After an HBO segment comparing Donald Trump’s campaign to a children’s book, the novel became an instant online best-seller — thousand of copies were sold within twelve hours, exhausting Amazon’s stock.
Such is the challenge of the modern supply chain: consumers increasingly expect to get what they want on-demand, even if suppliers cannot keep up.
Spurred by the ease of remote purchasing and the promise of quick, low-priced shipping, e-commerce quickly became a dominant disruptor in the U.S. market.
With the disruption, however, a new logistics panorama formed: a strengthened economic market made way for a boom in industrial real estate and third party logistics providers that would rise to the supply chain challenges presented by e-commerce.
Disrupting the supply chain
Walking into a brick-and-mortar grocery store may not be an e-commerce experience, but shoppers’ expectations are beginning to affect businesses outside the e-commerce sphere as well, David Egan, head of CBRE's Americas industrial and logistics research, told Supply Chain Dive.
“There’s a new supply chain being built” by third-party logistics providers, retailers and wholesalers, Egan added. Anyone involved in the retail supply chain “is being forced to examine and expand their supply chain.”
There is still a need for a broad distribution strategy in which retailers can touch most of their customer base in two or three days. But Egan notes merchants now need smaller, regional centers from which they can reach customers on the same day — or the same hour — and at low cost.
All these players are expanding the supply chain, adding new locations and making the back end much more complex, he adds. “We’ve got an industrial demand pie that has grown and I think the growth of the pie is a permanent growth.”
“The changes that are coming are a result of e-commerce to some extent,” said Egan. “If you don’t have a good supply chain, a good inventory-management system … that delivers to the front end, it’s never going to work for you.” For the grocer, that means ordering smaller batches of faster-moving inventory and using a more diffuse supply chain network.
Reverse logistics also pose a challenge in e-commerce, with many merchandise returns liquidated or destroyed since supply chains aren’t configured to handle them, Egan added. Traditional retailers have an 8 percent merchandise return rate while the online return rate is close to 30 percent.
A strong economy yields a solid foundation
E-commerce requires producers to ship small parcels directly to consumers at moment’s notice, while simultaneously handling high volumes of merchandise returns. The quick-delivery expectation is driving a need for distribution centers closer to customers.
The emerging trends are so strong that demand is outpacing the new supply and forecasts for industrial real estate in the U.S., commercial real-estate firm CBRE reports.
“The amount of demand we’re seeing is running well in excess of what you’d expect,” according to Egan, and e-commerce is fueling the outperformance.
CBRE’s recent industrial and logistics market report reveals the availability of industrial real estate in the U.S. declined to 8.7% during the first half of 2016, meanwhile the industrial vacancy rate fell 5.2% — the lowest level since 2002. In addition, the past financial quarter marked the 25th-straight quarter of positive user demand, the longest stretch in more than two decades.
E-commerce growth significantly outpaced estimated total retail sales, as the online market grew 15.8% from last year’s second quarter compared to retail’s meager 2.3% growth in the same period, according to statistics from the U.S. Census Bureau. E-commerce sales represented 8.1% of total retail sales last quarter.
Meanwhile, the logistics sphere has also shown significant growth: nearly 4.9 million people were employed in the warehousing and transportation industries as of July, according to the Bureau of Labor Statistics, showing an 11.7% increase from the previous year.
“E-commerce needs to be looked at as consumer demand,” said Michael Brennan, executive director of the University of Wisconsin School of Business’ James A. Graaskamp Center for Real Estate and chairman of the Brennan Investment Group of Chicago.
“Absorption has been strong in all markets by all industries and it’s lifted all industrial property types,” Brennan told Supply Chain Dive, adding he believes the increase in industrial demand is due to a strengthened general economy.
New actors, new models
There’s more than supply and demand, however, to e-commerce’s role in reshaping industrial infrastructure.
“The emergence of a logistics industry that’s fully capable of fulfilling the demands that retailers have for an e-commerce capability is still in its early phases,” said Brennan. “Great progress has been made but it will get better and better and better and more prevalent.”
Just as logistics companies have specialized in shipping large pallets to retail stores, Brennan said, “we’ll see the same third-party expertise in e-commerce.”
However, "the logistical challenge in e-commerce is not to be underestimated." Merchants now need to synchronize, label, pick and pack a number of small-order parcels, although most logistics providers were used to transporting large pallets of goods to physical stores.
As a result, Brennan claims the new service is still in its infancy given the limited number of supply chain players prepared for the challenge.
Early stages, promising future
“There’s going to be an opportunity for someone to figure out how to handle this,” CBRE's Egan said.
The big retail players are further along in their e-commerce strategies while many others, such as specialty retailers, have a way to go, Egan noted, adding that they will get there. This is the “very, very early” stage of a broad change, he said.
With sole proprietors, home crafters and mom-and-pop stores now able to open their own e-commerce sites relatively easily, new opportunities are arising for companies to fill their supply chain needs, Egan and Brennan noted. Some 3PL firms already are providing first-class service to small players, Egan said.
“Given the very low barriers to entry for people to open an online store,” Egan said, “the need for third-party logistics is going to become even more crucial.”
There will be contractions and slowdowns in the industrial real estate market, but Egan predicts recessions will be shallow and short with quick bounce-back, given the supply chain transformations in store
“I do genuinely believe that this broad e-commerce phenomenon and supply chain build-out is in early stages,” he said.