Next-day delivery used to be the exception. Now, the need for speed is universal — particularly when it comes to online sales and customer demands around e-commerce shipping.
Amazon upended the e-commerce market when it introduced two-day shipping for Prime members in 2005 and created an expectation among consumers that delivery should be fast and frictionless. Nearly two decades later, the company is continuing to shrink its delivery windows and the demand for speedy online shipping impacts virtually every brand selling on the internet.
However, e-commerce brands are facing new challenges, from cost to timing, when it comes to last-mile delivery operations. Recent surveys show the majority of logistics executives are concerned about rising transportation rates and inflation’s effect on goods and services. Last-mile delivery now makes up 53% of total shipping costs in e-commerce. With customers unwilling to foot the bill, retailers and their logistics partners are expected to eat the cost.
“E-commerce is not cheap by any stretch of the imagination,” says Nima Elyassi-Rad, head of business development at Shippo, a company that helps e-commerce businesses and platforms integrate shipping with multiple carriers. He says that to succeed at e-commerce, businesses need to be able to make all channels of the customer experience work, from the actual sale to making sure what someone ordered is delivered.
Experts agree that potential shipping delays and costs are some of the leading reasons buyers walk away from an online sale. Supply chain disruptions have only added to these stressors. Companies are looking for ways to make buying simpler, and more affordable for their customers.
“Consumers worldwide are becoming more demanding of service aspects, especially regarding the lead time and shipping cost,” says research firm Grand View Research in a recent report.
Expectations like these pushing businesses to turn to companies like Shippo, ShipBob and others, to help brands manage shipping and even returns via software and services. They can get discounted rates for themselves and their customers, helping to boost their ratings and sales.
Shippo is one of a number of supply chain startups providing software services to e-commerce companies and online marketplaces, like Shopify and Mercari. Rather than shipping packages directly, Shippo serves as a bridge connecting merchants to carriers like UPS, DHL, and FedEx. They do not maintain warehouses but instead negotiate discounted rates on shipping, for example, and also make it easier for their clients to track and ship packages to their own customers. The company recently created an API integration with Shopify that makes its tools natively available to millions of Shopify merchants.
Shippo isn’t alone. Competitors like EasyPost, Parcel Perform, and ShipRocket are developing cloud-based platforms to connect online merchants to multiple shipping carriers as a way to reduce costs and improve on-time delivery metrics. Airhouse, another startup in the e-commerce infrastructure space, closed an $11 million Series A round of funding in March, which should open up even more opportunities for small and mid-size online merchants. The companies view shipping as a competitive advantage, each using unique data integrations and logistics setups to help merchants optimize their shipping programs.
Top retail brands have even started purchasing their own logistics startups, such as American Eagle’s acquisition of third party logistics companies Quiet Logistics and AirTerra, bringing more control over not just the supply chain but an edge at meeting consumer expectations around free and fast shipping.
In an earnings call in September, American Eagle CEO Jay Schottenstein pointed to the company’s focus on supply chain, following its purchase of AirTerra in May 2021, and how investments in enhancing the supply chain would help the company deliver strong returns.
“The supply chain delivers great results even in the face of headwinds. While we made great progress, we’re just hitting our stride,” Schottenstein said. “I see so much opportunity for us to generate incremental value moving forward.”
Controlling the Supply Chain
While most conversations about shipping logistics revolve around cost, it’s actually lack of control over the supply chain that can be the bigger pain point for today’s largest e-commerce companies.
“The [merchants] who are succeeding are thinking, how do I take control of my supply chain?” Elyassi-Rad says. “Because if I don’t have control over it, come peak time, UPS might just say, ‘Sorry, your candle company is not big enough and Nike matters more.’”
To Elyassi-Rad, this is one reason American Eagle is following in the footsteps of Amazon — turning a cost center into a profit center. Not only does the retailer have an asset that it owns, but the company can sell that service to other people.
“So American Eagle is no longer just an apparel company, but they’re also an apparel company plus a logistics company,” Elyassi-Rad says.
Of course, American Eagle’s approach won’t work for every organization. For starters, purchasing a logistics firm takes significant financial investment. But companies without the balance sheet for major acquisitions still have opportunities to streamline shipping and logistics.
In certain regions, retailers are turning existing retail stores into micro-fulfillment centers. If, for example, the cost of labor at a store is less than an outsourced component, brands can utilize that asset and ship certain items to consumers directly from local stores, rather than regional distribution centers or warehouses. At Target, 20 percent of the retailer’s products are ordered online, but more than 95 percent of sales are fulfilled by its stores, not fulfillment centers. That sort of distribution model hinges on the use of sophisticated shipping software that can analyze SKU-level margins.
“It’s a conversation that every executive is either having and or acting on as we speak,” Elyassi-Rad says.
International expansion is often at the top of mind for mature omni-channel brands, particularly by executives who constantly feel a push to increase shareholder value. But global shipping logistics can put more burden on the customer, if the cost of paying duties and taxes is shifted to them.
“Cross-border international expansion is on top of mind for everyone, especially going into the next few years,” Elyassi-Rad says. “We work with marketplaces where they pass on the cost of duties and taxes to the consumer, and then we work with marketplaces where they actually subsidize that cost, which ultimately makes for a better shopper experience.”