The unrelenting march of technological innovation and continuing shift from brick-and-mortar to online and e-commerce platforms have completely changes consumer experiences and expectations. People who live in both densely populated and rural areas have come to expect a vast array of consumer goods be available to them within a few days shipping time. Delivery windows have shrunk, and consumers expect those delivery windows to come at a more inexpensive price.
Industries have had some difficulty adapting to this new paradigm. Take Sears and JC Penny as just two examples of big industry players who have been unable to keep up with the consumer-driven e-commerce changed in retail. Those businesses that have adapted, such as Kohl’s and Target, have decentralized their distribution channels and evolved them into flexible omni-channels. Consumers now define the interfaces, points of sale, and methods of order fulfillment.
Yet, how have these changes impacted the trucking industry? Sectors are still adapting to these changes and how this all will shake out is still not understood quite well. How will transportation companies adapt to these trends? What will trucking companies do to ensure they are staying ahead of the game when it comes to e-commerce disruption? These are the types of questions we are going to analyze in this two-part series.
The Evolution of Traditional Commerce
E-commerce began to explode onto the scene in the mid-90s. As the internet began to take over so many aspects of our lives, traditional retail and buying methods began to change. Now, e-commerce is defined by retailers who are using online platforms, or omni-channel retailing, to sync the different selling methodologies across disparate platforms. Technology has fueled this change and now promises a customer experience that is far superior. The customer experience is leaps-and-bounds ahead of where it was just a decade ago.
As a result, consumer spending patterns have changed. Traditionally, the retail business model involved a direct, physical relationship between the consumer and the retailer. Businesses were primarily interested in raising foot traffic into physical locations. Foot traffic drove sales and retailers competed on price, selection, and quality. The consumer would go to the location and purchase the product.
Behind the curtain, the retailer used a centralized method of distribution. Big box warehouses would often be spread throughout a particular region and store inventories would be replenished within that warehouse’s zone of operation. Retailers often used an intermodal method of delivery, whether it be air, rail, or truck to fulfill local or regional shipping needs.
This paradigm has now changed, however. The change in consumer spending patterns have changed the traditional retail model. Consider the numbers. In 2017, retail sales in the United States amounted to just over $5 trillion. Of that number, $449.9 billion, or nine percent of the total, represented e-commerce. In 1999, e-commerce represented less than one percent of total retail sales, so you can see the huge growth that e-commerce has gone through over the past two decades. In fact, the average annual rate of e-commerce growth has been 13 to 16 percent.
E-commerce has also come to be drive by the rise in non-store retailers. Businesses like Amazon, eBay, QVC, and others have tripled their overall share of the commerce pie between 2006 and 2016. Traditional brick-and-mortar retailers have suffered as a result. Yet traditional companies that embrace this new paradigm, such as Walmart and Target, have seen their fortunes rise while others have fallen.
The extent to which this is happening is unprecedented. Since 2011, employment at traditional brick-and-mortar retailers has fallen by more than 385,000 jobs. In 2017, there were 2,130 fewer brick-and-mortar retailers than there were just wo years prior. The numbers are quite shocking, but not entirely surprising given the changing nature of consumer spending habits.
Fortunately, this isn’t all bad news for job-seekers. In 2017, over 16,000 new non-store retailers opened. This rise in non-traditional retailing outlets has led to the creation of over 140,000 jobs since 2011. While this represents only half of the overall loss, as these numbers grow, more and more jobs will be created.
Transportation and Digital Spending
There is certainly a concentration of consumer product segments that are dominated by digital spending. Things like apparel, furniture, furnishing, and electronics make up the largest share of the pie. Yet, other sectors that previously only operated in the physical space are also starting to move in this direction. Industrial and construction supplies are just two examples. Even truck parts can now be found online.
Overall, online spending across all consumer categories, whether commercial or industrial, has risen substantially over time. The extent to which e-commerce spending is crowding out traditional spending at traditional retail outlets has grown exponentially. How are these changes impacting the transportation sector? Certainly, transportation-based businesses will need to adapt.
Of course, traditional retail stores remain an important part of retail operations, but retailers are adapting to the new environment. This has changed the way retailers are handling their interaction with consumers and order fulfillment. As a result, this has changed the way the transportation sector handles these goods.
After making a purchase, whether online or in-person, a consumer can now either transport the materials themselves, or have the items shipped directly to them or their home or work. Consumers also now expect to receive these goods faster and cheaper. Ten years ago, 3 – 5-day delivery was the standard. Today, 2-day delivery is the standard.
This change has created a higher level of behind-the-scenes complexity for distribution and fulfillment operations. Companies are now operating with hub-and-spoke networks, using robotic sortation, enhanced distribution, and hi-tech fulfillment facilities to ensure reliable delivery and narrow the gap between the retailer and the consumer.
An example of this can be seen in the last mile fulfillment averages. Last mile delivery averages have shrunk from around 15 miles on average to between 6 and 9 miles. As robotics continues to infiltrate transportation, this number will drop even further. This trend is also what is behind the drop in average long-haul distances. The gaps are closing as e-commerce moves the source and the end user closer and closer together.
Changes in Industrial Capacity
Although it may not align with conventional wisdom, despite the vast buildout of urban distribution and fulfillment networks, industrial warehouse capacity continues to be in high demand. Industrial vacancy rates for warehouses and large distribution centers fell to an all-time low in 2017. This high demand has shown in the steady price appreciation for this type of real estate.
E-commerce has not only led to a high demand in big warehouse footprints, it has also changed the way warehouses operate. Smaller warehouse facilities in dense urban zones have been retrofitted to provide the last mile delivery solution, whether it be human or robotic. Smaller fulfillment centers operate as the spokes in the large hub-and-spoke distribution system. This model has grown so much that these urban facilities now represent a whopping 7% of the industrial warehouse market. Considering these spaces accounted for a mere 58 percent in 2016, the growth is quite remarkable.
But even as urban distribution centers have shrunk one of the warehouse footprints, others have grown. The largest class of distribution centers has actually doubled in overall size in the past decade. Where 32-foot buildings were once the norm, we are now seeing buildings with 40-foot tall facilities. Taller warehouses allow a wider array of goods to be stocked and delivered. They also require many more workers, which is great for the job market.
As large facilities have rapidly developed over the past decade, payrolls have been boosted and job losses in other sectors have been offset. By the numbers, employment in the warehouse and storage subsector has increased by over 360,000 jobs between 2007 and 2017.
Several major geographical areas are now serving as major hubs for the flow of goods from e-commerce. This change has also provided a windfall for third-party logistics (3PL) companies. As transportation networks evolve and retailers attempt to harness the power of e-commerce, partners are needed to ensure there is no disruption within the network.
Over the past five years, as millions of square feet of warehouse space became occupied, the geographic footprint of logistics has changed. Ports, airports, interstates, and other inflection points now supplement shrinking supply chains. The flexible movement of goods is turning from a predictable web into something akin to an octopus.
As the distribution and warehousing models have changed, so has the methodology by which the transportation sector ensures the movement of goods and freight gets to where it needs to go. As firms alter everything from shipping to inventory management, trucking companies are adapting. Join us in Part II of our series where we take a closer look at exactly what trucking companies are doing to ensure they can weather the change without major disruptions to their business model.