Wednesday, February 8, 2012

Online shopping logistics "enduring growing pains"

A good article from our CEO, John Manners-Bell:

The internet retailing revolution has brought enormous benefits to the global express and logistics sectors. The online shopping market now accounts for almost a fifth of all purchases in some developed markets, and is growing at anything between 15-20% a year in Europe and the US and around 75% a year in China. Fortunately for the logistics industry, the online shopping model means that consumers' trips to the shops are being substituted by delivery direct to the home.
However at the same time, the market is enduring growing pains of many different types. Take China for example. The express and logistics industry has just not been able to keep pace with the growth in demand. Quality has become a critical issue, with delivery deadlines across the holiday season being missed. This undoubtedly will slow the take up by Chinese consumers.
The economic shift towards consumption rather than export driven production seems to have caught the Chinese logistics industry by surprise. The domestic sector is primarily serviced by local players without the systems or maturity to cope with the growth. In addition to this, the high level of fragmentation has made the market hyper-competitive, a factor, along with an uncertain regulatory regime, which led DHL to withdraw from the domestic market last year. Turning the massive growth prospects into tangible profits has proved to be elusive.
It is not just the logistics service providers which have faced problems in China. There has been speculation in the press that Foxconn's online shopping website is on the verge of shutting down. With 30% of customers located in rural areas, the company has been losing money on each delivery.
Alibaba – which owns the dominant player in the market, Taobao – has responded to the lack of supply side provision by establishing its own logistics operation, investing $4.6bn. Jingdong, the second largest player, established its logistics operations in 2009 and has recruited more than 6,000 people delivering in about 180 cities throughout the country. According to figures published by the State Post Bureau of China, each Chinese consumer ordered an average of two items for express delivery in 2010, half the global average of 4.1 and far behind the 26 items ordered by each US online shopper. The incentive to overcome these problems is obvious.
In the US a different challenge to the industry has arisen, one which will have a fundamental impact on online retailers' distribution strategies.  In the past, many distribution centres' locations were driven by factors such as access to transport infrastructure, ports, airports as well as proximity to consumer markets. Now there is another factor to take into account: state taxation policies. It seems that although one part of local government may be trying to attract giant logistics sheds to their vicinity (not least because of the employment opportunities they bring), state tax collection agencies have a very different focus.
For example, tax collectors in Arizona have just handed internet retailer Amazon a $53m bill for uncollected sales taxes. Amazon has stated that it intends to fight the case vigorously. The argument revolves around where a transaction can be considered to have taken place and whether this can be considered to be at the site of order fulfilment. In the case of Arizona, Amazon has four distribution centres, positioned to take advantage of the good links with the West Coast ports. Amazon clearly does not believe it should be taxed wherever it has distribution centres, instead lobbying for a nationwide tax regime for online retailers to be established. In fact, this is not only a US issue, with governments right across the world trying to work out how to capture missed sales tax revenue.
Online problems do not stop there. According to press reports, over the holiday period bricks-and-mortar retailers such as Best Buy, Target Corp, Wal-Mart and Barneys all struggled to meet demand. Some of these problems were as result of technology glitches while others were due to companies placing lower priority on their online offering than on their traditional distribution channels.
Europe was not immune to the problem of fulfilling customers' expectations either. One survey shows that last year, in the UK, a quarter of online shoppers received their goods "later than expected"; while 13% said they received nothing at all.
There is no doubt that the online shopping phenomenon has given the express and logistics industry a welcome shot in the arm. However, in many respects the sector is still maturing, with development issues on both the supply and demand side. These challenges may slow momentum temporarily, but even in developed markets, prospects for future growth are still exceedingly strong.