The A-Team: Alibaba and Amazon force a rethink of distribution

They’re here to stay and a force to be reckoned with - Alibaba, Amazon and a host of other enterprising companies occupying the cyber space between production and consumer. Jack Ma’s Alibaba is now the world’s largest retailer accounting for more GMV (gross merchandise volume) than rivals Amazon and eBay combined. The Chinese internet retailers’ online sales and profits surpassed all US retailers including Walmart, Amazon and eBay. Perhaps more importantly, Alibaba Logistics through the OneTouch service (which it bought back in 2010) is partnering with freight forwarders (and forwarding networks such as the WCA) and now even ocean carriers.

In December 2016 Maersk (CGM-CMA has since also signed up) announced it was teaming up with Alibaba, enabling the ocean carrier to list freight spaces on Alibaba’s import/export platform, which allows Chinese shippers to make shipping reservations online. According to the press release at the time, “The initial launch …allows existing Alibaba OneTouch (registered) users to lock in the price of required cargo spaces on selected routes by pre-paying a deposit amount.” These moves put Alibaba firmly in the middle of the supply chain as facilitator on a potentially grand scale.

Amazon’s role in logistics may be even more significant. Amazon’s sales account for a reported 60.5% of online sales growth. The hard charging company has put the pressure on not only other retailers but logistic service providers throughout the supply chain. Amazon’s warehousing is among the most enterprising, using robots and drones and highly automated systems (see Peter Buxbaum’s article) to provide both volume and velocity. Other innovations include Amazon’s Prime Air, a drone service designed to deliver shoppers product within 30-minutes of order placement. Recently Amazon began testing a new service for “Prime Wardrobe” that allows Prime members to try on the latest styles before they buy at no upfront charge, bridging the gap between brick and mortar and online retail. Customers have seven days to decide what they like and only pay for what they keep. Shipments arrive in a re-sealable box with a pre-paid label for returns. Amazon said more than a million pieces of clothing and accessories are eligible and include brands like Calvin Klein, Hugo Boss, Theory and Levi›s. This month Amazon announced it was buying Whole Foods Market for $13.7 billion upping the ante in its battle with Wal-Mart for the lucrative grocery sector in retail. Yet without a massive online service platform and the supporting warehousing and distribution system, neither foray would make much sense.

Adjusting to the Space Squeeze

The rise of e-commerce has squeezed warehouse space, particularly in urban spaces. In a June report from the CBRE Group, nearly half of the 167 million sq. ft. of U.S warehouse space now under construction, roughly 72 million sq. ft., is already pre-committed to tenants, primarily e-commerce, third-party logistics or retail users. This is the largest tally of pre-committed warehouse space in seventeen years. And at 43% pre-leased to occupiers, this exceeds the 17-year average of 38%.

David Egan, Americas head of industrial research, CBRE said in respect to the report’s conclusions, “Warehouse users are aggressively leasing space as soon as they have the opportunity, often even before the construction has been completed on the property. This is unusual compared with historical activity.”

But there are a number of underlying factors re-shaping the warehouse real estate market – beginning with the rippling impact of e-commerce. James Eckenrode, executive director of the Deloitte Center for Financial Services, an analyst, estimates that half of the malls in America will close by 2030. The reasoning behind his forecast is demand for traditional retail stores will continue to weaken as online sales grow. But e-commerce could have a secondary influence of moving fulfillment closer to consumers, a business model that could see retailers in the dual role of both store and fulfillment center.

Colliers International, a global real estate services company, is predicting that for the “first time, online retail is forecast to account for more than $1 out of every $10 spent in 2017 [around 10%].” But the Toronto-based Colliers’ analysts also point out the “flip side” to the forecast that is within the five–year time period, brick & mortar stores will still account for the vast majority of retail spending, and the legacy supply chain management model will still account for a vast majority of the movements.

Two Views on Warehouse Design

There is a growing dichotomy in the warehouse industry reflected in two very different approaches to warehouse design. In keeping with the e-commerce trend of bringing fulfillment closer to the consumers, often in urban areas, there has been a recent drive to repurposing existing industrial space or building smaller purpose-built warehousing in non-traditional areas. Without the abundant acreage normally available in a greenfield DC buildout, warehouses are being built with shallow-bays (those with bay depths of 120 to 200 feet and clearance heights between 18 and 24 feet) in high demand locations near consumers. For example, in an extreme case of placing consumers and commerce in close proximity, Amazon, which already has an extensive network of fulfillment centers in the Chicago metropolitan area, is now leasing 75,000 square feet on Goose Island in the heart of the city to facilitate their one-hour delivery service. The warehousing contains “shallow bays” for their delivery vehicles. While the Amazon facility seems unusual, it is part of a growing global trend of high velocity, albeit smaller warehousing, located in urban areas.

Partly because of the squeeze on space, another trend in warehousing is the repurposing of existing warehousing around more profitable niche freight - particularly temperature-controlled facilities.

On the opposite end of the warehousing/DC spectrum is the mega-facilities being built as hubs to service entire regions. Historically, many of these super DCs were built as stand alones but that business model is changing. Now the super DCs, running over 600,000 sq./ft., are often part of an industrial park sited near or in many cases within major transportation networks.

CN developed its $100 million “Calgary Logistic Park” around the rail operator’s own state-of-the-art intermodal terminal. (photo by George Lauriat)
CN developed its $100 million “Calgary Logistic Park” around the rail operator’s own state-of-the-art intermodal terminal. (photo by George Lauriat)

There are many shared benefits inherent to these industrial campus style zones. Calgary, Alberta for example, is serviced by CP Rail and CN and connects to Edmonton (and Canada’s oil patch) to the north and the US West to the south by highway. Calgary’s “sell” is that it is the “inland port” or “logistic gateway” providing access to Canada’s mid-West market. Back in 2013, CN began developing a $100 million “Calgary Logistic Park” around the rail operator’s own state-of-the-art intermodal terminal. Like many of the new logistics parks, this greenfield development offers massive amounts of space (easily capable of 600,000 plus DCs) wedded to daily intermodal rail service (capable of building exceptionally long trains) located next to the main highway corridors.

IoT & Integration of Industrial Activities

The IoT (Internet of Things) is driving a new industrial revolution (sometimes referred to as 4.0) through an integration of industrial activities. It is the constant rearranging through technology of business activities that is reshaping the concept of the supply chain and especially the warehousing distribution sector within the whole.

Take last October’s test. Otto, Uber’s autonomous trucking arm, made its inaugural run, delivering 50,000 cans of beer via self-driving vehicle plying the Colorado highways from Fort Collins to Colorado Springs. But there is a great deal more at play than autonomous delivery vehicles. Part of the new supply chain is shared logistics. There are companies like Seattle based Flexe, which offers on-demand warehousing by matching available space in a location with requests for expedited warehouse facilities. There are also a rising number of non-asset transportation companies that are matching trucks to loads, or chassis to rigs like UberCARGO in Hong Kong, Dolly in the U.S., and Nimber in Norway. Even 3PLs like Transplace, which bills itself as The 3PL & Technology Company, exist in this new shared space. Interestingly, Flexe thinks of itself as an Airbnb for warehousing – an industry comparison that wouldn’t have been possible a decade ago. Convoy is another new company in the shared-space with software to match deliveries coming into an area with the availability of tractor-trailers from smaller local providers, ideally maximizing scheduling efficiency and minimizing shipment downtime. Similar systems exist for matching containers to full or partial loads for freight forwarders (pioneered by WCA).

With the IoT, shared supply chain activities are proliferating daily and altering the very way we think about warehousing and distribution. How far can it go? Skuchain, another Silicon Valley startup, has created a platform that creates verifiable and auditable information packets out of each transaction – basically B-to-B platform with a self-servicing ATM/Bank to facilitate the exchange. What these shared services will mean to the warehousing and distribution segment of the supply chain is unclear. But what is clear, is that times - they are a changing.