How e-commerce is changing logistics and transportation systems

Predictions about the future that e-commerce will create bring to mind the author Mark Twain’s reaction to reports he had died: “greatly exaggerated”.

Excited hyperbole paints a picture of a world where one day we will simply raise our eyebrow and some new-fangled smart accessory will automatically order us whatever we fancy, which will be delivered almost instantly not just to our doorstep but to our living room!

That’s not exactly what is going to happen. That may be the way things are for a few, but if so, it is hardly an improvement on the comforts of the landed gentry in a bygone feudal era.

That said, the Amazon is a mighty river, and the e-commerce company of the same name is at least as enigmatic: A bookseller that has expanded its product offering and increased in value by a factor of 1,000 in 20 years and has now, with its purchase of Whole Foods, become an upmarket grocer.

So where’s the revolution? It’s not the first company to focus more on cash flow and market share than on profitability during its build-out phase. Amazon’s first big disruption was probably the introduction of algorithmic schemes that allowed users to compare products to get the lowest prices – a happy outcome was formally guaranteed until recently. That meant that, mathematically, you couldn’t beat the efficiency of shopping online, thus disintermediating the power not only of traditional stores but also of the inventory and stocking patterns in use for a century.

E-commerce is now also associated with home delivery. There, too, Amazon moved the needle by offering “free delivery”, practically forcing rivals to follow suit.

The corporate math of this is quirky: Amazon is in fact a service provider with a $150 billion merchandising arm tacked on. The company’s profit is due to the cloud-computing services it sells, while it loses $7 billion due to its shipping offers.

Many believe that Amazon’s strategy is to become so central to consumers’ lives that it can start raising prices and reap profits it forsook in its first two decades of existence. That may be – it’s worth noting that it no longer guarantees the lowest price, an idea that Wal-Mart, another e-retailing giant, has also dropped. But presumably part of the plan is to lose less money on shipping.


One way would be to roll out and dominate the logistics infrastructure required. That means purchasing or building warehouses that are well placed to serve the kingly customers flighty desires. Being able to deliver nearly instantly – which interestingly, is now something consumers prefer to have as an option even when they don’t plan to use it – means frontloading product closer to its final destination, basically guessing what products people will buy and moving them close to their eventual buyers, much as traditional stores always have. Today this is a process that can benefit from Big Data algorithms and logistics software but is still inexorably capital intensive.

The same applies to the final-mile delivery model – often a small truck. It’s worth recalling that WebVan, the 1990s prototype, went bust because it tried to own and control all this. Larger e-tailers today are looking more closely at how to assure resilience through a mix of delivery suppliers rather than direct ownership. This is an area where – as can be seen in disputes over Uber – there is ample local political risk, with labor and environmental regulations likely to play a formidable role.

At this stage, the excitement is in technologically savvy software players who can help move the whole logistics and transportation system “upstream” so that optimal decisions are made in close to real time, the moment the final consumer presses “buy” on their smartphone.

As delivery logistics account for between 5% and 20% of final costs in most countries, there are certainly efficiency gains to extract.

Yet since e-commerce’s explosive growth cannot mathematically continue at current rates, there must eventually come a moment of consolidation. Likewise, while software seems to have infinite efficiency upsides, the amount of goods we can afford – or even want – is not so elastic.

In fact, as Peter Relan, who headed technology at WebVan, that Icarus of all home-delivery companies, notes, many new tech-enabled enterprisers are no longer following the “get big fast” model but rather looking at a “minimal viable product” paradigm. That amounts to assessing how unsuccessful one can be without risking one’s existential survival, which is a world different than bragging about market domination.

In terms of logistics, this is paralleled by increasing interest in having physical real estate in or near high-cost urban areas – the likely motive behind Amazon’s purchase of Whole Foods and its network of stores in affluent neighborhoods. It may also be behind Jeff Bezos’ investments in indoor urban farming start-ups. In Rome, furniture giant IKEA now has several pickup points closer to the center.

Retailers and brands are likely to spend $65 billion on new infrastructure in the U.S. alone to make sure they can participate in a $370 billion market where consumers “pull” products, according to the AT Kearney consultancy. Those supply-chain costs are more than twice as high as traditional “push”-based retail-store channels.

This is where the stakes get higher. More and more city dwellers want cleaner air and less clanging traffic. Delivery is not in fact free - especially when the customer is not at home! - and people may catch on to the hidden costs, in both price and environmental terms. Home delivery may be a highly appreciated option but not in fact a common requirement. When that price is made explicit – a McKinsey study suggests people value same-day delivery as worth about 10% of the merchandise value - people may more frequently opt to wait for a few days and pick it up at their neighbourhood Whole Foods or similar depot point, especially if they reap a discount for doing so.

A recent Deloitte study found that while only 3 percent of shoppers currently buy a product online and pick it up at the store, four times are many view that option as preferable.

In such a scenario the new e-Superstore starts to look a bit more traditional, with butler-like delivery options of various sorts available for special occasions.

Technology’s utopian logic suggests a no-limits world, but reality is full of examples of how things work out differently. In Caracas, Venezuela, the first 28 floors of the Torre Davis skyscraper are occupied by around 3,000 squatters. They have no elevator, but have set up a ramp allowing motorcycle to drive things up to the eighth floor, and there are small bodega-like stories selling basic goods on most higher floors. It wasn’t the plan but, as noted by Rory Hyde, contemporary architecture curator at London’s Victoria and Albert Museum, it works.

Regulators, planners and investors are currently hoping that automated self-driving transport will solve a host of logistical challenges. One major impact such a revolution could have is to reduce the need for parking space, which would massively increase the amount of usable real estate for logistics and transportation providers.

Yet while the robot and drone revolution looks great on YouTube, people are sceptical. San Francisco, today’s tech haven, has just ruled that only nine robots can operate in the city at one time, with a top speed of five kilometers an hour. Oh, and they must be constantly under human supervision!

Rapid technology changes and above all rapid behavioural changes – fickle consumers have always been the challenge for retail sales – make capital allocation particularly challenging. The current vogue is for outsourcing, as shown today by the boom in bicycle couriers, part-time drivers and tomorrow perhaps in competition among urban real estate owners to supply logistics hotels for vendors.

For long-term investors, though, there are probably a few certain truths. What we might call the middle mile is going to remain the most intense phase of automation. For all the last-mile woes, warehouses outside the city limits are likely to get bigger, with benefits of scale also available in the way goods are moved to the cities. Imagine gigantic fortresses with human staffing levels of an oil tanker and able to serve multiple e-tailing clients.

Infrastructure, not retail, is where the big productivity gains are likely to come. In other words, all rivers start upstream.