Trends—July 2015

ShippingPass vs. Prime:
The Fight for Last-Mile Rights

Walmart and Amazon are a study in contrasts, from corporate culture to omni-channel strategy. One promises everyday low prices; the other prioritizes selection and speed. But all things being different, they are chasing the same thing—customer satisfaction.

Both retail leaders have found a common battleground when it comes to securing last-mile rights. Amazon is leading the way—by far—with an innovative, e-commerce-driven business model that features expedited delivery services such as Prime, Fresh, and Dash. The names alone offer a pretty good clue of where the company sees consumerism trending.

So when Walmart recently revealed that it was testing an unlimited, three-days-or-fewer guaranteed shipping service at half the price of Amazon Prime ($99), it turned some heads. Originally dubbed Tahoe—now marketed as ShippingPass—the new invitation-only pilot offers users about one million products, from toys to electronic gadgets. By comparison, Amazon Prime subscribers have access to more than 20 million SKUs.

It’s a compelling gambit for a company that, to date, has largely focused on building innovative retail formats rather than e-commerce volume. But with more than 4,000 stores in the United States, Walmart recognizes that it has a distinct last-mile edge if it can leverage proximity to demand to deliver direct to home.

“A few years ago, 96 percent of the U.S. population lived within 20 miles of a Walmart store,” says Rob Howard, CEO of San Francisco-based Grand Junction, a technology platform that facilitates local deliveries. “Its building spree in places such as California and New York, combined with the introduction of smaller formats, has increased coverage and reduced distances even more.”

Amazon has built smaller distribution centers in larger metro areas, but it doesn’t have Walmart’s national presence. Still, it took 10 years for the big-box retailer to respond to Prime. It has a lot of catching up to do in terms of building out a network, and investing in technology that will enable it to compete on the same level.

“Amazon has unique experience managing ‘fast logistics’ at scale, and it has worked hard in the 10 years since Prime’s launch to build a high-quality national courier network and fine-tune the customer experience,” Howard adds.

Walmart’s three-day shipping guarantee puts a unique twist on e-commerce expectations. Will consumers sacrifice one day of speed and fewer SKUs for a cheaper flat rate? That’s one risk. But there are others.

“In today’s marketplace, you have to offer customers as much as possible. A $50 annual fee with free shipping is enticing. But I question if Walmart might cannibalize some of its business,” says Vic Ricci, executive vice president of Dotcom Distribution, a boutique third-party logistics provider serving high-touch B2B and B2C clients.

For example, Walmart, like other big- box retailers, capitalizes on impulse buys. So providing an easier online option with “free” shipping could erode some in-store sales.

Cost Pressure

Another reality is people who sign up for Prime—and likely ShippingPass—tend to take advantage of that service. So over the course of the year, consumers amortize that yearly fee. This places additional burden on Amazon and Walmart to reduce transportation costs.

“Walmart will probably have to go upstream, if it hasn’t already, and work with carriers to figure out how to squeeze those costs out of the supply chain,” says Ricci.

“Traditionally, companies like to push costs down the supply chain, rather than out,” he adds. “So you have to be creative in how you build partnerships with suppliers and carriers so you don’t add cost.”

Howard contends that three-day shipping gives Walmart appropriate lead time to work out operational kinks, and coordinate a strategy to invest in technology and find courier partners that can deliver optimal customer service without breaking the bank.

“It’s a good move for Walmart, and an obvious baby step toward same-day delivery,” he says. The retailer has capital to spend and e-commerce is an area that presents huge growth potential. Still, Howard is skeptical whether or not Walmart can take advantage of its footprint.

Technology might ultimately be the key that unlocks Walmart’s last-mile strategy. If the retailer gets to a point where it can sense real-time demand and position inventory accordingly—whether it’s in store, at the DC, or conceivably in transit—it has an opportunity to leverage its brick-and-mortar assets and engineer a competitive omni-channel strategy.

It’s not beyond the realm of possibility. While Walmart operates at a different scale, Ricci points to a similar example when he worked at Amazon competitor Barnes & Noble in the U.S. Northeast, which might have one book available at several locations. The company would drive down stock across disparate locations by creating one facility of record. Inventory existed irrespective of location.

While Amazon and Walmart push the envelope to see who can deliver to the customer faster and cheaper, others are knocking on the door, too.

“Amazon does on-demand and am/pm (order in the morning and get it by end of day) same-day, but only Google Shopping Express does a scheduled delivery where the consumer picks a window,” explains Howard. UPS and DHL (with Amazon) are piloting unique services enabling shippers to collect shipments where and when they specify, on demand.

Ultimately it will come down to choice. “Consumers eventually will be able to choose at checkout from one- or two-hour on-demand service, a scheduled window, am/pm, or pickup at a third-party location or 24-7 locker—all of which will have different price points,” says Howard.

Amazon vs. Walmart: Produce or Else?

The grocery business is one product category where Amazon and Walmart are increasingly competitive. The world’s largest retailer has a well-established in-store presence, with 25-percent market share. But online grocery delivery is a new venture—one where Amazon Fresh has built upon the legacies of Webvan and Publix Direct to deliver a viable service in select U.S. cities.

360pi, an Ottawa, Canada-based company that helps retailers navigate the multi-channel landscape through big data insight and analysis, recently completed a study that compares pricing trends between daily Amazon and Walmart shopping baskets for assorted grocery and non-grocery items. The research was conducted between April 9 and June 9, 2015.

Importantly, 360pi did not include shipping costs in its comparison, given that Walmart only recently announced its trial shipping policy.

Among key takeaways from the report:

• Walmart’s grocery basket was initially much more competitive with Amazon than its non-grocery basket. The big-box retailer’s average price dipped marginally below Amazon in the middle of April. However, by May, this began to change with the grocery basket price consistently four to six percent higher than Amazon. Walmart’s non-grocery basket, on the other hand, became more competitive with Amazon, narrowing the price gap to two to four percent.
• The grocery basket was significantly less price-dynamic than the non-grocery for both Amazon and Walmart. The difference was more pronounced at Amazon. It’s still unclear whether both retailers are planning to keep a more “everyday low price” strategy to gain trust among online grocery shoppers, or whether the price dynamism will ramp up in accordance with category maturity.
• Even though Amazon made a significant number of price changes in the non-grocery basket, they were largely insignificant. The average price had a two- to three-percent swing respectively in the grocery and non-grocery baskets during the sampled two-month period. This is consistent with 360pi’s observations in many other categories over the 2014 holiday period. Walmart’s average price on both baskets fluctuated more dramatically during the same period, with a 10-percent and nine-percent swing on the grocery and non-grocery baskets.

Tesla, Truckee CC Pilot New Logistics Program

While discussions continue about a shortage of skilled labor in the U.S. manufacturing and logistics sectors—reports peg this deficit at anywhere from 500,000 to two million jobs—innovative partnerships between academia and the private sector continue to emerge.

The latest example features Truckee Meadows Community College, in Reno, Nev., which established a new four-year degree in logistics to help meet anticipated demand for skilled workers at Tesla Motors and other high-tech companies locating distribution hubs in the region. The school will offer a Bachelor of Applied Science degree in logistics operations management for the first time in the 2016 fall semester.

The new logistics program will train students for operations planning, warehousing, sustainability, and safety.

In 2014, Tesla announced that it would build a $5-billion “gigafactory” at the Tahoe Reno Industrial Center along Interstate 80 to manufacture lithium batteries to power its electric cars. The new facility is a major boon for the area, creating 3,600 construction jobs and 6,500 factory jobs over the next four years.

In terms of economic development, automotive companies are magnets—often attracting a slew of vertically integrated industries and suppliers. Michael Pender, managing director of Porous Power Technologies, a local supplier to the lithium battery industry, calls the coming wave of development an “absolute tsunami.” But companies need to source talent locally.

Applied logistics is an integral part of all distribution hubs, adds Pender, which is why his company located in the Reno area in the late 1990s. “Distribution and logistics are key to so many industries that are here now, and industries that are coming,” he says.

The U.S. community college system has a role to play in helping to devise new curriculums and training that support growth industries.

It’s the responsibility of technical schools to respond to changing economic climates as quickly as possible, says Maria Sheehan, president of Truckee Meadows. “That’s the exciting part—when you can do something that addresses jobs for the future and economic revitalization,” she says.

Driver Recruitment Reaches Outer Limits

A lack of qualified truck drivers is forcing carriers to get creative in how they recruit and retain new employees. Nashville, Tenn.-based truckload carrier Western Express is going to the ends of the earth, and beyond.

The trucking company recently announced plans to install premium, in-cab satellite TV systems in more than 1,600 trucks—at no cost to its drivers. Western Express is purchasing the systems from Salt Lake City-based EpicVue, which delivers TV packages designed exclusively for the trucking industry.

Each system includes a satellite dome and local area antenna mounted and aligned outside of the cab; a DIRECTV receiver inside the cab that features more than 100 channels of premium entertainment and DVR capabilities; and a 24-inch flat screen TV. Additionally, an Internet connection will be available with each EpicVue system.

“With most of our drivers on the road for seven to 14 days at a time, we are truly excited about making this investment so they can enjoy two of the creature comforts from home—cable television and Internet service,” explains Robert Stachura, chief operating officer, Western Express.

The carrier expects to have the full installation completed by September 2015. Then it will evaluate the possibility of outfitting the EpicVue satellite TV systems throughout its remaining fleet of 800 trucks that it uses for regional and dedicated operations.

Ghost Economy Scares Retailers

Logistics experts know missteps at any point along the supply chain can lead to inefficiencies and lost sales. A recent study by research firm IHL Group quantifies the toll overstocks, out-of-stocks, and returns exact on retailers around the world: $1.75 trillion annually, or about 12 percent of the $14.5 trillion global retail economy. OrderDynamics, a provider of prescriptive analytics software, commissioned the study.

The researchers use the term “ghost economy” to describe “activities occurring within the enterprise you don’t have a way to see and resolve, yet are eroding the P&L and reducing the enterprise’s value,” says Kevin Sterneckert, chief marketing officer of OrderDynamics.

The study examined three areas of inefficiencies: overstocks, out-of-stocks, and sales returns. Returns account for the largest portion of the ghost economy, at about $643 billion. Overstocks, in which sales occur, but at a loss, were next, at $472 billion. Finally, out-of-stocks, in which the customer wants to buy something, but can’t because the merchandise is unavailable, totaled $634 billion.

While retailers can’t plan for or eliminate all factors contributing to the ghost economy, they can tackle many of them. “Better aligned systems, forecasts, and insight can help recapture 50 to 70 percent of these losses,” according to the study.

This is key, especially as e-commerce accounts for a growing share of retailers’ business. While digital commerce has been shown to grow revenue, it’s not always profitable. “There are a lot of ghosts running around the digital world,” Sterneckert notes.

The biggest drivers of the ghost economy are bad processes that result in, for instance, retailers marketing products that are no longer in stock; data disconnects, which can lead to customers receiving products after the promised due date; and inaccurate forecasting.

To remedy these drivers, “Retailers need to address many systematic issues to alleviate the ghost economy,” Sterneckert says. To minimize data disconnects, they need tools that will link systems and information across all channels, including the Web, stores, and call centers. They need technology that will allow them to make near real-time decisions—for instance, letting them know the moment inventory isn’t available, so they can stop marketing the items.

Retailers also need to leverage artificial intelligence (AI). For instance, AI can automatically alert managers when they might want to consider price changes on items with slowing sales. “It’s raising the role of the decision maker and allowing technology to handle a manual effort,” Sterneckert says.

Eliminating disconnects and poor processes can offer retailers the equivalent of an 11.7-percent boost in comparable store sales, the study reports. What’s more, “They don’t need to get new customers or build new stores,” Sterneckert says. “They just need to fix the problems contributing to the ghost economy.”

— Karen M. Kroll

DC Locations: How Low Can You Go?

By analyzing trends in the macro economy, taking guidance from large corporate clients, and surveying site operating costs, a consultant has identified the lowest-cost locations for U.S. distribution warehouses.

The report, Comparative Distribution Warehousing Costs in Port and Intermodal-Proximate Cities, from The Boyd Company Inc., a location consultancy in Princeton, N.J., compares the costs of distribution warehouses in real estate markets that Boyd’s clients increasingly ask the firm to evaluate.

“These are the 25 cities you will be hearing about over the next 18 months,” says John Boyd Jr., principal. Costs include labor, real estate, construction, taxes, utilities, and transportation, and are based on a 500,000-square-foot facility with 150 hourly workers. All sites had strong links to global distribution via Class 1 intermodal rail terminals and deepwater container port operations.

The Boyd Company highlights the lowest-cost site in each of the East, West, and Gulf Coasts. “These are smaller cities that are increasingly on the map for new distribution center projects,” says Boyd.

• In the East, Chesterfield, Va., had the lowest annual operating cost of all 25 locations at $11.28 million. Its proximity to the Port of Norfolk, which is able to accommodate post-Panamax ships that will be traveling through the newly expanded Panama Canal, makes it a prime location. Chesterfield also is the location of one of Amazon’s new state-of-the-art fulfillment centers.
• In the West, Ritzville, Wash., had the second-lowest annual operating cost at $11.35 million. The city stands to benefit from growth in U.S. exports to China and Southeast Asia.

With more than 60 percent of the world’s millennials living in Asia, and a growing middle class demanding more and more U.S. branded food and consumer goods, “We expect companies to begin reconfiguring their supply chain operations so they can ship out of low-cost locations in the Pacific Northwest,” says Boyd. “It’s an exciting transformation of the global economy.”

The Trans-Pacific Partnership agreement is expected to further stimulate that trade. Ritzville also has some of the lowest utility costs in North America, an important consideration for distribution centers as the need for refrigerated goods, including frozen food, beverages and pharmaceuticals, increases. Love’s Travel Stops & Country Stores recently built a mega truckstop off I-90 in Ritzville, which Boyd views as a precursor to new distribution projects in Ritzville.

• In the Gulf, Humble, Texas, is well positioned to handle increased Port of Houston traffic expected from new trade with Cuba. The port also has launched a pilot to import summer citrus from South Africa. Humble has the fourth-lowest operating cost of the 25 cities—$11.66 million—and an Amazon fulfillment center.

Also on the list are Idaho Falls, Idaho, which is the crossroads of the North American oil and gas industry boom, and Fernley, Nev., which is becoming a prime location for suppliers to Tesla’s gigafactory, Boyd says.

To get a copy of the full report, email [email protected].

— Tam Harbert