Two things that my wife loves are good food and nice purses. In 2020, those two options became exclusively available, for the first time, online. While our personal airline and hotel expenses declined by 100%, our e-Commerce and food delivery bill mushroomed.
The COVID-19 global pandemic boosted US e-Commerce growth from a 10-year average of 15% to 44% in 2020, sending online sales as a percentage of total retail spend above 20% for the first time, according to Digital Commerce 360. US food delivery growth trailed slightly at 32%. The delivery economy has benefited from the pandemic and fast-forwarded its trajectory by at least five years. Online shopping is now expecting to surpass traditional retail by as early as 2024. In 2020, retailers big and small closed 12,200 stores.
Logistic cost as a percentage of net sales rise with the tide
As eCommerce companies continue to grow, logistic costs have skyrocketed over the past decade.
In 2018, Amazon’s fulfillment and shipping expenses amounted to $34.0 billion and $27.7 billion, respectively, an increase from just over $1 billion each in 2007. To control shipping costs, Amazon retrenched from FedEx and UPS and brought shipment management in-house; the company now delivers more than half of its own packages.
Relative weights of both fulfillment and shipping costs have grown steadily, accounting for 26.5% in 2018 compared to 16.6% in 2007, according to Statista.
$15 an hour is history for eCommerce
Whether the Democrats are able to pass the Raise the Wage Act of 2021, which would gradually increase the federal minimum wage from $7.25 to $15 by 2025, this would hardly affect companies such as Amazon. The eCommerce giant has already been paying a minimum starting wage of $15 an hour for all full-time, part-time, temporary, and seasonal workers since 2018.
Target has since followed suit, and last month Walmart has upped its minimum wage in the eCommerce warehouse by an additional $2; its workers in the distribution center now start at $17 to $18 an hour. Amazon responded with a hike in entry wage to $17.
Cheaper, Faster, Cheaper
While the increasing wage is not helping eCommerce’s bottom line, consumer expectations move in the opposite direction. Seventy percent of consumers are price sensitive to shipping cost, according to McKinsey & Company. This adds greater pressure to eCommerce companies to cut shipping cost while maintaining shipping lead time within three days, a standard consumer expectation according to research conducted by A.T. Kearney and a number that is only likely to decrease over time, but without an additional price tag.
Rising wage and increasing consumer expectations are driving logistic automation adoption.
We have gone full circle. There are two ways to reduce fulfillment and shipping costs: either by hiring fewer people or by reducing the output per worker, both of which are highly laborious activities.
The US manufacturing sector has followed the exact same path. Between 1991 and 2011, the sector doubled its output per employee, reducing labor cost as a percentage of net sales to a single digit. During the same period, the number of operating robots grew at a similar rate, augmenting labor productivity and keeping labor input constant, while significantly increasing output.
Thus, it is only logical that the ecommerce industry follows the same path. The automotive industry was highly labor-intensive before Henry Ford’s invention of and introduction of robotics in the assembly line. We expect industrial robots to augment fulfillment and shipping activities and create venture return automation opportunities in this sector.
In the next article, we will present a detailed examination of the workflow behind the fulfillment center and where opportunities exist for the most lucrative warehouse automation. We will then turn our attention to the hype behind last-mile delivery, and examine the challenges and opportunities within this space.