A few weeks before Christmas I was invited to the annual “future of technology series” run by https://www.apcuk.co.uk . It was a great line-up and the videos are all here for your perusal including my own short presentation. I took the opportunity to present on how changes in consumer expectations are likely to drive structural changes in logistics and last mile fulfilment and why understanding the commercial impact brands can mitigate through their businesses strategies. I specifically focussed on the Motor in this presentation but some of the insights are cross-category. It was whistle stop and i’ve certainly gone deeper here than i did for the 10mins i had then, with some more examples, so hopefully it may help spark some interesting thoughts of your own…
So, the first slide started with ONS data showing the shift in share of retail (online vs offline). Obviously grocery is overwhelmingly offline (penetration is around 13% which is double pre-covid but still low) but even total retail excluding grocery only comes in at 27% i.e. lets not accelerate the decline of offline by believing its dead already. That said, there appears to be a step change of around 7.5% which is not insignificant and a new baseline.
That said, the previous chart is in % terms and when offline retail effectively closed in LD1 (lockdown 1) its perhaps unsurprising that e-commerce saw a % increase. To add more colour to the scenario its worth looking at actuals and as you can see whilst there has been a clear acceleration, the total offline retail dwarfs the online world. When you hear people calling for Amazon to be broken up because of the stranglehold on retail, its worth remembering this chart. Amazon is only a proportion (and a small one) of that red line. Its certainly not a monopoly here.
Something that this change has affected though is consumer expectations. When it comes to e-commerce and delivery the biggest impact Amazon have arguably had is on perceptions of service. We expect cheap, quick delivery with the minimum of fuss. I’ve written previously about e-commerce and how fulfilment is expensive and hard and how the costs of decent delivery have to come from somewhere but its worth reiterating
Fulfilment networks are costly. The set-up is vastly different from a retail outlet and the limited distribution required to stock fixed units plus they have “last mile delivery” issues too. The “hub-and spoke” model of Argos and the regional and local hubs operated by Next are designed to mitigate this and improve efficiency/reduce cost. Interestingly the key, non-covid, statement in last years Next company report, for me, is “The focus will be on systems that consolidate items, quickly and accurately, into individual parcels”. Why is this important?
What do i mean by this? Well its about distribution, especially that last mile. Its one of the problems with the food delivery businesses like UBER and Deliveroo and explains why they are trying to shift into broader logistics because what’s that problem?.. marginal costs. Let me explain, a van or bike (plus driver) represents a cost and as soon as you have a single package this cost is incurred. The first parcel is always the most expensive whilst subsequent packages reduce that cost by spreading it, that’s marginal cost, the extra cost incurred for each subsequent unit.
In traditional store based logistics this is fine. You fill the lorry to its capacity and off it goes. In the new e-commerce model where parcels are being delivered to multiple houses in a small geographical area plus the expectations for instant delivery (and cheap) set by AMAZON you have a problem, because its unlikely that you’ll be able to send that package out on a full truck, ergo its highly cost inefficient. This is happening all over the country too in multiple locations, every day. As a business you could hire 3rd parties to do this part for you, but; even with multiple potential clients this can still be a problem and there is an elevated cost for utilising their network because they know this and clients pay for the inefficiency. This is what I mean by “stepped” because each vehicle started is contributing marginal cost that is not optimal, kranking up the negative effect on margins and explains why brands that operate in the mid-low end of margins struggle with e-commerce and have to find the savings somewhere else in their business (see the BOOHOO paper again for the wrong way to do it). Back to that mention in NEXTs report. They’re looking to cross subsidise this uncontrollable aspect by focussing on their own operations and reducing inefficiency there. clever stuff eh!.
So, why did i leap to bundling and unbundling. Well everything above is fairly general. This is an actual trend and its fuelled by consumer expectations with clear commercial impact. This is also where the implications start. So, a reminder, if the logistics scenario above is the the case, businesses have a choice. Either continue to run their own logistics networks or utilise someone else, a good example in modern retail is NIKE vs Adidas.
Over the Summer Nike were raving about the rise in e-commerce, they’d pulled off some of the big ecomm platforms and the shares were skyrocketing. Read the company reports again and you’ll notice that margins declined and admin costs also declined hugely (including demand generation or marketing). In simple terms a huge cost centre was removed which lended a glossy glow to the bottom line figures BUT also; despite full price sales increasing (this is a function of an excellent stock management system) margins have consistently declined. check here, here and here for more info. I’m digressing from my original point a bit here but if you remove £3bn (combination of operating expenses, they namecheck flights!! and marketing here) from £10bn revenue its going to look good on the bottom line (and its also likely to come storming back when covid is over) but also that consistent 1% drop in margin is due to the owned e-commerce focus and represents how difficult it really is to cross subsidise the old world with the new and stay the same. Adidas on the other hand are currently piloting using Zalando to do their fulfilment. How does this relate to bundling and unbundling, well its simply do your logistics or don’t?
The bundling vs unbundling example Is clear in this example. Hiut the specialist jeans maker from Wales who “ONLY DO JEANS” and make a virtue out of it or Tesco and Booker and a vertical integration play that is arguably Sir Dave Lewis’ finest gift to the TESCO business. Especially when you remember the context of the business he came into, with multiple acquisitions struggling to do anything other than drag. He made one BIG play and it was a step up the chain I.e. a big bundle. So onto the car market…
Its worth reminding everyone at this point that the thesis of this presentation was e-commerce has risen (but not as much as you’d think), but its real impact is on the expectations of service. E-commerce is a drag on margins because of marginal cost inefficiency and therefore businesses have a strategic choice to make, do they bundle or unbundle…. So Motors and motor sales, a market ripe for disruption.
There has been an acceleration of new brands in the car buying space in recent years but the two that catch the eye are Alex Chestermans Cazoo and BCA’s Cinch. Why is this and how does the above trend feed in? Simply put, if buying a car is shifting to the e-commerce model then imagine the commercial implications of the “last mile”. The car has to be dropped off at a house. Its going to be either driven (in which case you need a following car) or via a truck (which has only one car on board for residential streets, probably with a HGV driver and a sales person on board) which means the marginal costs are steep. The opportunity costs are also huge because that sales exec can only service ONE delivery/sale during his time on the van vs the multiple ones he can manage when on the forecourt. You can see how costs are going to rise exponentially! Now i’m not saying that buying online is going to be mainstream anytime soon, its still a tiny % but combine this with the national coverage of online sales (imagine i’m in London but buy a car in Glasgow) and the whole regional/local garage model is under significant pressure. OEMs (original equipment manufacturers) for new cars can’t do this and whilst they often handover control to sales networks, that becomes complicated too as they’re often not fully national.
So (longwinded) that leaves the door open for the aggregators to step in and they’re perfectly placed to dis-intermediate the sales networks by building out their logistics back end + a digital forecourt front end and cover the whole of the UK, essentially bundling sales and logistics up and leveraging economies of scale. BCA already do logistics for the motor industry (and they own We Buy Any Car) but Cinch is them entering the new car sales marketing (they’re a £2.5bn business) whilst Cazoo are coming from the other direction and going sales platform, supported by a logistics network (and then they’ve bought some forecourts, probably as a holding pen).
If i were to conclude this rather rambling section I’d say that size matters in the e-commerce sphere to mitigate those changing expectations and bundling sales plus logistics plus forecourts/warehousing is the future. OEMs would be better placed to just give up sales (unbundle), whilst the sales networks themselves face an existential threat.
Ah yes TESLA. They can do it. They sell direct after all (despite Elon backtracking on closing his forecourts) Well can they? They’re already losing money and as we’ve set out the e-commerce model doesn’t help here. In fact it does the opposite. So its really not the DTC model you need to be worrying about. It’s the aggregators who bundle.
WOW. I definitely added loads of other stuff in there that was in my head especially as the original video was only 10 mins long. I summarised here and i still think this is the best overall way to do it, so i’ll leave it at that.