E-commerce and warehouse logistics – growth engine and challenge

overview

The current landscape of the retail sector is characterized by massive changes, as consumers' purchasing behavior is increasingly altered by the growing digital connectivity of their customers. They are ordering more and more frequently via PCs or mobile devices such as tablets or smartphones, instead of buying goods in brick-and-mortar stores. Last year, e-commerce sales in Germany reached almost €34 billion. And this is just the beginning, as online retail is predicted to continue its strong growth in the coming years.

The rapid pace of e-commerce is placing entirely new demands on logistics. This applies both to the courier, express, and parcel (CEP) services market, with its handling of shipments and returns, and to intralogistics, which deals with the storage, transport, and order picking of goods. Due to intense competition and low margins, more and more providers are striving to streamline their cost structures while simultaneously optimizing the critical success factor of delivery time

This article outlines the current state and medium-term development of online retail and addresses the resulting challenges facing companies in warehouse logistics

Furthermore, we will publish additional articles on this topic in the coming weeks. Each article will focus specifically on areas crucial to warehouse logistics, such as:

• Comparison of storage methods (chaotic vs. fixed location)
• efficient returns handling
• Delivery times & speed (keyword: Sameday Delivery)
• Machine use and automation in the warehouse
• Networking/Digitalization of Warehousing & Logistics

Overview: The rapid development of the e-commerce market

Worldwide sales of US$1.22 trillion in 2013

According to a study by the market research company emarketer.com, global B2C e-commerce revenue in 2013 was approximately US$1.22 trillion, driven by roughly one billion active online shoppers (http://www.emarketer.com/Article/B2C-Ecommerce-Climbs-Worldwide-Emerging-Markets-Drive-Sales-Higher/1010004). Despite the rapid growth the market has experienced in recent years, further revenue increases are expected. eMarketer forecasts a total volume of US$1.86 trillion in 2016. However, growth rates are expected to decrease from the current global average of approximately 18% to 11% in 2016, which, compared to overall global economic growth of approximately 3-4%, still represents an exceptionally high figure.

With sales of USD 340 billion and 240 million buyers, Europe is currently home to the world's third largest market after the USA and Asia, and although growth in Europe is weaker than in the global comparison, steady increases in market volume to USD 455 billion in 2016 are expected in the coming years.

Global growth is primarily driven by Asian countries, emerging economies like Brazil and India, and Africa. One reason for the slower growth in Europe and the USA is that these regions are already far more advanced in terms of the reach and acceptance of e-commerce. For example, the proportion of online shoppers among all internet users is over 70% in Western Europe and the USA, whereas it is below 45% in Asia and Eastern Europe, and only around one-third in Central America and Africa.

Germany is the second largest market in Europe

Looking at Europe, Germany represents the second-largest market with sales of €34 billion. The UK is by far the leader, with revenues of almost €70 billion in 2013. France (€25 billion), Spain (€15 billion), and Italy (€14 billion) follow in the subsequent positions.

Besides its large population, Germany's high ranking is primarily due to the comparatively high acceptance of online shopping among internet users, at approximately 80%. This is the second highest figure in Europe after the UK (87%), and higher than, for example, the US (73%). Another reason for the size of the German market is the relatively high average annual spending per customer (study: E-commerce in Europe 2014, PostNord). In Germany, this average is almost €800, placing it among the top European countries. Only the UK leads the way – albeit significantly – with average spending of €1,180.

However, growth in Germany was comparatively low at just under 13% in 2013. Significantly stronger growth was observed in other European countries (Italy 22%, Spain 16%).

Clothing is the largest segment in Germany

However, even with rates slightly below the European average, e-commerce as a sales channel will remain relevant for the foreseeable future the It is a growth engine in the retail sector. This is one of the main reasons why almost 500,000 online sellers were active in Germany as early as 2012. From Amazon, Otto, and Zalando to one of over 170,000 commercial sellers on eBay: the internet is becoming increasingly important for retailers the A crucial platform for distributing their products, with the 100 largest shops already generating around €18.5 billion in revenue, accounting for well over 50% of total sales. In recent years, the share of online retail in total retail sales has grown to 8%, with sectors such as electronics and fashion already reaching around 30%.

It is therefore not surprising that clothing and shoes are the main drivers of e-commerce and constitute by far the largest segment. This is followed by electronics and books. Together, these segments account for over 60% of total revenue.

Impact on warehouse logistics

High competition and cost pressures are putting a strain on companies

German consumers are characterized by a comparatively high price sensitivity, which keeps price pressure on retailers operating in the German market consistently high. The fact that German customers also place great value on fast and, above all, free shipping and returns – and that their return rate is among the highest in Europe – considerably exacerbates the cost situation for suppliers. The widespread practice in Germany of paying by invoice also has a negative impact on suppliers, as it delays their access to revenue by up to several weeks.

The resulting margin losses force companies operating in the market to constantly scrutinize their own cost structure in order to remain competitive. Due to the high logistics costs across the industry, efficient warehousing is a particularly important aspect of this.

Investments to increase efficiency in logistics and warehousing

The rapid development, the need for flexibility, and the profitability situation in e-commerce present major challenges for both retailers and solution providers.

In an interview with the industry publication etailment , Dieter Urbanke, CEO of Hermes Fulfilment GmbH, the following answer to the question about the key challenges posed by the rapidly growing e-commerce market (the full interview can be read at http://etailment.de/thema/player-and-people/Interview-So-will-Hermes-in-der-Logistik-wachsen-und-punkten-2206): “The biggest challenge is efficiently processing the constantly increasing number of customer orders and meeting market demands regarding customer service, product availability, and transparency. End customers are demanding ever greater flexibility and a stronger focus on the customer experience. This applies not only to the online shop itself, but also to fulfillment.”

To meet this challenge, market participants face significant investments. Mail-order companies, in particular, have been investing tens of millions of euros in logistics and, above all, intralogistics for years.

Here are just a few examples from the extensive measures that the big players in online retail have taken to modernize their warehouse structures:

• Tchibo is expanding its 200,000-pallet-capacity European central warehouse in Bremen for €50 million to ensure it can meet future demands. The expansion includes the construction of an automated small parts warehouse, a sorting building, and technical equipment for a total of 17 km of conveyor lines. Extensive investments in IT are also being made.
• Bosch is investing over €100 million in a 20-meter-high shuttle warehouse equipped with RFID (radio-frequency identification) and approximately 200,000 storage locations at its logistics center near Karlsruhe. This will increase capacity by 50%, equivalent to an additional 20,000 square meters of warehouse space. This central warehouse will be used from 2016 onwards to supply spare parts to automotive workshops and wholesalers in over 140 countries worldwide.
• Hermes Fulfillment, a subsidiary of the OTTO mail-order company, has opened the world's largest returns warehouse. A total of €470 million was invested in the construction of the logistics center in Haldensleben. The world's largest shuttle system has been operating there since 2011. It has a storage capacity of approximately 1 million items, with a picking capacity of up to 15,000 items per hour during peak periods.
• Zalando uses a central warehouse in Erfurt to ship its extensive product range. The facility covers 120,000 square meters and employs approximately 1,000 people. Expansions to the complex are already planned.

But it's not just the rapidly growing volume of goods to be stored and picked that's responsible for the constant pressure to optimize warehouse logistics. Employee safety concerns (keyword: workplace ergonomics ) and the anticipated further decline in margins due to intense competition will demand a significantly higher degree of automation in the warehouses and distribution centers of online retailers in the future.

And this trend towards greater automation is evident everywhere in intralogistics. Increasingly sophisticated software systems now often handle the entire spectrum of the production flow. Tasks such as inventory management, coordinating orders and shipments, or checking the picking process, which were recently performed by humans, are now being taken over by machines.

But what level of automation is economically viable and will be accepted by retailers? High automation also means that, in addition to significant investments, companies may lose flexibility if they rely too heavily on upgrading their warehouses with advanced technology. Therefore, in the future, e-commerce providers will most likely use flexible automation technology that simultaneously enables high picking performance, low error rates, and optimal storage densities.

For warehouse logistics providers, the following questions must therefore be answered to ensure success in the market:

• What are the most pressing problems that existing warehousing methods face in light of the rapid growth in e-commerce?
• Which technologies and levels of automation will prevail in warehousing and order picking?
• What is the maximum allowable cost for the solutions to be procured?

In a series of articles over the next few weeks, these questions will be addressed, examined in more detail, and potential solutions for their efficient application in warehouse logistics will be explored.