus on ensuring effective stream of information across it. But dedicated legacy tech stacks often are not up to the task, due to lack of transparency, inefficient flow of information, limited automation and inability to provide actionable insights.
This complexity is worsened by the industry wide shortage of blue-collar workers: key causes being baby boomers retiring, low-wages workers claiming disability benefits more often, tighter restrictions on immigration and the population becoming on average more educated (Source, Source). The net effect is that automation in delivery and warehousing operations are becoming a pressing need.
Competing with Amazon is difficult due to its sheer size, breadth and depth of its warehousing and fulfilment infrastructure and cutting-edge automation. Even the US’s most dominant brick-and-mortar retailer Walmart reportedly lost $1B from its e-commerce division last year as it raced to narrow the gap between itself and Amazon.
The Future of Logistics: Top 3 Areas to Watch
Companies will increasingly need to outsource specific logistics functions, such as storage, distribution, or customer service, to operators that have the necessary technology and expertise. This is true not only with under-resourced SMBs, but also large enterprises that are hindered by legacy technology stacks and internal complexities. Innovative tech startups that focus on specific pain points are well positioned to build lean and effective solutions for the whole industry.
Overall, solutions are needed to: improve visibility across the logistics chain; 2) increase speed of delivery; 3) improve cost effectiveness of storage and fulfillment.
- Improving visibility: 24/7 tracking becomes table stakes
Over the last few years, the “consumerization of IT” wave hit the logistics industry from warehouse to transportation management. That means business professionals expect enterprise software to look and feel like the consumer apps they use everyday — simple, fast and easy-to-use. But most companies’ legacy infrastructures have challenges with easy tracking or visibility into existing inventory.
Given how hard it is to implement new solutions into legacy infrastructure, both turnkey tech-enabled solutions and pure play vertical software are making inroads in digitizing the sector.
A new wave of venture backed tech-enabled solutions that marries both technology and execution such as Shipwell (freight), STORD (warehousing), and Shipbob (fulfillment) can provide an end to end digitized offering while providing the speed, reliability, and affordability that are critical for shipping operation teams. Over time, these companies can scale faster as its easier for shippers to adopt while continually iterating on their software. Incumbents such as PE-backed BluJay also offers a breadth of cloud-based software applications, providing end-to-end collaborative visibility in their freight offerings.
Enterprises that have built large supply chain teams can work well with plug and play solutions. Vertical software such as FourKites, and Project 44 have raised significant amounts of venture capital to build integrations to many of the existing vendors such as SAP and Oracle in order to scale and handle enterprise level complexity.
We see a lot of potential in this space and with companies specifically focused on building a modern stack for inventory management, and/or warehouse management, bundled with execution capacity.
2. Speed of delivery: Same day shipping will be the norm
Studies show that cart abandonment in e-commerce is predominantly driven by cost and speed of shipping. For example, Invesp’s survey concluded that 49% of shoppers say that same-day delivery makes them more likely to shop online. While two-day shipping is average in e-commerce, Amazon’s more recent announcement of one day shipping is a precursor to where the industry is being pushed. According to Invesp, over 65% of retailers surveyed expect to offer same-day delivery within the next two years.
One solution is to have fulfillment centers closer to consumers, which presents its own challenges from the amount of SKUs offered to being cost prohibitive. For reference, Amazon has 110 fulfillment centers in the US, while the leading B&M retailer Walmart has at most 20 centers. Others, like Target, are looking to retrofit stores to offer more delivery points.
Both incumbents and startups are trying to solve the problem offering end to end fulfillment solutions to e-commerce players, including warehousing, packaging, fulfillment, transportation, and reverse logistics services.
While Amazon has been offering access to its infrastructure to sellers who sell outside its marketplace via Multi-channel Fulfillment by Amazon (MCF) since 2006, others have entered the space such as FedEx who recently launched a similar service in 2017, UPS’s Ware2Go in 2018, incubated by BCG Digital Ventures, and XPO Logistics’ XPO Direct.
M&A has also been a popular way to add new capabilities in the logistics industry, such as Ryder Group’s acquisition of MXD Group to increase footprint through an addition of 121 e-commerce hubs to better meet two-day delivery requirements. Or innovative fulfillment provider Quiet Logistics who was co-acquired by Related Fund Management and Greenfield Partners. In the same space, ShipWire was acquired by Ingram Micro in 2013 and now offers a platform solution to combine warehouses within the network.
Additionally, startups like Deliverr, Shipmonk and Darkstore offer competitive or better solutions in terms of cost and speed, usually controlling supply of storage directly and outsourcing or crowdsourcing delivery.
Others have gone vertical, such as Cathay Innovation portfolio company and delivery app Glovo, who recently launched their version of a darkstore which is the size of a garage with limited inventory inside cities — but with a goal of guaranteeing 15 minute delivery. According to Glovo’s CEO Oscar Pierre, “Dark stores are a major priority for us, and we plan to open further stores in Barcelona, Lisbon, Milan and Tbilisi within the next year. Being able to deliver within 20 minutes has a massive influence on the customer’s decision. When the delivery time is short and the pricing sensitivity is low, that’s what makes people decide between going to their local convenience store or ordering from the app.”
Delivery speed expectations is going through its own “Moore’s law” now and it is an area we see a great amount of opportunity given the conflux of change needed from physical retail meeting digital expectations.
3. Storage & fulfillment: Cost-effectiveness to rapidly improve
Just like how Spotify and Netflix have conditioned consumers to a price point around $10, retailers and last mile delivery players are doing the same with shipping costs. This limits the ability for shippers to pass the costs onto consumers, thus forcing vendors to look elsewhere to cut costs.
Several new tech startups are emerging to solve the problem that legacy companies are ill equipped to solve on their own: enabling retailers to compete with Amazon, respond faster to market needs and contain rising costs.
As it becomes increasingly difficult for retailers to plan 5–10 years of needs ahead for traditional warehousing investment, be it owning their own warehouses and distribution centers or signing contracts with traditional 3PL models (3rd party logistics providers), flexible storage has become an option to save costs and expand footprint, AWS style.
Flexible, on-demand warehousing has become a good option to save costs and expand footprint, AWS-style. Companies like FLEXE and Flowspace are connecting unused warehouse space and fulfillment capacity with clients that have dynamic warehousing and fulfillment needs, creating a more liquid and efficient market while also increasing visibility into their assets. On the trucking side, companies such as Convoy and Ontruck, (my firm’s investment) is also making sure trucks are being better utilized by matching capacity to empty trucks.
As many shippers just like Walmart above grapple with creating a profitable e-commerce operation, areas including storage, distribution and fulfillment will be key areas where everyone will be focused on.
The e-commerce landslide shows no signs of slowing down: while global B2C e-commerce was estimated to be $2.3 trillion, B2B e-commerce is growing at even more head-spinning speed, and estimated to have reached $7.7 trillion in 2018 (Source).
With several technological innovations, from IoT and sensors to machine learning models and autonomous robots, that can improve and automate different steps of the logistics supply chain, we see the opportunity for startups to help this industry deliver on its innovation potential.