Former manager at ShipBob Inc
- Sustainability and longevity of recent US e-commerce volume growth
- Key cost pressures across e-commerce logistics chain
- Third-party logistics platform and competitive environment dynamics
- Q4 2022 growth outlook
FedEx spooked the US e-commerce logistics market in its Q1 FY23 with its comments about slowing growth and the recessionary conditions we’re seeing. What are your thoughts on the current trajectory of e-commerce parcel volumes?
You mentioned we could see a slowing of parcel volumes growth over anywhere from one to four years. How should we think about the factors that would elongate that period of slowing growth vs what might lead to a quicker recovery?
Looking at the trend rate of growth, players such as Amazon and other e-commerce-enabled third-party logistics players are obviously banking on this more secular growth in parcel volumes moving forward. Do you think the sharp increase in volume growth during the pandemic was a one-off that is now starting to normalise, or might that be representative of a substantial increase in volume growth that we should expect to see over the medium-to-long term?
On the subject of showing people what’s possible, you talked about consumables and things such as being able to get medicine online and have it delivered. How many e-commerce logistics players are really enabled to provide that all-in-one, end-to-end solution, so not only getting people their parcel orders, but also things such as medicines and pharmaceuticals? Are we seeing that with the third-party logistics players that cater to the space, or even the in-house logistics platforms of players such as Amazon?
What trend average did we see within volume growth pre-pandemic, what did we see during it and what are your expectations now, post-pandemic?
It’s interesting that FedEx is reporting the lower sales and blaming it on slowing volume growth. If we’re expecting that the growth is back to what it was pre-pandemic, does that mean the third-party logistics and e-commerce logistics space built itself too aggressively around the pandemic numbers and people expected growth that was just out of trend?
Why do you think some carriers, third-party logistics players and shippers might still be doing fairly well or better than players such as FedEx?
As a result of the weak volume growth that FedEx saw, the company also talked about and announced higher rates. Are we seeing this across third-party logistics in the space and could the imposition of higher shipping rates and surcharges such as the fuel surcharge negatively impact demand?
Do you think there are red flags or anywhere you might consider the increased shipping rates and surcharges starting to impact demand? Especially if we’re talking about a slower volume growth environment, I imagine many players might be worried about what the volume growth looks like moving forward, and obviously higher prices impacting that volume growth is also something to look out for.
Your comments are an interesting way of thinking about the cost control levers – instead of just charging higher rates, another tactic is to lengthen the lead times. How does that relate back to the cost structure management for the e-commerce logistics space? How does extending that delivery cycle allow them to charge lower rates than if they were trying to push through two-day and overnight delivery?
Why haven’t two-day and overnight delivery been sticking with the customer?
Another reason two-day and overnight delivery haven’t been sticking seems to be failure to hit targeted lead times. You pointed out that in many cases, they target 3-5 days and end up on day seven, so are there issues with the logistics chain in meeting lead time targets?
Do you see USPS as the lowest-cost player in US e-commerce logistics?
How do you assess the implications of USPS’s improved competitiveness and low-cost position? What do these things mean for other e-commerce logistics players in the near term, when we talk about lower-growth recessionary conditions and players such as ShipBob, Deliverr, FedEx and UPS? If the volume isn’t there to subsidise and they’re starting to charge higher rates, does that put USPS in a position to steal share from these private sector players?
Looking at the differentiators or performance that we’d expect from players such as UPS, if they’re going to charge shipping rate so much higher than the Postal Service, what’s the value-add? We talked about lead time and how that’s actually not extremely important for the customer today, so where’s the value-add here to justify charging USD 5 per unit higher?
What are your thoughts on the stability of volume growth in the near term across different parts of the market? When we look at the e-commerce market, parcel, different parts of courier and so on, do you think certain parts of the market hold up better in the near term vs others?
When we look at the cost structure of the e-commerce logistics industry – so sortation costs, fulfilment costs, last-mile costs and various other parts of that chain – how would you segment the impact of recent inflationary pressures across that chain?
Where do you think the logistics chain has been most impacted by inflationary pressures? Where have you noticed the biggest cost-per-parcel increase or cost-per-unit increase, and perhaps parts of the chain that are more insulated against general inflation?
How does the VCPO [variable cost per order] metric play out? How would you define that metric and what did it look like pre-pandemic vs now?
We’ve seen about 50% inflation in the VCPO in e-commerce logistics pre-pandemic to now. I’ll assume this is more of an average or an anecdotal figure that you’ve seen in your experience. How do you think about which parts of that inflation are sticky vs more temporal, or parts that might normalise as things return to normal on the inflation side? Is there a part that’s sticky, perhaps such as labour? What are the chances that you start paying people less in 1-2 years?
What are third-party logistics players and the platforms for their in-house logistics arms doing to hedge out the labour component in the longer term by automating? Are we seeing that successfully implemented?
Would it be fair to say you’re not super confident in the role of automation in bringing down unit costs in e-commerce logistics, longer term?
How is the chain going to handle the general inflation in unit cost? Where does it get passed on or how can it be hedged out? Who absorbs or swallows it? Will that be Amazon? Will Amazon pass it to the customer? Do the third-party logistics players charge higher or do they just swallow that inflation and take the volume allocation?
Using VCPO as the unit cost metric, we’ve talked about how it might stay sticky and higher moving forward, but how has it trended over the last 3-5 years? We’ve got the pandemic in there, but also the more normal period before that. Was the VCPO figure inflating or reducing over time as we saw players enter the market in that scale?
If the unit cost or VCPO was reducing prior to the current inflationary spark, and that came down to the factors you mentioned, what’s changed, given we’re now seeing that the only thing likely to bring it back down is automation? Did we really flesh out all the productivity improvements in the last 3-5-year cycle? Is there anything left that can provide some VCPO reductions in the near term?
How do you assess the role of GMV and density growth? Is there a unit productivity benefit there, either having previously been realised or being able to be realised by players in the space moving forward? Does that add any benefit to the unit cost or provide other unit economic benefits that you could foresee?
GMV and density growth is another secular factor that we know the platforms and third-party logistics players are trying to play. How might unit economics return to scale when there’s growth? If we take metro New York, for example, and density doubles, how do we think about the benefit to the player there? Is it going to be commensurate or proportionate? Is there an outsized benefit there that’s greater than trends in the VCPO? How would we think about that?
Do you think there’s a unit economic benefit or any economic benefit to looking at the lower lead time market? We discussed how two-day and overnight aren’t what they’re cracked out to be. What was the rationale there, and how do we think about lower than that, so same day and sub-same day, perhaps even same hour or two-hour? Is there any reason for the platforms to target this market or third-party logistics players to try and provide facilitation of services there, or is that just not feasible?
With all the instant delivery and delivery on-demand start-ups that have tried to enter the space, we might be thinking here that there’s no market for it. Are they too early to the party?
Even if the volumes were to be there in the micro-fulfilment space, would you be confident that a micro-fulfilment start-up would be a competitive player vs a FedEx or a UPS? Would these start-ups have the incentive to try and crack that market, or even Amazon itself, if it decided to in-house that function?
How do you expect competitive interactions between platforms such as Amazon and the third-party logistics players to change in the near term? Could there be any volume commitment or perhaps even pricing squeeze here? Will there be a large churn in volume share between all the third-party logistics players and what they’re getting from the platforms?
What are your expectations around market share and volume share trends in e-commerce logistics?
I think UPS said in July 2022 it would not lift the number of packages it would deliver for Amazon? Do you find that surprising, when we consider that we’re going into a slowing growth environment, where perhaps third-party logistics players would become more competitive for volume? My understanding is UPS was looking to put that limit there to focus on improving its return profile. Does that make sense to you? Is this how third-party logistics players should be behaving, as opposed to competing for volume?
In the delivery space, when we think about the rise of Amazon – overtaking FedEx and now getting close to UPS in the delivery space by parcel volumes – do any of the announcements earlier in 2022 suggest to you Amazon will reduce its volume share growth in the near term? The company is looking to shed warehousing space and has made recent announcements around curtailing its air fleet growth.
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