Will rising costs throw a wrench in e-commerce operations?
Last week, e-commerce providers were hit by a double whammy of negative news: a proposed hike in postal rates as well as a report indicating warehouse space remains scarce.
The U.S. Postal Service (USPS) proposed last Wednesday that traditional parcel delivery — which applies to packages weighing more than a pound — would go up 9.3 percent, while the rates for lightweight packages would rise 12.3 percent. The changes will take effect on January 27, 2019 if approved by the Postal Regulatory Commission.
Major carriers, FedEx and UPS, have raised their own delivery rates in response to USPS increases in the past. According to MarketWatch, Barclays said in a note on Amazon, “Our math … suggests Amazon will have five percent lower retail operating income from this shipping cost inflation, if we assume there are no offsetting factors.”
At the same time, The Wall Street Journal, citing a CBRE report, says warehouse availability in the third quarter reached its lowest level since 2000 due to expanding online growth. About 50 million square feet of distribution capacity was added in the third quarter, but e-commerce fulfillment operations are quickly filling those spaces.
Retailers bringing in holiday product earlier than normal ahead of proposed tariff hikes may also be partly driving warehousing challenges.
A CBRE report from early September forecast that the rapid growth of e-commerce will create demand for another 452,000 warehouse and distribution workers in the U.S. this year and next. Investing in more automation and recruiting from other industries may help mitigate labor scarcity, but the report states that site selection will become more important for the already labor-strapped industry.
“The most intelligent site selection efforts never lose sight of the fact that labor accounts for more than 20 percent of total supply chain cost and up to 75 percent in final-touch distribution. Its importance can’t be overstated,” said Adam Mullen, senior managing director – Americas leader for CBRE.
- Notice And Order Concerning Changes In Rates Of General Applicability For Competitive Products – U.S. Postal Service
- The Post Office wants to raise the fees it charges Amazon and other shippers – CNBC
- Amazon could suffer 5 percent income drop if proposed U.S. Postal Service price hikes go into effect – MarketWatch
- Warehouse Space Growing Tighter on Rising E-Commerce Demands – The Wall Street Journal
DISCUSSION QUESTIONS: Will retailers be able to offset, or will they have to absorb, higher costs related to postal rates and warehousing? How might higher operating costs and warehousing shortages affect retailers’ financial performance?
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16 Comments on "Will rising costs throw a wrench in e-commerce operations?"
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Managing Director, GlobalData
Although retail demand is strong, retailers are facing a rather toxic cocktail of costs. Labor is more expensive, trucking rates are rising, tariffs are adding more expense, and now fulfillment costs will potentially be higher.
Some, but not all of this, can be offset. I suspect most retailers will ease up prices, but will do so cautiously so as not to scare off consumers and become uncompetitive. As a result, margins will come compressed.
A further dynamic might be retailers encouraging more consumers to pick up deliveries from stores rather than have them delivered. Walmart already builds in a financial incentive for consumers to do this, and that kind of thinking will likely become more common.
Cofounder and President, StorePower
Margins in most e-commerce businesses are painfully low. This new double whammy can’t help. Given the already low margins, retailers will not be able to absorb the rise in costs, so one constituency will have to pay up — consumers. One company that may not be hurt by this is the company who’s spent 20 years convincing Wall Street that profitability does not matter …
Chief Executive Officer, The TSi Company
Global Retail & CPG Sales Strategist, IBM
I actually believe the current level of value offered to shoppers, in general, is unsustainable. Virtually all SG&A costs are rising, including labor, so retailers will either have to build these COGS into their selling prices and/or they will have to once again break out items for surcharging, such as shipping.
Senior Marketing Manager, RW3
Some large retailers will absorb the cost while most will increase shipping or basket minimums this holiday season. Once one national retailer adjusts their requirements the others will follow, similar to American announcing baggage fees back in 2008.
Chief Commerce Strategy Officer, Publicis
Principal, Retailing In Focus LLC
“Free shipping” is like free lunch, in a way — there’s no such thing. And the inflationary pressure on logistics costs is coming from several directions — warehouse capacity, tight labor markets, higher fuel costs and so forth.
But are retailers footing the bill for these costs or expecting their vendors to pick up the tab? At the college-level retailing class that I teach, a guest speaker in the wholesale business made clear that suppliers are bearing the growing margin burden for these kinds of expenses.
EVP Thought Leadership, Marketing, WD Partners
Ultimately the consumer will absorb the costs, followed closely by retailers. Reminds me of the tariffs; who do you think is going to pay for tariffs on China? No one seems to care because all boats are floating now but, at the end of the day, retailers need their vendor partners in China, just as they will need their shipping and storage partners to work with them as much as possible.
Ps: I’m sure you’ve read where Amazon has started their own shipping company and already has over 60 cargo planes in the air. Again, ahead of the game.
Founding Partner, Merchandising Metrics
There was no room in the margins to absorb any new costs. And “free” delivery is almost table stakes at this point. So purchase thresholds and attending fees are certainly targets. This is a prime time for companies to take a hard look at the mechanics of their membership programs.
Independent Board Member, Investor and Startup Advisor
Everywhere we turn there are signs of inflation from cost of products (manufactured or sourced), to shipping and wages. These will make their way to consumers in higher prices, less (deeper) discounting, and rewarding of bigger basket purchases. On the retailing side, technology will continue to offer opportunities to increase productivity and redefine what people do and what robots and embedded machine learning can do to shift labor content to higher value outputs.
For now, there’s no reason that retailers can’t judiciously pass some increases in COGS while working to offset the rest via use of intelligent technology. However, once the business cycle turns negative, the companies with healthy balance sheets will be the ones to survive and invest as they prepare for the next business upcycle — this is inevitable.
CEO, One Door
Serious question — but how many omnichannel distribution channels does the retail world need? It is only a matter of time before retailers recognize that their omnichannel supply chains are NOT a competitive differentiator and, for many of them, detract from the brand experience they are trying to deliver. I would bet on serious consolidation in this area.
Chief Executive Officer, Progress Retail
For many yes. The focus on the store increases as a centralized hub to experience brand, product, and service. E-commerce is a limited channel, especially at macro scale.
Chief Amazement Officer, Shepard Presentations, LLC
So what? Costs are going up. Like that hasn’t happened before? And it’s not like it’s happening to just one company. These higher costs impact all companies. If costs didn’t go up over time, we’d still be paying what today would be referred to as “next to nothing.”
Managing Partner Cambridge Retail Advisors
This is a great example of market forces that will drive innovation. Consumers are demanding delivery and as traditional delivery costs increase, it opens up space for disruptive technologies, tools and practices to generate new opportunities. We’re already seeing innovations around pickup, autonomous delivery, etc. starting to be explored. I suspect the short term will see some price increases/margin decreases for retailers until some of these new models can achieve scale.
Vice President, Research at IDC
Retailers will continue to absorb increasing logistics costs to take advantage of ongoing ecommerce growth. Similar to 2017 in this survey, where only 12% of shippers were willing to raise rates, speed and delivery of shipment remain prime concerns.
Retailers are betting that volume, especially during an up-market will make up for the added costs (both long term as well as short term). Those with enough margin to take a hit will continue to look for ways to reduce these costs further or share the costs across their supply chains. CEP price changes will affect all non-palletized shipping — but an interesting twist will be shipments from abroad. With recent changes in discounting from China, we’ll see added costs for Chinese goods coming into the US — a big part of eCommerce (and Amazon).