WHY IT MATTERS: Digital Transformation

WHY IT MATTERS: order fulfillment is an essential component of ecommerce digital transformation and there are solutions to reconfigure existing warehouses to improve picking efficiency and maximise storage space.

WHY IT MATTERS: Amazon spends 14.2% of its net sales to fulfill orders and 12.2% to deliver them to consumers. Thus a quarter of the costs of products sold is allocated to logistical costs and this is the biggest hurdle to eCommerce wide adoption. Amazon and other pure plays have a number of key advantages over established brick-n-mortar retailers (no retail store costs, no store employees, etc.) but they have to battle with order preparation and delivery which traditional retailers delegate to their customers as they push their carts in the store aisle. In that context, recent announcement of Sobeys to leverage Ocado's automated warehouse technology or recent Amazon announcement to create a parcel delivery solution that competes with FedEx and UPS makes sense. Any retailer thinking of scaling its eCommerce operation should thus make sure that its business model is viable regarding fulfillment and shipping - all other elements of eCommerce are not an issue.

- Amazon SWA service: http://fmcs.digital/blog/amazon-package-delivery-service-to-compete-with-fedex-and-ups-swa-ecommerce-disruption-retailapocalypse/ 

- Sobeys Ocado partnership: http://fmcs.digital/blog/u-k-s-ocado-taps-into-canadas-online-grocery-market-with-sobeys-tie-up-is-canada-mature-enough-to-have-automated-grocery-fulfillment-centers-ecommerce-robots/ 

- Ocado's technology: http://fmcs.digital/blog/video-shows-ocado-warehouse-technology-that-sobeys-has-acquired-to-prepare-grocery-orders-is-based-on-an-army-of-small-robots-working-on-3d-hive/ 

WHY IT MATTERS: distribution is the final frontier, the last nut to crack in eCommerce today - as most other aspects, from technology to processes to business models, have already been solved. Distribution remains costly and often an area that retailers - pure plays as well as brick and mortar - struggle with.

As discussed in the past, grocery food delivery appears to be the holy grail of delivery: 1) put trucks on the road with fixed schedules to deliver groceries as the milkmen did in the past 2) manage to break even on these deliveries as this pays for fixed costs - all other deliveries have only a marginal cost and thus become essentially "free"

WHY IT MATTERS: this is not a surprise as delivery fees are close to 15% of Amazon costs. I wrote about this in the past numerous times and it looks like Amazon is moving in the direction of competing with large delivery providers. Again, Amazon only needs to break even on delivery costs, it does not need to make a profit. Moreover, going into grocery eCommerce can provide additional volume and predictable routes (think milkmen routes) to put trucks on the roads, pay for their fixed costs, and effectively make delivery "free" for all other product categories. When self-driving cars -or more likely autonomous vehicles - become a reality, Amazon will be there to reap the benefits. Another attack of established retail and distribution industry that Amazon is famous for.

More on this: Amazon vs UPS and Fedex (2016 but still relevant: http://fmcs.digital/blog/parcel-delivery-disruption-coming-with-amazon-building-uber-for-trucking-app-and-self-driving-trucks/ 

WHY IT MATTERS: On the heals of recent technology deals between Ocado and Carrefour in France and Sobeys in Canada, this paper and others explain how the technology works.

HUMAN-LESS WAREHOUSE

The technology is akin to a huge vending machine, where products are stored in compartments that robots can access when required. More important is that this technology can apply to any product you can buy online, not only grocery. In fact, figuring grocery item picking is probably the most difficult product category - with 3 temperature items (room, cold, frozen) and lots of small and delicate products (think tomatoes and meat). This will help reduce the cost and errors of web order fulfilment, and potentially speed delivery to make 1hr delays possible. When coupled with robot manipulation and self-driving delivery vans, the days of human-free order preparation and delivery is fast approaching.

RETAIL ARMAGGEDON

This will revolutionize the way we think of retail and distribution by making the store useless. The value chain will become produce-warehouse-home.

https://www.theengineer.co.uk/grocery-4-0-ocado-reshapes-retail-grocery-with-robotics-and-automation/ 

https://www.youtube.com/watch?v=iogFXDWqDak 

WHY IT MATTERS: robots will soon replace humans in Amazon warehouses, as there are already 45000 kiva robots and growing. Moreover, the tasks that robots can perform is expanding and Amazon is pushing the limits of what's possible with this annual robotics challenge. 

Also see

- Economist story http://econ.st/2yO8n90 

- projections that US manufacturing jobs will continue decline while robots growth at an accelerated pace http://bit.ly/2yOFhWO 

- PWC estimates that robots will replace pretty every human worker in every industry https://pwc.to/2yQ270n 

WHY THIS IS IMPORTANT

This is one of the ways eCommerce will evolve in the near future: robotization. Orders are prepared automatically, without humans touching them. Even for grocery. Especially for grocery. Because it is a high volume, low margin operation, grocery mandates automated preparation. Of course, this level of investment can only be afforded at very high volume, which is the case in the UK where Ocado's warehouses like this can deliver 190,000 orders every week. No other country has this level of grocery eCommerce but when they do (think Amazon Fresh in the US), robotic warehouses like this will become mandatory to stay in business.

The last missing link will remain, of course, the last mile: delivery. There, self driving cars and drones may offer a solution.

WHY THIS IS IMPORTANT

A key piece of eCommerce and retail has to do with delivering packages from warehouse to customer homes or offices. Amazon spends 12% of its revenue for shipping and is expected to ship more volume than FedEx in 3 years. To reduce this cost and improve customer service by allowing more frequent and faster delivery, Amazon has been doing a number of things:

1- putting trucks on the road with its AmazonFresh grocery delivery service;

2- building delivery infrastructure between its warehouses and distribution centers and delivery spokes;

3- now it is planning to become a broker between small parcel delivery providers in a UBER like model (this article)

4- self-driving vehicles have been targeting trucking industry as their primary focus, with UBER recently investing in startup OTTO and demonstrating a 2000 case beer delivery via self driving truck

Combine all these innovations and you have a profound disruption in the delivery and logistics industry. Retailers should now consider Amazon no longer as an online marketplace and third-party logistics company (3PL) but also as a parcel delivery solution provider that can compete FedEx and UPS provide last-mile delivery solutions and eliminate the need for retailers to maintain or lease their own delivery vans and trucks.

Links in this post:

• amazon net shipping costs 4.7% of revenue: http://fmcs.digital/blog/new-e-commerce-strategies-threaten-ups-fedex/ 
• amazon total shipping costs 12% revenue: http://www.beyonddevic.es/2014/02/03/amazons-prime-problem/  http://www.wsj.com/articles/amazons-newest-ambitioncompeting-directly-with-ups-and-fedex-1474994758 
• amazon fresh trucks: http://sco.lt/7i9FbN 
• self-driving truck: http://fmcs.digital/blog/tesla-brings-self-driving-hardware-to-its-entire-fleet-see-the-video-for-a-glimpse-into-the-future-of-driving/ 
• amazon competes fedex: http://fmcs.digital/blog/jeff-bezos-amazon-wont-compete-with-fedex-and-purolator-usps-i-dont-believe-him/ 
• FBA 3PL: http://fmcs.digital/blog/27-tips-on-how-to-build-fba-strategy-via-cpcstrategy/ 

Jeff Bezos said during Code conference that Amazon will not get into the delivery business to replace partners - but will supplement it heavily.

I wrote before that amazon will get into the grocery food delivery business because it is the only way they can reduce their delivery costs - costs they have to give to fedex, purolator, USPS and others. So basically they will go into grocery business to break even and get free local delivery in certain key market areas. 

Recently, Walmart has begun pilot tests to deliver groceries using UBER (http://www.reuters.com/article/us-wal-mart-groceries-idUSKCN0YP0H6?il=0). This sounds like a great idea, focussing on each other's strength (walmart = products & logistics, uber = delivery) with no investment to access huge volume. This option may not be as efficient as the Amazon model however but be a great solution in periods of high volume.

To see what I wrote about this, see http://www.scoop.it/t/digital-transformation-of-businesses?q=amazon+fresh 

WHY THIS IS IMPORTANT

Delivery remains the biggest cost for online retailers. Between 10% to 20% of retailer costs are sunk into delivery. This remains a huge hurdle for both retailers and consumers compared to physical stores. I expect online retailer to be more and more creative on the delivery front to reduce costs and deliver faster.

Established eCommerce retailers should look for opportunities to improve delivery and newbies to never underestimate delivery as it is the CORE to make or break their online retail business. Mark my words... 

This article suggests that Amazon is creating a UPS/FedEx competitor offer to distribute parcels to end users. The article provides some very interesting data, and links. Other links include 

• http://www.businessinsider.com/why-amazon-wants-to-build-own-delivery-network-2016-3
• http://www.businessinsider.com/fedex-exec-mike-glenn-doubts-amazon-will-build-shipping-service-2016-3 

I don't agree Amazon would create a competitive offer. However I believe it makes sense for them to deliver packages in 2 use cases:

1. create an internal distribution logistics infrastructure to fulfill its warehouses and transfer packages from its own locations;
2. distribute to end users using grocery delivery solution as the baseline to get trucks on the road and effectively get virtually "free" delivery. A recent report indicates Amazon will be in the top10 grocer by 2019: http://www.bloomberg.com/news/articles/2016-03-17/one-wall-street-firm-says-amazon-is-about-to-feast-on-the-food-and-beverage-market

I wrote about this in the past here: http://www.scoop.it/t/digital-transformation-of-businesses?q=amazon 

Amazon is by far the largest online retailer. If its shipping costs are growing, as they appear to be, all other retailers should take note as they should expect the same.

This analysis suggests that we have started to use Amazon to buy smaller products more often, which in turns cost more to be delivered compared to the price of the item. Thus the surge. This may indeed be right, as Amazon Prime cuts down on the incentive to increase basket size to get free delivery.

So for Amazon the solution may be to increase the Amazon Prime membership price, open physical stores (as they have announced) or accelerate its deployment of local distributiuon centers to get closer to customers - thus reducing delivery costs, and delays. Or do all three!

For other retailers, the solution may be as simple as keeping the minimum order size to a high enough value that ensures sufficient margin to account for the free delivery costs.