Bob Trebilcock: Welcome to The Rebound where we'll explore the issues facing supply chain managers as our industry gets back up and running in a post-COVID world. This podcast is hosted by Abe Eshkenazi, CEO of the Association for Supply Chain Management, and Bob Trebilcock, Editorial Director of Supply Chain Management Review. Remember that Abe and Bob welcome your comments. Now, to today's episode. Welcome to today's episode of The Rebound: What's Ahead for Small Package Delivery. I'm Bob Trebilcock.
Abe Eshkenazi: I'm Abe Eshkenazi.
Bob: Joining us today is Alan Amling. Alan is a fellow at the University of Tennessee Global Supply Chain Institute and CEO of the advisory firm Thrive and Advance. To today's topic, he's also a former UPS Executive. The increase in e-commerce orders over the last six months shows no sign of letting up ever. For e-commerce fulfillment centers, every day is Cyber Monday, but getting orders out the door is only half the batter. After all, no order is complete until it's delivered to the customer.
A lot of the recent focus has been on the distribution center, small package delivery is also feeling the stress. What comes next? As a former UPS executive and, now, an academic doing research into e-comm fulfillment, Alan brings a unique perspective to that question. Abe, why don't you start things off?
Abe: Absolutely. Thank you, Bob. Alan, welcome to The Rebound.
Alan Amling: Thank you.
Abe: Let's start off with some straightforward questions here. First, our reliance on small package delivery has accelerated and exploded in a lot of different areas, I think, I'm responsible for a majority of it in my neighborhood. Based on the recent service, we've seen not only increases in the package delivery, but we've seen the companies that are responsible for it not only having trouble finding employees, but their stock price has obviously been reflected the additional efforts that they've been undertaking. Obviously, this is a good thing for the carriers, right? Does this last, or are we going to see a significant change post-pandemic?
Alan: Thanks for that question. Abe and Bob, thanks for having me on The Rebound. This pandemic has been so horrible for so many people around the world. My heart goes out to them and I'm cheering on, as we all are, all the health care professionals working on treatments and vaccines. At the same time, as a logistics nerd, I'm just fascinated. We're living through a real-time experiment on structural change in the economy. As a logistics practitioner and student of disruption, it's been fascinating to see how these consumers and businesses have adapted, not the least of which is to these surging e-commerce orders.
The structural transformation that's happening around the way we purchase goods has been going on since the mid-'90s. What was Amazon? It was like '95 or '96 when they started. It seems it's accelerated six years in the last six months, and it's not just consumer goods. There's been an acceleration of online grocery, prepared foods. My 83-year-old mom began ordering groceries for curbside pickup a few months ago, and she'll never go back. Post-pandemic, that change is going to continue. You think of all the other structural changes. Back in the day, the term Zoom meant that- we used it to meet, that we wanted go fast, and now it means to get on a Brady Bunch style video call in shorts and a nice dress shirt.
The streaming services gain millions of new subscribers. Just last week, I think it was Disney, was able to turn a profit while their parks were closed. Who would have ever thought that would happen? These trends that we've seen during the pandemic won't subside or go away post-pandemic. As a former employee and current stockholder of UPS, I'm very happy about the increased deliveries and the bump and stock price, but the road is still very rocky for their traditional carrier's coming out of this pandemic.
The stock prices surged lately because the carriers are- they're taking an advantage of some pricing power that they have in the market right now. While that's great, we live in a capitalist economy, and what's really interesting is going to be following what's the reaction of the retailers that have to pay that. Is it going to exacerbate them building out their own networks or finding other regional or local solutions? I love being in the middle of this, being able to look at it from both the practitioner lens and an academic lens.
Bob: Alan, your last point about retailers and manufacturers, I think it's a great segue for this next question, because, as a consumer, the first thing we look at when we go online, or many of us look at is, "Where can I get free shipping? Or, "What's the lowest shipping I can get if it's not free?" Which leads us, as consumers, to assume it must be free for the retailer and the manufacturer, and maybe it wasn't a big deal when e-commerce was 5% of their business or 7% of the business, it was kind of a loss leader, but as e-commerce is becoming such a bigger part of their business and they are now facing these delivery charges, how are manufacturers and retailers adapting to this rapid growth?
Alan: Yes, Bob, that's a great question. As the people in the industry know, free shipping is not free. What we've been seeing from manufacturers and retailers has been really cool. Retailers have been starting up or expanding their buy online, pick up in store, and curbside pickup options which had been around for a number of years with several retailers, but now, it's like masks, things that were so foreign, now kind of feel normal. They've been starting to expand ship-from-store, and that is a dramatic dynamic that's changing in the industry.
Many companies have retailers, have started ship-from-store for the very first time during the pandemic out of necessity. For big-box retailers, their retail footprint has really been an untapped e-commerce asset. Think about a retailer that, back in the day, had maybe two or three distribution centers across the country, and maybe they had a wide network of stores, but they weren't using stores for e-commerce, and now they're able to route orders to the location, either the distribution center or the store that's closest to the point of consumption.
That's becoming more and more important as same-day and next-day are starting to become commonplace. I know it wasn't that long ago that two to five-day delivery was pretty good. We all expected that. It has been so funny during this pandemic to hear my neighbors and others complain that, "Oh, my delivery is taking two days," because we're getting used to same-day. How do you do same-day from a regional distribution center? You can't. If you do next-day, you have to fly it. That's just not an economical way to go. You're seeing the companies really embrace this buy online, pick up in store, curbside delivery, or the ship-from-store.
One of the challenges, one of the things I'm looking at, is, how does that take off? How does that evolve? Because it's just not as efficient picking items for e-commerce from stores, because stores weren't built for e-commerce fulfillment, they were built for us as consumers to go in and buy. It'll be interesting to see how that evolves. It'll be interesting to see 3PL's, whether 3PL's start to tap into that opportunity to work with retailers and ship-from-store. In terms of manufacturers, you're seeing more direct-to-consumer and that's coming in a few different ways, so retailers that have had to offer a wider selection of goods are offering a lot of goods that are only available online and there are dropshipping direct from the manufacturer to the consumer. Then you have companies like P&G. I'm really fascinated looking at these CPG companies like P&G and how they're expanding their direct-to-consumer sales, yet Unilever purchased Dollar Shave Club last year. Clorox is making inroads to that market. They just bought a company called Nutranext, which is a wellness company. Once these big brands start getting expertise and going direct-to-consumer, it'll be interesting to see if it goes to their core items as well.
Today, who wouldn't buy a subscription Clorox offering if they could get privileged access to Clorox wipes? Then you have all of the brands like Warby Parker and Casper mattresses. We're just getting more comfortable as consumers buying these types of items online. I heard today on CNBC about people spending a million plus on paintings and classic autos through virtual auctions. Who would have thought that that would happen? It's been fascinating to see and how these manufacturers and retailers are adapting to the digital economy.
Abe: Now, Alan, you're bringing up some really excellent points. Not only on the various products that consumers are now comfortable ordering online and having delivered online. You talked about autos. Very few individuals go to an auto showroom anymore. They pick the car up and they have it delivered. The direct consumer seems to as you identified through- your grandmother is a great example, much more comfortable, much more at least confidence that I'm going to get what I want in the manner that I want it at a price that I want it.
How has ship-from-store in this hyper-local fulfillment- how does this impact the carriers? The small package carrier is when you're starting to see, in some respects, fragmentation of a logistics industry and trying to get consolidation again from 3PLs. What does this look like?
Alan: There's a short-term and a long-term story here. The short-term, it's been a good thing for carriers, but it's been what I call the "chocolate ice cream problem." I love chocolate ice cream, and even though it's not good for my waistline, one or two a day, I love it. It's great. By the time I've had my fifth chocolate ice cream cone, I'm feeling a little sick. That's what's happened to the carriers a little bit. Too much of a good thing. We saw companies like FedEx began to limit the number of items being shipped from cold stores. Short-term, that's been good. Longer-term, it will be a challenge.
The reason having these hyper-local fulfillment centers which-- When we talk about that or whether it's ship-from-store, it is fulfillment centers that are actually in the population centers, so they're all local deliveries. It allows you to easily do same-day and next-day delivery. Instead of a company that needs a national network, you can use local providers. That's going to be a challenge to this small package carriers because local contractors and gig workers are much less costly. It gets to this idea of same-day delivery. If that takes off, you're going to see more of a push towards ship from store on these hyper-local fulfillment centers, because if it's a competitive imperative, that's really the only way you can economically do it.
Again, you can't do it from a regional distribution center for same-day, and for next-day, it's just very costly. The flip side of that is, you're going to be paying more in inventory because you're going to be duplicating inventory in more locations. It's going to be evolving and it's going to be very context-specific to the individual retailer. If we do see same-day take off, and my suspicion is that it is going to become more of a standard because you've already got Amazon pushing it, Walmart Plus, which is going to be rolling out, is going to have same-day delivery of consumer goods and groceries as a standard part of that offering.
Right there, between those two retailers you've got 50% of e-commerce in the United States. That is going to be the bar that people are going to have to meet. The small package carriers were built for that. The issue that they have is being a victim of their own success. They have these highly efficient route-based networks. What I mean by that is these, like my alma mater, these brown package cars, they leave the delivery centers full in the morning of deliveries and they come back at night full of pickups. UPS and FedEx do such a good job of optimizing those networks, but they're not conducive to the in and out that's required for same-day delivery. Those are really geared towards contractor and gig economy network. It's part of what I was talking about. This structural shift is really rocking the logistics world, and its small package carriers are going to be part of that disruption. It'll be interesting to see how they're able to adapt themselves as that change takes place.
Bob: Alan, this is a great conversation. I'd like to extend that point just a little bit more. You and I talked when we were getting ready for this that-- I've been talking to a lot of these startup platforms that are trying to- they're focusing on those low-cost couriers, the gig economy workers who want to go out and work four hours a day and make delivery. They're going to create an Uberlike platform, to go to the stores and that. It doesn't seem as if the UPSs and the FedExs and the DHLs of the world are set up to do that, go to the store, pick up a bunch of stuff, and deliver it in a neighborhood and then go pick up some more. How are they going to compete?
Do you think they're going to specialize in what they've always done, which is doing great, getting it across the country, doing, let's say, next-day, and the same-day goes to the gig workers, the local couriers, the platform through creating this, or do you think they're going to have to come up with some kind of a service to compete with that, to do same-day?
Alan: Bob, I think this is the challenge that the carriers are going to be facing. They are not set up to do ins and outs. Their networks are built around the ability to consolidate packages, which has been the traditional efficiency lever. They've been able to pull with great success, but same-day throws this on its head. If you look at carriers, you could see potentially FedEx adapting to this because they've got a non-union workforce for their ground delivery. They may be able to adapt that to this new reality of same-day shipping. I think it will be a little more difficult for UPS, with team drivers, it's not that they couldn't do it, but it would be very difficult to make that cost-effective.
I think you're seeing the carriers doing some great things in terms of investing in automation and robotics. They are still optimizing a route-based system that is not conducive to same-day delivery. Some of the companies that we were talking about that are providing this hyperlocal fulfillment, companies that are stored in flex. UPS has a joint venture called Ware2Go that is doing this. You've got Dematic and others that are building these highly automated utilities, automation for very tight spaces for urban deliveries. That's going to drive this new generation of last-mile delivery solutions. That isn't going to be the sole area controlled by the traditional small package carriers.
It's really going to democratize small package delivery. We're going to see many more players, regional players in this area. Really, the differentiating factor is going to be which company can use AI and machine learning to coordinate these delivery assets and make them efficient, because right now, it is a necessity, but no one's making money on same-day shipping. That's something that's just going to have to change over time as this goes from exception to commonplace.
Abe: Alan, those are great points. Let me ask our final question here. We've seen retailers like Amazon, Walmart, Target, they're all getting into the logistics space right now, but they're also significant customers of the package carriers. How does this dynamic play out in the next few years?
Alan: What you're seeing is, retail supply chains are moving from cost centers to strategic investments. In the first half of 2020 alone, you saw Costco spend a billion dollars for middle and last-mile carrier Innovel solutions. That was the former Sears Logistics, and they do a lot of heavy goods. Home Depot opened a dozen last-mile facilities. They're planning for 100 more. Target, their e-commerce sales in the first quarter, rose 141%, and they're leveraging Shipt, S-H-I-P-T, which is the same-day delivery company, they acquired a couple of years ago.
As we talked about earlier, Walmart has been expanding ship-from-store. I think they're expanded over 2500 locations, and of course, the elephant in the room is Amazon. Amazon made up about- I think it was like 12.6% of UPS revenue in 2019, and according to Morgan Stanley, Amazon Logistics is already delivering nearly as many packages per year and is projected to grow pretty rapidly through 2022.
This creates interesting dynamic, because all of these retailers are still great customers of the carriers, and it's creating an interesting dynamic. When I was in corporate strategy for UPS, I never lost sleep over FedEx. FedEx is a fantastic company. They really are up and down the line, but I knew that if they invested $1 in logistics, they had to make $1 in logistics. That's just not the case with Amazon, with Walmart, with Target, with Home Depot, with Costco. These are paying industrial companies. They are multiple revenue streams. It's a very different animal.
You think about trying to compete against a company in your core business that doesn't have to make money, and they make money in different places. Amazon is obviously the champ of that. I actually first saw this phenomenon a couple of years ago. I was looking at logistics in e-commerce in China. I did a paper with Patricia Daugherty, from Iowa State, and we were looking at China and saying, "China, the e-commerce penetration is double what it is in the US. The urbanization issue is much greater in China. What are they doing right now to service their e-commerce deliveries, and could that be a harbinger for things to come in the US?"
One of the really interesting findings at that time was that the biggest investors in logistics in China were not logistics companies. They were retailers. They were companies like Alibaba and JD.com. What they were showing is that the industry was changing from an industry where if you control the assets you win to an industry where if you control the customer you win.
In China, a lot of the traditional logistics companies are subcontractors to the retailers. Fast forward a couple of years to what we're seeing in the US with all of this investment in logistics from retailers, you're seeing a very different kind of logistic structure. We're in early days, but you're starting to see a very new logistic structure form, and it will be fascinating, and I love where I'm at, at University of Tennessee, because we dig into these problems and challenges every day, how is the traditional logistics industry going to respond to this because times are changing.
Abe: I think you've brought up some really excellent points for us to consider. We can continue this conversation for a couple more hours, but that is all the time that we have today. Alan, thank you so much for joining us today. For our listeners, we hope you'll be back for our next episode. We look forward to seeing you then. I'm Abe Eshkenazi.
Bob: And I'm Bob Trebilcock.
Abe: Stay safe and healthy, everyone. Thank you.
Bob: The Rebound is a joint production of the Association for Supply Chain Management and Supply Chain Management Review. For more information, be sure to visit ascm.org and scmr.com. We hope you'll join us again.