Will COVID plus the 2020 holiday season break the e-commerce industry? I say yes.
You would think that too much business is a good problem to have, particularly now, when COVID-19 has already dried up demand and put so many companies out of business. Homebound consumers have broken numerous records with the amount of money they spent online with e-commerce and home delivery this year. This year's Cyber Monday was the single biggest online shopping day in history. But consumer demand, in addition to the pressures that COVID-19 placed on the workforce, have overwhelmed e-commerce companies and the logistics and shipping companies that support their supply chains. Problems with logistics and shipping, particularly for small- and medium-sized companies, were already there, but COVID-19 has both strained the system and shone a light on those problems.
The 2020 holiday season is about to break the system altogether, and consumers will find out in an ugly way, when their gifts don't show up as expected. But the system has to change, and maybe this will finally force it to happen.
So much focus is placed on the digital half of e-commerce, with very little discussion on the fact that there are physical buildings and actual people that have to facilitate shipping product orders.
The industry as a whole was not ready for the impact COVID would have on the physical aspects of the business. Early on, it was inventory issues for most e-commerce companies; most of these issues were resolved shortly after China came out of COVID-related lockdown. Now that product is sitting in warehouses around the United States, the issue is more about (a lack of) labor and scalable processes.
According to eMarketer, U.S. e-commerce will grow 32.4% in 2020 over 2019 (in comparison to 14.0% from 2018 to 2019), in small part because of the continued industry growth and in large part because COVID has accelerated most consumers to purchase more online.
It has been widely discussed that the major shipping carriers have had backlog issues in their networks. Essentially, the COVID surge came so quickly that they didn’t have time to hire fast enough to meet the growing demand and COVID limited things like distance between employees, which drastically slowed processes such as unloading trucks. Profit in this business is based on efficiency, so this was a big problem.
UPS and FedEx both suspended their guarantees on their services in late March, began hiring as quickly as possible (paying a premium for their new hires and giving raises to their existing employees), and are getting closer to under control in most parts of the country leading up to this holiday shipping surge.
Many e-commerce brands use 3PLs (third-party logistics companies) to ship orders on their behalf rather than ship products to buyers themselves. The 3PL warehouses the inventory, electronically receives a copy of orders and typically then uses a major shipping carrier like FedEx, UPS or USPS (among a few others) to move the package from that warehouse facility to a customer's door. Like other logistics and shipping companies, 3PLs have been overwhelmed by COVID issues and increased demand.
Warehouse Labor Shortages
For the 3PLs, the labor situations are much worse. Many 3PLs that I’ve spoken to are paying 30% more for new hires and having to provide equivalent raises or bonuses to loyal employees. The problem is that margins are typically not high enough to sustain this and even with these higher wages, there are still not enough qualified workers available to work at these 3PLs.
Higher margin or more capital-rich companies like Amazon and FedEx have hired hundreds of thousands of U.S. workers to meet their own needs, depleting the same employee pool the relatively fragmented 3PL industry also taps into to meet their labor demand. This means that orders are sitting for days or even weeks longer than normal.
Thus, orders placed days or even weeks prior to the Christmas holiday will not make it to their destination in time. This won’t be a situation that a few brands face but one that MOST brands face.
Technology Companies
In the last few years, there have been several players who have arrived on the fulfillment scene with a lot of funding and technology-first business models. COVID-19 has meant drastic "growth" (not necessarily profit) for all the different parts of e-commerce, including fulfillment companies and solutions providers, which has attracted even more investment opportunities for companies in the space, even if they don't actually know what they are doing.
Last week, a large 3PL with multiple U.S. locations, sent out an email admitting their problems with hiring enough people and having them actually show up to service their demand. Then a few days later, management let the same customer list in on their excitement in raising a multi-hundred-million-dollar investment in an investment round for a "minority stake in the business." We've seen more emails from this 3PL, and others, telling their e-commerce brands that the brands need to "set expectations" with their own customers, and other nonsense.
Unfortunately for its customers, this 3PL, like some other relatively new but well-funded examples, has built a technology business in an industry that has to be built as a services business first – a tech-enabled service. The difference is that you have to define the operations process through expertise first rather than letting the technology dictate the process. Additionally, services businesses are most successful when managed well by people, rather than being led by technology. Until we get to the point where fulfillment warehouses are filled with nothing but robots, mechanical arms and products, fulfillment will remain a people-first business that's driven by technology. In a low-margin business like this one, if you start with technology and treat people as an afterthought, well - the human factor will throw a wrench in your profitability every time.
Investors are perpetuating the industry problem by funding “technology” businesses that are marketing well but delivering poorly. Companies like the ones mentioned here are growing rapidly but aren't retaining customers because of flawed processes and lack of adherence to their commitments. We recently helped a client leave their "catastrophic relationship" with a 3PL – saving them about $500K on $2 million in annual logistics spend – getting better service, shipping from a better location for transit times and with a more-transparent relationship with everything from customer service to invoicing. The 3PL they are leaving behind is the same one that just got a huge investment round that values the company at well over a billion dollars.
Many brands will be facing a different fate this year – their products will be trapped inside 3PLs that don’t have the people or processes to meet the ocean of demand. There will be canceled orders, a backlog of excess inventory, brand experience degradation, and on and on -- all during the critical part of the year when e-commerce companies finally see a profit. This is a disaster for smaller e-commerce brands. Customers aren't going to blame brands' fulfillment centers when their gifts don't show up in time for Christmas, they're going to blame the company they ordered from.
Larger companies like Amazon or Wal-Mart (who are both in part 3PLs) will benefit from this. Buyers will almost certainly react to delayed orders from smaller brands and smaller retailers by placing back-up orders to give to their loved ones on Christmas. Even "shop small" loyalists aren't going to be OK with not having Christmas gifts for their loved ones. This will happen not because of the retailers' digital capabilities, but because of their physical capabilities and the reliability problem that this creates.
It is time for e-commerce brands to place more emphasis on their logistics decisions. Ship Simply has built a process for efficiently identifying the opportunities for delivering products to e-commerce buyers more cheaply, more quickly and with an overall better experience for the consumer. If you need help with shipping or logistics now, or after the holiday season, or if you have a 3PL that lets you down, we can help.