The retail world is in
upheaval over e-commerce — can transport carriers be far behind?
By Satish Jindel
recent months, the Internet has had an enormous, historic impact on the
stock market in many different ways. Real-time access to stock prices
and lower transaction cost has increased trading by small investors,
causing stock price fluctuations not seen in the past. The influence of
the Internet on other industries will be of similar proportions. Because
of the new dynamics created by the buying and selling of goods over the
Internet, the global transportation industry will feel much of the
impact of electronic commerce through the changes in the retail sector.
recently, even the most enlightened transport operators viewed the
Internet merely as a tool for doing business. But the rapid growth of
on-line commercial business promises far greater changes that are
already being felt in the United States and will soon have a similar
impact in other parts of the world.
sector has undergone a few structural changes in the last 50 years. Each
development has had major impact on the transportation sector.
Although it is
too early to quantify the impact of Internet-driven e-commerce, it
promises to bring a monumental change for both the retail and
transportation sector. Already, the ability to reach consumers directly
is changing the relationships between retailers and some of the large
manufacturers such as Nike and Levi Strauss that have created virtual
outlets on the World Wide Web. The flow of goods between manufacturer
and consumer will alter dramatically. (See Table 1)
the Internet, sophisticated manufacturers will gain access to the
consumers for direct delivery to businesses and households. Depending on
the product mix and characteristics, and the logistics capabilities of
the manufacturer, consumers will bypass the retailers for lower prices,
more choices and more efficient delivery. More businesses will be able
to order their regular quantity of office supplies, janitorial supplies,
and so on, directly from the manufacturers.
revolution will give small businesses, and even the individual consumer,
the ability to create a virtual just-in-time delivery system and
eliminate the non-value added handling and transportation costs that are
built into so much of retail trade. And it will do to the major
retailers what they have done to the “mom and pop” retail stores.
case study of the direct retail channel is Dell Computers, with $17
billion in annual revenue. The Internet represents 20 percent of
Dell’s total revenue, triple what it was a year ago. By selling
directly to businesses and households, Dell is able to offer lower
prices due to elimination of retailers and reduced assembly cycle time.
Dell is growing faster and achieving higher profit margins than its
competitors, forcing companies such as Compaq to follow a similar model
or risk losing even more of its market share.
industries following the Dell model, there will be huge growth
opportunities for logistics and parcel companies.
Internet-driven manufacturer/consumer retail model will result in shifts
in the kinds of transport sellers use and increased spending on
transportation. Large shipments from manufacturer to distribution
centers will be converted into smaller shipments delivered directly more
frequently to consumers, both businesses and households.
The new retail
model may also result in major modal shift for transcontinental movement
of goods. For instance, the elimination of intermediate steps may either
generate more air express traffic or shift some existing air cargo to
elimination of some wholesalers and retailers will trigger many changes
in the economy with major implications for the transport industry. It
- Reduce cycle time for
getting products to consumers, which will result in elimination of
additional handling and transportation of freight by wholesalers and
- Increase sales through
lower prices due to the elimination of huge markup by wholesalers
and retailers. The stock market has demonstrated this phenomenon
with $5 broker commissions and real-time access to stock prices that
has fueled more transactions by investors.
- Provide additional
revenue for the manufacturers to cover the higher shipping and
handling cost of smaller shipments delivered more frequently to
- Offer higher margins to
the manufacturer to push more rapid improvements in the products.
Internet will create international shopping malls that will erase
national boundaries for businesses and households around the world. It
will eliminate retail channel steps that do not add value and permit
businesses to buy products at more attractive prices directly from
manufacturers in other parts of the world.
information revolution will benefit manufacturers with the logistics
capabilities to take orders and ship products directly to consumers,
particularly to businesses around the globe. For instance, manufacturers
in China, Taiwan and South Korea will have the opportunity to sell their
products directly to retailers or consumers in the United States and
other parts of the world and look virtually the same to the buyers as
sellers down the street.
will be able to eliminate the traditional markup on their products by
the brokers and wholesalers.
and handling task now performed at the retailers’ distribution centers
will shift to the manufacturers’ plants. The lower cost of labor in
the exporting countries will make it attractive for some manufacturers
to perform these logistics functions with their people. Although
transcontinental movements will continue to occur in large shipments,
distribution at the destination country will result in smaller shipments
with greater frequency delivered directly to retail stores or consumers.
are some of the implications of these changes for select transportation
companies with global scope stand to benefit most from these changes. In
the best position are companies prepared to handle the increased
shipping and handling functions at the retailers’ distribution centers
or the manufacturers’ plants and which have the capability to design a
totally integrated distribution solution.
companies have the opportunity to help manufacturers establish a
shipping and handling operation that can assemble smaller shipments of
multiple products for delivery to the final consumer. In some cases,
that may involve merging products manufactured at different plants,
cities and even countries into a single delivery either in transit or at
the final destination.
companies already positioned to meet these challenges and take advantage
of these changes are FDX Logistics, UPS Worldwide Logistics and the new
Danzas/Deutsche Post combination. The push by other logistics companies
to establish global capability via alliances and acquisitions of parcel
carriers appears to be driven by such future growth opportunities.
companies are big players in the international movement of goods from
manufacturers to distribution centers. With logistics changes at both
the manufacturer site and in the destination country, these companies
will get increased competition from logistics companies with greater
transcontinental modal shift between air and ocean transport provides
opportunities for freight forwarders to add value to the design of a
totally integrated distribution solution.
more shipments crossing international borders more frequently, the
customs clearance activities will become more challenging. Hence, the
brokerage expertise of freight forwarders will make them attractive
merger/acquisition targets for some global logistics companies.
Companies such as Air Express International and Kuehne & Nagel with
strong customs experience could be early targets.
carriers could gain significantly from this development if they enhance
their international capability to handle increased shipping activity
efficiently and reliably. The integrated carriers will see tremendous
increase in total volume of parcels and lower weight shipments. This
will increase the so-called density, or number of shipments going to one
address, of business deliveries and reduce operating costs.
household deliveries may prove unprofitable unless the operating model
and pricing structure is revised to handle this growth. FedEx’s 1997
acquisition of Caliber System and its RPS package subsidiary allows
FedEx to capitalize on these developments. The Global Package Link and
domestic Priority Mail services of the U.S. Postal Service (with planned
service enhancements) are also positioned to benefit from this
development. The international expansion of postal authorities in the
Netherlands and Germany also puts them in an excellent position to
capitalize on the trend.
It is still
too early to estimate the impact of growth by segment, but the total
spending on logistics and transportation services will be significantly
higher with more direct shipping and streamlining of the retail
the world’s largest domestic delivery market, the United States, the
transportation industry will see similar modal shifts as smaller and
more frequent direct deliveries of products go to businesses and
households. Full truckload movements may convert to less-than-truckload
and LTL shipments may see bundled hundredweight shipments become
parcels. Moreover, the final leg of the retail distribution channel is
really now performed by the consumer in a personal vehicle. The Internet
retail channel will replace this
new retail site on the World Wide Web is starting up with the
delivery strategy as a key part of its business model. WorldSpy,
which is creating something of a virtual department store
on-line, has already set up inventory management and transport
agreements as it negotiates for productions from manufacturers
than a year into its development, the worldspy.com business has
“built a very sophisticated back office that allows
manufacturers to be involved in e-commerce,’’ said company
President Alan Clingman. The company its site to become a kind
of ultimate broker by setting up deals with banks, manufacturers
and inventory managers so that “we never touch the money and
we never touch the merchandise.”
The company signed a contract with UPS Worldwide Logistics to
manage the warehouse and distribution operations that put the
goods in consumers’ hands in a promised three days. That is an
attempt to build certainty into delivery to overcome a weakness
Clingman sees with other, more prominent electronic retail
“Using focus groups, we found that among the largest
complaints about Internet commerce were that buyers could not
get accurate deliveries,’’ said Clingman. “They did not
know when the goods were coming and misdeliveries were too
the management pact with UPSWL does not include a bias toward
UPS delivery, he said. Instead, a purchase will trigger an
electronic search within the WorldSpy computers for the best
routing and cheapest price to achieve three-day delivery. Buyers
can request faster delivery and WorldSpy will then search out
the cheapest price to meet the buyer’s demand. The buyer can
then track and trace shipments from the WorldSpy Web site.
said he and a partner seized on the plan after researching their
own investment options. “What we saw occurring was the
disintermediation of the retail supply chain, and we wanted to
be at the forefront of that,’’ he said.
transport link with direct
delivery by a parcel carrier. For business deliveries, the impact on the
local delivery and courier industry will depend on the evolving shape of
the retail channel.
for the LTL industry will be determined by these carriers’ ability to
handle a decline in the shipment weight and deliver heavy parcels and
lighter shipments to residences. With the growth of residential
deliveries, the distinct and unique logistics requirements of the
residential consignee will result in more changes in the transportation
domestic business-to-residence parcel delivery represents $5 billion in
revenue in the United States. This market is primarily served by parcel
carriers, with the lion’s share handled by UPS Ground Service and USPS
Parcel Post. With changes such as zoned pricing for express services and
the growth of home-based businesses, Priority Mail and the express
services of UPS and FedEx are becoming a bigger factor in this market.
e-commerce, this market will grow at the expense of deliveries to retail
stores. The retail industry uses several modes of transport, but most of
them are surface operations. Discount retailers such as Wal-Mart, with
annual revenue of $135 billion, use huge private fleets of trucks. When
such retailers see a shift of retail sales to direct delivery to the
consumer, the impact will surely be felt by all segments of the
In the United
States, domestic intercity freight trucking amounts to $200 billion in
revenue and the retail sector represents 20 percent of this traffic, or
$40 billion. With a 25 percent shift of retail sales to direct
consumers, $10 billion in intercity freight trucking revenue would
convert to residential deliveries.
could more than double due to the difference in unit transportation
costs between truckload delivery to a large retail store and parcel
delivery to consumer. Hence, considering the normal growth factors and
modal shifts, the business-to-residence market could reach $25 billion
in annual revenue by 2004.
growth represents numerous challenges for the entire U.S. transportation
industry, but mostly for the parcel carriers. In order to benefit from
this growth, the carriers will need to modify their operations to handle
the specific characteristics of the business-to-residence (including
residence-based business) delivery market segment.
operations of parcel carriers is based on requirements of
business-to-business shipping. As shown in Table 2, this model is not
suited to handle business-to-residence deliveries.
- The deliveries are made
early in the day when most residential consignees are at work.
Hence, the package has to be either left at the home, increasing
claims exposure, or requires costly return trips by the drivers.
- Pickup service is not
user-friendly for returns from residential addresses.
- The information system
does not automatically provide parcel data to the consignee. Recent
pricing changes by UPS, including fees for certain services and area
deliveries, partially address the cross-subsidies among consignees.
However, the overall pricing structure needs to be revised based on
the business-to-residence operating model. The growth in
business-to-residence volume will improve operational density, but
service needs for residential deliveries are unlikely to change.
some businesses may permit employees to receive deliveries at offices,
the approach has many shortcomings:
- In large corporations,
it will add significant cost and logistics challenges for
a) accepting increasing number of parcels,
b) responsibility for loss or damage claims,
c) distribution to employees’ work areas, and
d) storage of parcels for out of town employees.
- For employees commuting
via mass transit, or parking at remote lots, this option will be no
better than buying from a retail store.
successful parcel carriers and logistics companies will be those that
realize the differences in the business-to-business and
business-to-residence operating models and establish operations that
deal with those variations and make the service more attractive for the
logistics companies and parcel carriers that position their businesses
to handle this change in the retail channel and the shift in shipping
and handling operations from retailers to manufacturers will stand to
benefit in the future. The opportunities are already there. With Dell
experiencing phenomenal benefits from the Internet in terms of sales and
profits, companies in broader consumer industries such as Proctor &
Gamble, Gillette, General Electric, Johnson & Johnson, and so on,
will not be far behind in developing this capability.
It used to be
that blue jeans were not available at all in the Soviet Union. Soon,
consumers anywhere in the world will be limited only by the ability of
transport companies to reach their homes.
manufacturer-to-consumer retail channel not only provides for more
growth for logistics and parcel carriers, but also an opportunity for
higher margins because they will be able to squeeze cost from the system
through reduced handling. This transition will increase the number and
average weight of parcels for delivery to businesses and households. The
global and domestic carriers who are slow in responding to these
challenges will miss a tremendous growth opportunity. Hence, the impact
of e-commerce on the transportation industry will be a mixed bag of good
and bad news, depending upon how the individual segment and carrier
responds to the developments.
is a former parcel industry executive who is now a principal in SJ
Consulting Inc., based in Pittsburgh, Pa.
© 1999 Journal of
Commerce, Inc. All rights reserved.