E-Commerce Fulfillment: how new tech players are bringing supply chains online
As online shopping booms and Amazon sets the precedent for instant delivery, new fulfillment players are building the tech-enabled operations for small brands to keep up.
Preface: my colleague Wendy wrote a great article on shifts we’re seeing with Commerce 3.0 here.
Covid catalyzed a market grab from the new generation of fulfillment players
2020 saw a booming e-commerce market and a proliferation of small brands, forces which drove such a surge in delivery demand that the big three logistics players (USPS, FedEx, and UPS) couldn’t keep up and were forced to impose volume caps and surcharges on e-retailers.
This created a huge market-grab opportunity for other fulfillment players to absorb orphaned volumes and for alternative models to quickly gain traction. VCs of course were quick to jump on the momentum.
At first glance, many of these “Ship*” companies seem to have similar value props (i.e. a variation of “shipping and logistics software”), however, while the fulfillment space is very overlapping/intertwined and hard to unpack, the needs of different pieces of the value chain are quite broad and the opportunity to build a unique offering and go-to-market wedge is fairly high.
The most straightforward way to segment the fulfillment sector is to think about it from the brands’ perspective and what options they have when designing their operations to physically get product to the consumer. At a high-level, brands are oftentimes evaluating a mix of drop-ship, FBA, self-fulfillment, and 3PL.
It’s worth mentioning that brands can arrange for product to be sent directly from the manufacturer to the end consumer, thereby cutting out the need for any warehousing operations. This option tends to be more relevant for specific situations — e.g. for custom products that require on-demand production, for temporary situations like new product testing or seasonal overflow, or for bulky, expensive, and/or fragile products that are expensive to store/transport — otherwise, brands will generally not use drop-ship as their sole or primary fulfillment strategy.
Fulfillment by Amazon (FBA)
Brands can fully outsource the logistics to FBA for orders sold through Amazon.com, a compelling value prop that captures 450k global sellers and grew 34% yoy in sales in 2020. However, this service comes at a big cost as Scott Galloway (NYU Professor and marketing expert) points out:
Amazon partners with companies the same way that a virus partners with a host, in that partnerships will always favour Amazon. The tech giant uses its data to promote its own private label brands, and essentially owns the consumer relationship, therefore Amazon makes it easy to sell products, but incredibly difficult to establish a brand or sustainable business.
If Amazon is a “virus”, then platforms like Shopify or fulfillment players that are enablements rather than competitors are “proteins”.
Some brands will run their fulfillment operations in-house, a strategy most likely suited for tiny, Etsy-sized makers shipping from a home/office or for very large brands that want to verticalize their supply chain.
Technologies a brand may leverage to setup self-fulfillment operations include:
- ShipHero (WMS), ShipHawk (TMS) — warehouse and transportation management softwares to be used by operations teams
- Shippo, ShipStation, Soapbox — software to manage parcel labels for traditional carriers like USPS, FedEx, and UPS
- Shipday, Shutle, Tiramizoo, Shipsi, Olo — delivery routing software to connect to last-mile courier platforms or to optimize an in-house fleet
- AxleHire, Envoi — last-mile courier fleets similar to the crowd-sourced platforms but O&O and focused on package delivery (not meal delivery)
Note that these players partner with both brands that leverage self-fulfillment and with 3PLs that are managing operations on behalf of bra
Managing fulfillment operations in-house is complex and oftentimes not enough of a strategic focus for mid-size brands, so most brands will work with third-party logistics (3PL) providers on some or all aspects of their fulfillment. The players here include:
- ShipBob, ShipMonk, Takeoff, Alert Innovation, Masonhub—the first generation of warehouse players disrupting incumbents like XPO with e-commerce-friendly warehousing networks that are owned & operated (O&O/asset-heavy) with proprietary management tech systems
- Deliverr, Flexe, Flowspace, Airhouse, ChannelApe — second-generation warehouse tech layers that provide 4PL-like services (i.e. supply chain orchestration and on-demand warehousing) by aggregating disparate warehouse spaces in a marketplace product that oversees brands’ fulfillment needs (asset-light)
- Fabric, Bond, Ohi, Darkstore/FastAF, Mlkmn, Fillogic, Lucky Labs, Via.Delivery, Saltbox — warehousing services specifically offering instant commerce solutions via micro-fulfillment services (more below)
To that last bullet, Amazon has trained online shoppers to expect instant gratification and has brands scrambling to offer two-day, same-day, or even 1-hour delivery to keep up. A major shift in the ecosystem the past few years to democratize access to instant delivery has been the growth of last-mile delivery players, especially the gig economy platforms moving from hot meals and grocery to non-food retail.
Crowd-sourced delivery platforms and the rise of micro-fulfillment
For platforms like DoorDash, UberEats, Grubhub, and Postmates it’s been a race to the bottom to provide the fastest, most affordable restaurant deliveries and these players have invested in aggressive growth to expand the breadth and depth of their networks. The leader, DoorDash with ~half the US delivery market, doubled down on suburban markets and today is available in over 4,000 cities across all 50 states, up from 1,200 cities in 2018.
As a natural progression, these players are looking to leverage their assets for services outside of restaurant meals and grocery (growth flywheel: more services = more revenue = larger delivery network = better economics = more services), including expanding their delivery platform into other CPG categories. For their Superbowl ad debut this year, DoorDash positioned itself as an “on-demand local logistics platform”.
This presents a great partnership opportunity for big-box retailers that have expansive inventory footprints via their brick-and-mortar locations and distribution centers; by turning their networks into fulfillment centers and leveraging crowd-sourced delivery platforms to do the last-mile, brands like Amazon and Target can reach consumers with same-day offerings.
However, this also creates a performance gap between large retailers and digital brands. For smaller, digitally native brands that don’t already place product inventory close to the end consumer via physical retail channels or via inhouse DCs (distribution centers) and that don’t want to rely on selling thru platforms like Walmart/Amazon, accessing these last-mile networks is cumbersome.
To help digitally native brands keep up with the Amazon-effect of instant delivery expectations, a few players have emerged to service this segment.
The first place a brand will look for micro-fulfillment services is from their existing 3PL partner. However, while instant delivery is on all of their warpaths, the larger and traditional 3PLs have not yet invested in the micro-warehousing networks necessary to offer it; players like ShipBob and ShipMonk are still two years away from offering true same-day delivery (based on our interviews). Smaller, asset-light 3PLs like Airhouse, Flowspace, and Flexe can move more quickly into this space, but it doesn’t seem to be a priority.
Alternatively, there are 3PL players whose go-to-market wedge is specifically to enable 2-hr and same-day deliveries:
- Fabric — has an O&O network of highly automated micro-fulfillment centers (MFCs); less suitable for small e-commerce brands but seeing strong traction with grocers
- Bond — started as an O&O network of MFCs but today is focused on post-purchase delivery task management (e.g. back-of-store order fulfillment)
- Ohi — has an asset-light marketplace of MFC partners that use Ohi’s WMS; works with small brands to project geo-based demand and to place inventory within their network
- Darkstore/FastAF, Mlkmn — consumer-facing platforms for instant purchases (wholesale and private label, respectively); not a direct sale for the brand
- Fillogic, Lucky Labs, Via.Delivery, Saltbox — partner with existing retail locations (shopping malls, wellness centers, small bodegas, and co-warehousing, respectively) to turn dead space into MFCs
These platforms are different from the 3PL/4PL fulfillment players because the initial value prop is not to absorb a brand’s national volumes but rather to supplement a brand’s primary fulfillment strategy with something that enables instant delivery in key markets (NYC, SF, LA, etc.). However, eventually, both sides will eat into each other’s markets, i.e. national 3PLs will have a same-day fulfillment offering and micro-fulfillment 3PLs will be able to accept a brand’s non-instant volumes.
Others will move into this space as well, but more likely from a partnership perspective. Shopify, for example, announced their Fulfillment service in mid-2019 but is still in the “early stage of development” (from their Q3-2020 financial report); while they are highly territorial around the transaction (namely, checkout/payments), Shopify will likely not block other fulfillment players from integrating with their network. And even as DoorDash’s Dashmart, GoPuff, and others move into the space, it’s unlikely that they will make warehousing a core competency.
As various players thread the needle to execute on micro-fulfillment services, the larger, adjacent players will likely seek M&A to verticalize into it.
What we look for as investors
Northzone is a global, early-stage venture capital firm investing since the mid-90s into software businesses. One space we especially like is e-commerce and e-commerce enablement, for example, we were early investors in Avito, the world’s second-largest online classified business which sold for $2.7 billion in 2015 (at the time making it one of the largest-ever tech M&A deals for European VC).
When looking at fulfillment, we’re evaluating for a few key things:
Asset-light models — while there’s a lot of control and opportunity in automating warehouse spaces, business models that provide just the tech layer are more scalable, flexible, and capital-efficient
Good margins — a given, but hard to prove early on; there should be an understanding of what components of the margin will/won’t get squeezed by other well-funded players and a proven price point for delivery plus the model-suited logic behind who pays it
Wedge in the market, including how this looks at scale; some examples:
- Instant delivery (Ohi)
- 4PL services (Airhouse)
- Cross-selling (Honeycomb)
- Complex cargo (Arta)
Strong positive feedback from brands, most notably on (a) easy onboarding that’s quick and does not require an engineer and (b) good customer experience backed by positive feedback from their consumer base.
Strategic value hypothesis — beyond what a fulfillment player can do for logistics operations, there needs to be a story that extrapolates to something more strategic, for example a data play that uses the consumer purchasing behavior to direct go-to-market decisions.
On that last point, Benedict Evans wrote a good piece asking what comes next after an industry is destabilized by software — for example in media, selling written, video, and audio content was originally about getting consumers to buy devices like books, CDs, and TVs/DVDs but then streaming softwares like Amazon, Netflix, and Spotify changed media forever, to the point that content is no longer king and the question now becomes what’s next for the media industry given it’s been transformed.
Technology…broke apart the old model and changed all the rules, but the questions about the new models are TV and cinema questions, not software questions….Doing ‘online’ properly is both necessary and hard, but your success will be determined by retailing questions, TV questions or music questions.
Unlike media, the fulfillment industry is still at the software stage of disruption and the questions we’re asking are tech questions (i.e. who can bring fulfillment operations online?). But the massive outcomes in the space will come from players that use the digital transformation of fulfillment to unlock other experiences that expand the addressable market outside of logistics.
Thank you to all the founders I’ve met the past few months in this space! And a special shoutout to my friend Cameron for WFH-ing together and listening-by-proxy to many fulfillment-related calls.