E-COMMERCE LOGISTICS in the UNITED STATES Domestic and International Transportation, Warehousing and Fulfillment, Last-Mile Delivery, and Reverse Logistics

E-COMMERCE LOGISTICS IN THE UNITED STATES Domestic and International Transportation, Warehousing and Fulfillment, Last-Mile Delivery, and Reverse Logistics

April 2018

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©2018 Armstrong & Associates Contents Executive Summary 4 Report Scope and Definitions 13 E-Commerce Networks, Transportation Logistics, and Domestic Transportation Management 15 E-Commerce Logistics Network Shifts 15 E-Commerce’s Impact on Less-than-Truckload, Full Truckload, and Intermodal Transportation 19 Third-Party Logistics for E-Commerce Transportation 23 Focus On: Amazon Logistics 24 The Last Mile 32 Parcel 32 Same-Day Delivery 40 Focus On: Same-Day Grocery Delivery 45 Focus On: Last-Mile Delivery for Heavy Goods 46 E-Commerce Warehousing and Value-Added Services 53 Facilities, Demand, Development, and Location 53 Labor Market 56 Technology 59 E-Commerce Warehousing Value-Added Services 64 Focus On: Value-Added Services for Beauty Products and High-End Apparel 65 Focus On: Value-Added Services for Subscription Boxes and Meal Kits 67 Cross-Border E-Commerce Logistics 71 Cross-Border E-Commerce Market, Growth, and Trading Partners 72 Third-Party Logistics for Cross-Border E-Commerce 75 Third-Party Logistics Services for Cross-Border E-Commerce 76 New Value-Added ITM 3PL Services 78 Global Networks 82 Small- and Medium-Sized Retailers 84 Cross-Border E-Commerce Case Studies, Challenges, and Trends 85 Cross-Border E-Commerce Profitability and Logistics Costs 85 Focus On: Cross-Border Profitability at ASOS 88 Focus On: Shifting International Logistics Networks 91 Focus On: Fourth-Quarter Seasonality 97 Focus On: Cross-Border E-Commerce Drop Shipping 100 E-Commerce Reverse Logistics 103 E-Commerce Reverse Logistics Costs, Speed, and Facilities 103 E-Commerce Retailer Returns Strategies 106 Third-Party Reverse Logistics Services for E-Commerce Retailers 108 Focus On: Algorithms and Predictive Analytics in Reverse Logistics 110

E-Commerce Logistics sales. Likewise, the massive changes in speed, price, and assortment that have characterized the in the United States: rise of e-commerce have been achieved due to A $117.2 Billion Industry sophisticated and continuously improving logistics Within the last 20 years, e-commerce has capabilities. transformed the retail industry. By the end of 2017, e-commerce accounted for 9.1% of all retail We estimate U.S. e-commerce logistics costs sales.1 E-commerce retail sales for the year, as reached $117.2 billion in 2017. This figure accounts defined by the U.S. Department of Commerce,2 hit for the key costs associated with e-commerce $452 billion. Add to that non-retail3 business-to- logistics: inbound and outbound transportation business e-commerce sales, and the figure could (including last-mile delivery), warehousing easily double. and distribution, reverse logistics, logistics administration, and inventory carrying costs. E-commerce retail sales growth has been strong and consistent, with a 14.7% compound annual growth rate (CAGR) in the last five years. The Figure 1. U.S. E-Commerce Logistics Costs, 2017–2020E, US$ Billions industry is showing no signs of slowing, and is expected to grow at roughly the same pace through 2022, with a CAGR of 14.4%.4

We can’t overemphasize the role logistics plays in e-commerce retail. E-commerce as we know it would not be possible in the United States without $196.2 our vast, efficient logistics networks. The logistics $168.2 $141.6 infrastructure to support e-commerce has grown $117.2 alongside the e-commerce retail industry. Retailers and logistics providers engage in domestic and international transportation, warehousing and fulfillment, last-mile delivery, and reverse 2017 2018E 2019E 2020E logistics to support the growth of e-commerce

1 “Quarterly Retail E-Commerce Sales: 4th Quarter 2017,” U.S. Census Bureau, U.S. Department of Commerce, February 16, 2018, https://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf. 2 “Industries at a Glance: Retail Trade: NAICS 44–45,” Bureau of Labor Statistics, March 2018, https://www.bls.gov/iag/tgs/iag44-45.htm. 3 Non-retail as defined by the U.S. Bureau of Labor Statistics. 4 “Retail Ecommerce Sales: US,” eMarketer, February 2018.

4 Executive Summary

E-commerce now accounts for 6.9% of U.S. At the time, the industry did not require much logistics costs, up from 5.2% in 2016. Noting support in the way of logistics. When consumers that e-commerce now represents a significant placed an order online, it was obvious they’d be proportion of logistics costs, Armstrong & expected to pay for shipping on an order that Associates undertook an in-depth study of would likely take a week or more to arrive. The the current state of domestic and international turning point for e-commerce logistics came transportation, warehousing and fulfillment, last- several years later, when Amazon launched mile delivery, and reverse logistics supporting Amazon Prime in 2005. For an annual fee of e-commerce. This report represents the wealth of $79, Amazon promised unlimited “free” two-day data and trends we uncovered in the course of our delivery on a million items. With this launch, research. Amazon established the “new normal”: two-day delivery, free delivery, and a seemingly endless Our focus is the logistics of transportation, storage, product assortment. and fulfillment related to e-commerce, from the manufacturer to the customer. This includes a vast The novelty and luxury of two-day free shipping array of parties, many of which we have worked lasted for years. But Amazon continued to raise with firsthand. To analyze ground transportation, the bar. Gradually, two-day delivery evolved from the middle mile to the last mile, we studied into next-day, then same-day. Free shipping trucking companies, parcel carriers, gig-economy was virtually unheard of prior to the launch of delivery platforms, domestic transportation Amazon Prime; today, two out of every three management third-party logistics providers e-commerce transactions are shipped free.1 As for (3PLs), and Amazon’s 3PL services. To assess product variety, the rising popularity of groceries, e-commerce warehousing and fulfillment logistics, prescriptions, furniture, and appliances attests to we studied fulfillment centers, sortation centers, the assortment of products customers can now parcel fulfillment centers, automation systems purchase online. Today, Amazon Prime members and providers, and value-added warehousing and can place an order for free, same-day Whole Foods delivery 3PLs. From an international perspective, delivery. If consumers need a place to store all we studied international transportation those groceries, Amazon can solve that problem, management 3PLs, global omnichannel too. Thirty different full-size Kenmore refrigerator retailers, air and ocean freight carriers, and even models are available for free two-day delivery. international payment platforms. Finally, to inform our discussion of reverse logistics, we studied Keeping up with the “new normal” is the biggest retailers and 3PLs specializing in services tailored challenge facing e-commerce retailers today. to reverse logistics. Above all else, these three factors—delivery speed, delivery price, and assortment—have transformed The “New Normal”: e-commerce logistics from a niche service to a A Turning Point in $117.2 billion industry. E-Commerce Logistics The first e-commerce retailers came online in the mid-1990s. When the Census Bureau first started recording e-commerce sales in 1999, e-commerce represented just 0.6% of all retail sales.

E-Commerce’s “Extra Mile” The well-traveled path from distribution center to store location is being replaced by a much We frequently talk about the “last mile” in more involved series of moves: from distribution logistics—the short but costly final leg of a centers to fulfillment centers to parcel hubs and product’s journey. The shift from brick-and- sortation centers to last-mile delivery providers mortar to e-commerce retail has resulted in a for residential delivery. See Figure 2, below, for an such a significant addition to the typical logistics illustration of e-commerce’s new distribution path journey for retail products that we think of this as for a parcel delivery. e-commerce’s “extra mile.”

Figure 2. The “Extra Mile”: E-Commerce Retail’s Path from Manufacturer to Customer

Brick-and-mortar: Goods are transported from the warehouse to a store via full truckload.

After pickup from a port or manufacturer, goods are picked up by a dray carrier for delivery to a DC or deconsolidated and transloaded to a carrier.

The E-Commerce “Extra Mile:” Goods are transported from the warehouse to a fulfillment center via full truckload or less-than-truckload.

Goods are packed and sent to one or more parcel sortation centers.

A parcel carrier handles delivery to a customer’s doorstep.

Redrawing the Map: delivery. LTL carriers have been beneficiaries of the rise of e-commerce. As demand increases, Logistics Network Shifts LTL carriers have been expanding their terminal networks and even using terminals for short- E-commerce is effectively redrawing the map for term e-commerce warehousing and distribution. logistics networks. We see the impacts first in Capacity is becoming stretched for some storage and fulfillment network shifts, which have LTL carriers. To accommodate demand, new a cascading effect on domestic transportation, equipment orders are up, including orders for last-mile delivery, international transportation, and trucks best suited to e-commerce. Though this reverse logistics. should increase capacity somewhat, the current state looks as though it will extend well into 2018. Two-day delivery necessitates proximity to customers, which means more distribution centers LTL has benefited from e-commerce; still, LTL and fulfillment centers. To accomplish two-day only accounts for less than 10% of total trucking delivery, retailers that previously could have relied revenue. Full truckload (TL) carriers also play a on one or two distribution centers now must have significant role in e-commerce transportation. five to provide reliable two- to three-day delivery. The inbound transportation leg, from a port or The increasing frequency of next-day and same- manufacturer to a distribution center, is largely day delivery requires an even more dramatic the same for brick-and-mortar and e-commerce increase in locations. Next-day delivery works best retailers. With inbound transportation accounting with 40-50 locations, and same-day requires 80- for about 20% of logistics costs for a typical 1 100 locations. e-commerce shipper, it is evident that TL carriers benefit from increasing e-commerce retail as well. Rapid delivery requires location changes, too. Some have signed dedicated contract carriage 3PL A retailer with two distribution centers may agreements with e-commerce shippers, increased have locations on the East and West Coasts, density, used driver teams to double the speed of for example. Two-day delivery, however, means long-haul routes, and built or expanded last-mile retailers and 3PLs have snapped up space on the businesses to meet the growing demand for last- periphery of major metro markets and near parcel mile residential delivery. hubs. Now, warehousing demand is heating up in secondary and tertiary markets, too. The Last Mile Meanwhile, the popularity of e-commerce retail While the three primary e-commerce drivers we comes as brick-and-mortar’s popularity wanes. discussed—two-day delivery, free delivery, and Nearly 7,000 stores were closed in 2017, and seemingly endless product assortment—impact experts predict that up to a quarter of malls may every leg of logistics, other e-commerce trends be shuttered within five years. are also at play. The customer-centric nature of e-commerce retail has a major effect on logistics. Domestic Transportation The origin of customer-centric culture can be These network shifts are far from complete, but traced back, once again, to Amazon. Each year, we have already seen a direct impact on domestic Jeff Bezos, Amazon’s CEO, writes a letter to transportation for e-commerce. Smaller shipments Amazon shareholders. For more than 20 years this travel shorter distances. Less-than-truckload (LTL) letter has included a section titled “Obsess Over carriers are well-equipped for the transport of Customers.” The section details the company’s e-commerce goods from distribution centers to annual efforts to cater to customers. Here’s an fulfillment centers, as well as some local last-mile excerpt from 2017: “Even when they don’t know it,

1 Müller, S., “DHL Omni-Channel Day 2017,” DHL Consulting, May 4, 2017.

customers want something better, and your desire Finally, heavy-goods last-mile delivery providers to delight customers will drive you to invent on have seen a surge in demand as e-commerce their behalf.” retailers expand into the furniture and appliance product categories. 3PLs, as well as LTL, TL, Nowhere is this principle more evident than in last- and regional carriers, are adding or expanding mile delivery. E-commerce’s last mile, consisting of this service offering. Many carriers require new, delivery to a customer’s doorstep, is the epitome smaller equipment to traverse residential areas, of convenient, customer-centric service. This last and the service is labor-intensive and costly. Still, mile was previously traveled by someone else: the by managing costs through adequate density, and customer. Last-mile delivery essentially replaces potentially offering complementary in-home value- the customer’s transportation to and from a added services, this area offers opportunity for store. E-commerce retail has assumed an entire 3PLs and carriers. logistics step that had previously only existed on a very small scale. And, of course, the retailer often Warehousing and Fulfillment provides this service for free. This is no small favor, as the last mile can account for 30%–40% of the E-commerce’s increasing product assortment cost of transportation. has had a profound effect on e-commerce warehousing. E-commerce retailers offer a vast As a result, leading parcel carriers UPS and assortment of products that must be available FedEx have experienced a shift in the mix of across ever-expanding fulfillment networks. business-to-business (B2B) and business-to- Development is booming, both in terms of mega- consumer (B2C) packages they transport. The fulfillment centers (1 million square feet and up) direct result is a lower delivery density. A B2B and smaller facilities closer to urban centers. In delivery consists, on average, of three packages, fact, demand and rents have both reached record compared to just one for a typical B2C delivery. highs. Some real estate investment trusts report This has placed pressure on profitability, which that space devoted to e-commerce exceeds 20% parcel carriers are addressing by increasing prices, of new leases. improving efficiencies, expanding networks, and investing in sortation capacity. The unparalleled E-commerce warehousing is affected by the residential delivery network of the United States current tight labor market. The labor-intensive Postal Service (USPS) also provides a convenient piece-picking work characteristic of e-commerce partnership. UPS and FedEx funnel packages into fulfillment requires three times as many employees the USPS’s Parcel Select service, which pairs the per square foot as a typical warehouse. As labor demand grows, high wages are exacerbated sortation capabilities of parcel carriers with the delivery density of the USPS. Meanwhile, these by increasing local competition. As a result, high-revenue package deliveries offset the USPS’s investment in technology and automated solutions declining mail revenues. has become more enticing, both as a cost-saving measure and an opportunity to drive efficiency. Same-day delivery presents more new challenges. E-commerce retailers must secure delivery staff Within warehousing, we see the impact of yet over a wide geography at a low cost. This has another e-commerce-driven trend: the attempt given rise to online same-day delivery platforms, to compensate for customers’ lack of an in-store staffed by gig-economy workers. While this experience. It’s no secret that visual merchandising solution helps satisfy the current demand for appeals to consumers’ psyches in stores. Color, same-day delivery, we believe that a more signage, texture, light, and displays help convert sustainable model will be necessary to support the browsers to buyers in a way that even the slickest growing same-day delivery space. website cannot: once customers have entered a store, they’re up to 10 times more likely to

make a purchase than a customer browsing Reverse Logistics that same retailer’s website. This is particularly true for high-end categories such as beauty After e-commerce merchandise painstakingly products and apparel. E-commerce retailers are makes its way from international manufacturers increasingly looking to provide personalization to U.S. ports, it is picked up by a dray carrier for and picture-perfect packaging to customers, delivery to a distribution center, or deconsolidated meaning demand for value-added services is on and transloaded to a carrier. From the DC, an LTL the rise. Value-added services are also tailored to or TL carrier will transport the merchandise to other high-volume and high-growth e-commerce a million-square-foot fulfillment center where a product categories, from consumer electronics to worker picks a single piece as part of her several- subscription boxes and meal kits. mile daily journey around the facility, perhaps even wrapping it in tissue paper before placing it in a box. Next, the package enters the parcel carrier Cross-Border network, where it is sorted at one or more facilities. Increased product assortment isn’t limited to It may be handed off to the USPS for final-mile domestic e-commerce. Cross-border e-commerce delivery to the customer’s doorstop. Then, a represents about a fifth of global e-commerce customer unwraps the package—and, in the case and is growing twice as quickly as domestic of one out of every three e-commerce purchases, e-commerce. International goods were once decides she doesn’t want the item, after all. difficult to discover and buy. Now, a global assortment of products appears to be local, as E-commerce merchandise is returned up to three many e-commerce websites display products in a times more frequently than products purchased customer’s own language and currency. in stores, meaning that reverse logistics is of enormous importance. Again, speed is a pressing To achieve cross-border delivery that’s measured concern. Short-lifecycle products require speedy in days, not weeks, e-commerce retailers must returns to get inventory back in fulfillment balance innumerable decisions. Retailers seek a centers, otherwise retailers risk overstocking. balance between international transport modes, The unpredictable mix and volume of returned choosing between air freight shipments—complete SKUs cause retailers to weigh the pros and cons with speed and visibility but rising rates and of dedicated, co-located, and multi-client returns tight capacity—or slower but more cost-effective facilities. ocean freight. Global retailers must compete with domestic retailers on delivery speed and price, The complexity of handling e-commerce yet rein in logistics costs to remain profitable returns also calls for improved systems and the while doing so. E-commerce has helped drive an implementation of new technologies. Juggling both urgency for global apparel retailers to turn to a in-store and shipped returns poses a challenge for “fast fashion” model, and locate operations closer retailers without top-notch inventory management to consumers, yet this comes with the cost of systems. Some retailers also harness returns investing in international networks. And after years data to inform predictive analytics, disposition of overstocking on holiday merchandise, retailers decisions, and even assortment, pricing, and are rethinking the balance between tight inventory facility location optimization. management and the cadence of seasonal imports.

U.S. E-Commerce Logistics Growth in e-commerce logistics costs is also driven by overall logistics trends. Total logistics Costs: 2017–2020E costs accelerated significantly in 2017, and we Despite the complexities of e-commerce logistics, expect the growth rate through 2022 to exceed the an e-commerce retailer’s logistics costs are 2012–2017 growth rate. actually quite comparable to a brick-and-mortar retailer’s. Outbound transportation, warehousing At the same time, costs will be offset, to a degree, and fulfillment, and reverse logistics costs are by efficiency gains generated through technology clearly higher for e-commerce, but brick-and- investments, optimization of storage and fulfillment mortar retailers face higher inbound transportation facility locations, proximity to customers, improved costs, and must account for store labor and rent.1 systems and better applications of data analysis, and the systematization of e-commerce-oriented We estimate U.S. e-commerce logistics costs will service offerings. increase from $117.2 billion in 2017 to $196.2 billion in 2020, with a compound annual growth rate of E-commerce retail is still very much an industry 18.8%. This growth rate is higher than anticipated in development. Many retailers are playing e-commerce retail growth (with a 2017–2022 catch up and are doubling-down on growing CAGR of 14.4%). their e-commerce businesses. There are many moving pieces—we hear warnings of the “retail Costs will be driven by many factors. E-commerce apocalypse” as brick-and-mortar stores and sales will continue to represent an increasing malls close, yet many e-commerce retailers share of total retail sales. Development of logistics have recently opened physical locations. networks will require investment. As logistically Likewise, e-commerce logistics networks are still complex product categories, such as furniture and developing. We expect total e-commerce logistics groceries, make the shift to e-commerce, last- costs to continue to increase into the foreseeable mile delivery will grow more cumbersome and future. costly. Parcel is the most rapidly growing logistics cost segment in the U.S., and shippers face rate Third-Party Logistics increases driven, in part, by carriers pricing accordingly for an adjusted B2B/B2C business Providers mix. Reverse logistics will assume an increasingly Clearly, e-commerce retailers are juggling a vast significant role in retail; as total e-commerce array of new challenges. Third-party logistics sales grow, the high proportion of returns will providers (3PLs) play a major role in helping cause reverse logistics costs to grow at an even e-commerce retailers meet these challenges. With greater rate than total e-commerce logistics costs. services ranging from domestic transportation The seasonal nature of e-commerce retail also management (DTM), value-added warehousing presents costs related to flexible networks that can and distribution (VAWD), international ramp up quickly around key shopping dates. transportation management (ITM), and dedicated contract carriage (DCC), 3PLs can provide Software and technology costs will also grow. expertise and end-to-end services, which allow Omnichannel operations and inventory call for retailers to focus on their own core competencies. more sophisticated transportation, warehouse, and inventory management systems. Investment We have seen retailers turn to 3PLs to help in new technologies, from automated warehouse manage omnichannel and e-commerce operations. solutions to predictive analytics, come with upfront U.S. 3PL e-commerce revenue hit $12.8 billion in costs. 2017, and we expect an 18.0% CAGR through 2020.

1 “’The E-Commerce Effect’ on Supply Chains,” Lee Clair and Steve Fox via Stifel, February 6, 2018.

Figure 3. U.S. 3PL E-Commerce Revenue, markets, 3PLs can quickly provide specialized 2017–2020E, US$ Billions services and localized knowledge.

High freight rates and tight capacity are compounded by e-commerce retail’s massively busy fourth-quarter peak season. 3PLs can source hard-to-find capacity and handle huge seasonal peaks for both forward and reverse logistics. $20.9 $17.9 Additionally, as retailers seek to provide top- $15.3 $12.8 notch delivery speed and service in regions with lower density, 3PLs accumulate density through complementary clients, which ultimately lowers 2017 2018E 2019E 2020E costs.

3PLs can offer technology solutions to e-commerce retailers that do not otherwise have As we have discussed, e-commerce requires more the means to invest in IT. 3PLs can provide or SKUs per storage facility, as well as warehousing integrate with top-tier transportation management operations in more locations. To add to the systems, warehouse management systems, and challenge, retailers often use the same pool of order management/ERP systems. Additionally, inventory to supply both brick-and-mortar and some 3PLs implement picking technologies or e-commerce channels. Not only do retailers benefit robots in warehouses, thereby improving efficiency from 3PLs’ expansive networks of warehousing and accuracy, reducing manual labor, and cutting and fulfillment locations across the country (or costs for retailers. world), but from integrated technology solutions that help manage inventory from a central location. Some 3PLs, like Port Logistics Group, Radial, As networks expand, transportation needs also Ingram Micro Commerce & Lifecycle Services, become more complex. Many 3PLs offer integrated and Amware Fulfillment, specialize in solutions transportation and warehouse management for e-commerce retailers, with 70% or more of solutions to accommodate both needs. Finally, gross revenues attributed to these customers. cross-border e-commerce adds another dimension Most leading 3PLs, such as C.H. Robinson, UPS of intricacy. From the arrangement of international Supply Chain Solutions, FedEx Supply Chain transportation and customs clearance, to (formerly GENCO), Ryder Supply Chain Solutions, international warehousing and partnerships with GEODIS, DHL Supply Chain & Global Forwarding, local delivery service providers around the world, and Kuehne + Nagel, offer services tailored and ITM 3PLs help cross-border e-commerce run marketed to e-commerce customers. Many others smoothly. count e-commerce retailers among a diverse customer base, with e-commerce customers often The ability to scale is another key factor for accounting for 1%–15% of gross revenues. Many e-commerce retailers. The industry’s annual offer value-added services, and a handful, such growth rate of 14%–15% means business is as FedEx Supply Chain, have first-rate reverse growing rapidly for established players and logistics operations. attracting new entrants. Even if retailers have the cash flow to invest in logistics networks, speed 3PLs can help their customers manage the ever- can be an issue. 3PLs’ established networks can growing costs of e-commerce logistics, while help retailers scale quickly. As retailers seek to helping retailers remain competitive. Every time capitalize on new, flourishing e-commerce product the service bar is raised, the challenge—and categories, or enter new domestic or global cost—of staying afloat increases. Managing both

the top line and bottom line has been a constantly By the time leading brick-and-mortar retailers looming issue for many retailers. Retailers, even began to focus on omnichannel strategies, industry leaders, have therefore had trouble finding Amazon’s first-mover advantage had resulted the funds (and patience from investors) required in massive market share. Amazon’s estimated to invest in e-commerce logistics capabilities. 43%–44% market share puts it far ahead of the And that’s if they were focusing on e-commerce opposition. Its closest competitor, eBay, has a 6.8% in the first place. For most of the past decade, share of market, while numbers three and four, many brick-and-mortar retailers only dabbled in Walmart and Apple, each account for 3.6%.1 e-commerce, instead concentrating on stabilizing their businesses after the Great Recession, then Now, retailers are left playing catch up, and they’ll trying to salvage falling revenues and profit. need to do it quickly, without the luxury of posting quarter after quarter of minimal profits. In short, Amazon, on the other hand, had the luxury of e-commerce retailers need quickly accessible, developing its logistics infrastructure over two sophisticated, and extensive logistics capabilities decades. For years, Amazon famously delivered that can scale with their growing e-commerce slim to negative profits while being rewarded channels. 3PLs are often looked to as the solution by the market, and very patient investors. for keeping up with Amazon. Amazon’s strategy was to focus on free cash flow, then reinvest in capital expenditures. As revenue soared, Amazon simultaneously built a retail business and the logistics infrastructure to support it.

1 Garcia, K., “US Ecommerce Sales 2017: The Top 10 Companies,” eMarketer, October 23, 2017.

Report Scope and Definitions Defining E-Commerce Logistics Our focus is the logistics of transportation, storage, and fulfillment related to e-commerce, from the manufacturer to the customer. This includes a vast array of parties. For the sake of brevity, we refer to anything that falls into the following categories as “e-commerce logistics:”

To analyze the ground transportation, from the middle mile to the last mile, we studied trucking companies, parcel carriers, gig-economy delivery platforms, domestic transportation management 3PLs, and Amazon’s 3PL services. To assess warehousing and fulfillment logistics, we studied fulfillment centers, sortation centers, parcel fulfillment centers, automation systems and providers, and value- added warehousing and distribution 3PLs. From an international perspective, we studied international transportation management 3PLs, global omnichannel retailers, air and ocean freight transportation providers, and even online international payment platforms. Finally, a discussion of reverse logistics includes 3PLs specializing in services tailored to reverse logistics.

Overlapping Industries In our research, we noted many areas of overlap between logistics and complementary industries and services. As customers continue to seek end-to-end logistics solutions, logistics providers, technology providers, and retailers have begun to expand from their primary functions into functions typically provided by others.

Additionally, there is naturally overlap between brick-and-mortar and e-commerce retailers; therefore many of the topics discussed are truly omnichannel, and address challenges and solutions for the intersection of e-commerce and brick-and-mortar retail.

Primary and Secondary Effects of E-Commerce Throughout the report, we note that e-commerce is a driver of current logistics trends. We do not mean to falsely attribute a logistics mega-trend solely to e-commerce, but do want to make mention of e-commerce’s role among a confluence of factors. Where we indicate e-commerce as a driver of a trend, it should be understood to be one driver among others.

Most discussion is focused on e-commerce’s first-order effects on logistics. However, e-commerce also drives many secondary impacts. Delivery speed is an example. E-commerce has set the expectation for two-day delivery, and that, in turn, has affected non-e-commerce performance expectations. One secondary effect is that manufacturers are increasing speed to market. We do include some discussion of these ripple effects where we see significant impacts.

Geography Our discussion is generally limited to the United States, although some global trends are noted, and many of the trends seen in the U.S. are applicable to other countries with similar e-commerce volumes and logistics networks. We include a section on cross-border e-commerce logistics and international transportation management, but a discussion of e-commerce logistics in other countries will be addressed in our forthcoming global e-commerce logistics report.

B2B/B2C E-commerce transactions can occur between a variety of parties. Business-to-consumer (B2C) is probably the most familiar—an online shopper makes a purchase from an e-commerce website and the order is delivered, most frequently to the consumer’s home. Business-to-business (B2B) e-commerce transactions are purchases placed on behalf of a business on e-commerce websites. Examples include office supplies, vehicle parts, industrial parts, and electronics. Many e-commerce retailers cater specifically to B2B sales, but retailers like Amazon also have dedicated B2B websites. EBay is one of the best-known sites for consumer-to-consumer (C2C) transactions. All three are included in our e-commerce logistics costs and 3PL revenue estimates. However, many of the most prominent logistics impacts driven by e-commerce are best illustrated by an analysis of general or B2C e-commerce.

Innovation and Trends Logistics providers, retailers, and technology providers alike are rapidly innovating for tomorrow’s e-commerce landscape, the subject of which could fill another report in itself. Our aim is to provide an analysis of the current state of e-commerce logistics. We expect drones, for example, will play a role in last-mile delivery, but have limited applicability today, and therefore we have omitted drones in our discussion. As innovations become mainstream, we will incorporate them in future editions of this report.

We do, however, look in depth at current trends and developing topics in e-commerce logistics. Though these trends may impact many aspects of e-commerce logistics, we’ve slotted the discussion in where a trend is most applicable or illustrative. Ten “Focus On” sections provide case studies or examine emerging product categories: Amazon logistics, same-day grocery delivery, last-mile furniture & appliances delivery, value-added services for beauty products and high-end apparel, value-added services for subscription boxes and meal kits, cross-border profitability, shifting international logistics networks and the global impact of e-commerce on fast fashion, seasonality, drop shipping, and algorithms and predictive analytics in reverse logistics. Some of these trends may already have peaked; others indicate just the beginning of major new changes in the industry.

Domestic transportation of e-commerce shipments, from inbound transportation to the last mile, is experiencing a drastic network shift. The map is being redrawn for e-commerce warehousing and transportation. Warehouses and fulfillment centers are moving closer to consumers or clustering around parcel hubs, while brick-and-mortar stores are closing.

As a result, transportation networks are transforming. The traditional pattern of retail delivery—from a retailer’s distribution center to a brick-and-mortar store via a full truckload—is moving to a new model, to support e-commerce. Smaller shipments now travel shorter distances, increasingly via parcel and less-than-truckload modes. As a result, e-commerce shippers face high rates and tight capacity, all while trying to move at the speed of e-commerce.

Many e-commerce shippers, which often prefer to focus on core competencies, rely on 3PLs to manage logistics, secure carrier capacity, and decrease logistics costs. Meanwhile, e-commerce powerhouse Amazon has made recent moves into the 3PL space, and may prove a formidable competitor for 3PLs.

This section will first examine shifting e-commerce logistics networks, then note how these networks impact different transportation modes. An overview of third-party logistics for e-commerce transportation will be followed by a section focusing on Amazon’s logistics costs, 3PL services, and our predictions for its future logistics strategy. E-Commerce Logistics Network Shifts The discussion of transportation for e-commerce shipments must begin with an overview of logistics network shifts. We see simultaneous shifts in warehousing and fulfillment networks, transportation networks, and retail distribution networks. Each of these network shifts has downstream impacts.

E-commerce is driving a redefinition of transportation and logistics networks For e-commerce retailers, the traditional distribution network, in which full truckloads of goods are carried from distribution centers to stores, is being supplemented by a new model. To support fulfillment to customers’ doorsteps, rather than to brick-and-mortar locations, goods are increasingly transported from distribution centers to fulfillment centers, via less-than-truckload (LTL) and full truckload (TL) shipments. Routes are shorter and stops are more frequent. From fulfillment centers, packages are passed to the parcel carrier network (consisting of hubs, sortation centers, and delivery centers). Local delivery to the consumer is then handled by parcel carriers or the United States Postal Service (USPS). The first phase of the move, in which e-commerce products are moved from a port (in the case of imports) or a manufacturing facility (for domestically produced goods) to the distribution center, has not seen as much of an impact,

though some secondary factors, such as increased seasonal port activity and shipments direct from manufacturers to consumers, have begun to assert effects on the network.

At the same time, the need to fulfill shorter delivery times, including two-day, next-day, and same-day delivery, has forced warehousing and fulfillment sites to move closer to consumers.

Brick-and-mortar retailers shifting to omnichannel fulfillment models are driving a third network shift. Retail stores are closing. Some brick-and-mortar retailers are suffering due to the prominence of e-commerce, and others are “right-sizing” their brick-and-mortar footprint and dedicating resources to e-commerce.

Finally, manufacturers are increasingly bypassing traditional retail channels, and opting to distribute products directly to customers. Some are building in-house operations, while others turn to Amazon to fulfill the dual role of online marketplace and logistics provider.

Demand for warehouse and fulfillment center space is up due to e-commerce, and retailers are focusing on adding more local facilities The rise of e-commerce has been a significant factor in the ten-year low in logistics warehouse vacancy rates, even amidst a rapid increase in new construction. New construction attests to the disproportionate impact of e-commerce on demand. In early 2017, the majority of CBRE’s pre-committed construction in its top 10 markets was dedicated to e-commerce, retail, and third-party logistics users.1 In fact, all the top industrial real estate management companies have identified e-commerce and 3PL use as major demand drivers.

New facilities remain top of mind for retailers. A survey by Retail Systems Research found that, among over-performing retailers,2 the top strategy for supply chain execution improvement was the addition of local distribution centers, with 47% citing this as a key opportunity.3

Secondary markets are ripe for development of new facilities to support e-commerce fulfillment nationwide The top markets for new warehouse construction at the end of 2017 were the Inland Empire, Dallas/Fort Worth, Eastern Pennsylvania–Lehigh Valley, Atlanta, and Chicago. However, many e-commerce retailers have established a presence in major markets, and are aiming to get closer to e-commerce consumers nationwide. Therefore, many secondary markets are experiencing high demand, which should spur new development. Charlotte, Cincinnati, Columbus, Denver, Louisville, Minneapolis, Portland, St. Louis,4 Jacksonville, Palm Beach, Reno/Sparks, Boston, Detroit, Milwaukee, North Bay, Phoenix, and Pittsburgh are all emerging as markets ripe for development.5

E-commerce development clusters around major parcel hubs for quick fulfillment Newly constructed major parcel hubs are a magnet for e-commerce development. FedEx and UPS have both made recent considerable investments in facility expansion. FedEx added four major distribution

1 “U.S. MarketFlash: New Warehouse Construction Pre-Commitments Hit a New High,” CBRE, May 17, 2017, https://www.cbre.us/research-and-reports/US-MarketFlash-warehouse-construction-new-high. 2 Note: Over-performing retailers are defined as those with better-than-average year-over-year retail sales growth. 3 “Supply Chain Execution: New Challenges Demand New Solutions,” Retail Systems Research (RSR), October 2017, https://www.rsrresearch.com/research/supply-chain-execution-new-challenges-demand-new-solutions. 4 “Pent-Up Demand: Secondary Logistics Markets Poised for Accelerated Growth,” CBRE Group, June 21, 2017, https://www.cbre.us/ research-and-reports/US-MarketFlash-Pent-up-Demand-Secondary-Logistics-Markets-Poised-for-Accelerated-Growth. 5 “Industrial Property Clock,” JLL, 2017, http://www.us.jll.com/united-states/en-us/research/property-clocks/industrial.

hubs in its 2017 fiscal year,1 and UPS announced plans to build three large-scale hubs in 2018.2 Proximity to such locations help e-commerce retailers reduce transportation costs and increase speed.

LTL networks are expanding Expansion isn’t limited to warehousing facilities. Carriers, too, are expanding their networks. Old Dominion Freight Line, the third-largest LTL carrier in the U.S.,3 has added new hubs and service centers.4 YRC Freight, the fourth-largest LTL carrier in the U.S., announced plans to convert eight terminals to distribution centers, increasing its DC count by a third.5 Saia opened six new terminals in the Northeast in 2017, with plans to open four to five more in 2018.6 Regional carriers have also expanded locations and consolidated through mergers and acquisitions in the past few years.

To move products faster, some LTL carriers, like Pitt Ohio and Averitt Express, have begun to use their terminal space creatively. These carriers pair LTL service with short-term warehousing and distribution in their terminals, followed by delivery with straight trucks. As this option becomes more popular, we can expect to see terminals constructed with high ceilings and wider docks.7

While e-commerce shipment volumes are a contributor to the need for such expansions, industrial sector growth, the wide-ranging need for increased speed, and increased LTL demand have also been major drivers. Still, this is significant because changing LTL networks play a role in the overall landscape of shifting networks affecting e-commerce fulfillment.

In the long run, storage of e-commerce inventory will cause retailers to reassess optimal facility locations As retailers add facilities, the result will be a change to optimal locations. For example, a retailer with a single facility will likely find that a location in Ohio, Kentucky, or Tennessee minimizes net average distance to customers. If the retailer expands to two facilities, East and West Coast locations would be optimal. Likewise, moving to a network of three or more facilities would result in different optimal placements of DCs in the Southeast, Midwest, West, and Pacific Northwest.

Direct-to-consumer (DTC) fulfillment is multiplying as brands that previously focused on wholesale distribution are now emphasizing the DTC channel Some retailers are moving towards a direct-to-consumer (DTC) model. Nike, for example, has typically sold products to wholesalers, but is focusing on increasing DTC sales. In the 2017 fiscal year, Nike Brand

1 “FedEx Annual Report 2017: Investment + Integration + Innovation Adds Up to Accelerated Performance,” FedEx, accessed November 10, 2017, http://s1.q4cdn.com/714383399/files/oar/2017/AnnualReport2017/AnnualReport2017flat/docs/FedEx_2017_Annual_Report.pdf. 2 Ziobro, P., “UPS Plans to Ramp Up Spending After Struggles with Holiday Season Delays,” The Wall Street Journal, February 1, 2018, https://www.wsj.com/articles/struggling-to-keep-up-in-holiday-season-ups-to-invest-in-operations-1517491075. 3 Schultz, J., “Top 50 Trucking Companies of 2016: Reinventing the Fundamentals,” Logistics Management, March 28, 2017, http://www.logisticsmgmt.com/article/top_50_trucking_companies_of_2016. 4 James, E., “LTL Carriers: E-Commerce Powerhouse,” Inbound Logistics, February 18, 2018, http://www.inboundlogistics.com/cms/article/ltl-carriers-ecommerce-powerhouse/. 5 “YRC Freight to Add Eight DCs to Relieve Stress on Existing Locations,” DC Velocity, July 26, 2017, http://www.dcvelocity.com/articles/201707226-yrc-freight-to-add-eight-dcs-to-relieve-stress-on-existing-locations/. 6 “Saia LTL Freight Opens its 6th Expansion Terminal in the Northeast During 2017,” Saia, Inc., December 12, 2017, https://globenewswire.com/news-release/2017/12/12/1253315/0/en/Saia-LTL-Freight-Opens-Its-6th-Expansion-Terminal-In-The-Northeast- During-2017.html. 7 Ashe, A., “LTL Fleets Offering Short-Term Storage, Shift to Smaller Trucks for E-Commerce,” Transport Topics, March 27, 2017, http://www.ttnews.com/articles/ltl-fleets-offering-short-term-storage-shift-smaller-trucks-e-commerce.

DTC sales grew by 16%, and now represent 28% of total revenues and 70% of total company growth.1 While the majority of its DTC revenue derives from company-branded stores, about a quarter of DTC sales—$2.2 billion—is attributed to its e-commerce sites.2 Profitability is a major impetus for DTC sales: by one estimate, Nike’s DTC margin is 62%, as compared to a 38% margin in its wholesale business.3 The focus on DTC sales has a huge impact on logistics. Previously, Nike would distribute products to wholesalers. Now, Nike must deliver more products both to its own stores and to customers’ doorsteps.

Nike is just one example. Other brands, like Campbell Soup, Coca-Cola, Pepsi, Unilever, and Kellogg are also ramping up direct-to-consumer marketing efforts. A recent study demonstrates that logistics providers are feeling the impact. The study found that DTC accounted for 46.2% of outbound transportation spend in 2017, a 23% increase over the previous year.4

Online marketplaces represent an opportunity for consumer packaged goods brands to make the shift from brick-and-mortar to e-commerce Brands can set up their own e-commerce sites to sell products, but online marketplaces, most notably Amazon, offer another ready-made channel. In 2017, both Nike and Sears’ Kenmore brand joined the marketplace. In some cases, like the Nike deal, manufacturers sell products directly to Amazon, and Amazon distributes them.5 Others are handled with a retailer’s existing distribution network; Sears will handle all distribution of appliances sold through Amazon.6

Amazon has every incentive to attract big brands to its marketplace, and has recently tried to entice consumer packaged goods (CPG) brands to the site. The pairing could be mutually beneficial. CPG unit sales have been flat to negative since 2008,7 and CPG companies in general posted disappointing results in 2017.8 CPG has not been a strong category for Amazon. By emphasizing the opportunities to improve customer experience and efficiency, Amazon is aiming to convince CPG companies that DTC through its marketplace is a better alternative than selling wholesale to retailers.9 As Amazon aims to go bigger in the category, with the introduction of its own private brands, for example, we may begin to see CPG brands make a shift to the marketplace. Again, this could cause a complete logistics realignment. CPG companies would shift distribution away from long-established brick-and-mortar store networks. CPG manufacturers could create their own networks for DTC fulfillment, or move products to Amazon’s storage facilities.

1 “2017: Form 10-K,” Nike, May 31, 2017, https://s1.q4cdn.com/806093406/files/doc_financials/2017/ar/docs/nike-2017-form-10K.pdf. 2 Withers, B., “Under the Covers of Nike’s High-Growth Direct-to-Consumer Business,” Motley Fool, September 19, 2017, https://www.fool.com/investing/2017/09/19/under-the-covers-of-nikes-fast-growing-direct-to-c.aspx. 3 “Nike at Two-Year High as Analysts Tout Margin Benefits of Direct Sales,” Reuters, January 19, 2018, https://www.reuters.com/article/us-nike-stocks/nike-at-two-year-high-as-analysts-tout-margin-benefits-of-direct-sales-idUSKBN1F82E1. 4 Holcomb, M., Manrodt, K., “26th Annual Study of Logistics and Transportation Trends: Transportation and Digital Speed,” Logistics Management, September 1, 2017, http://www.logisticsmgmt.com/article/26th_annual_study_of_logistics_and_transportation_trends_transportation_at. 5 Stevens, L., and Germano, S., “Nike Thought it Didn’t Need Amazon— Then the Ground Shifted,” The Wall Street Journal, June 28, 2017, https://www.wsj.com/articles/how-nike-resisted-amazons-dominance-for-years-and-finally-capitulated-1498662435. 6 Farrell, M., “Shopping for a Kenmore Appliance? Now You Can Skip Sears and Go to Amazon,” Consumer Reports, July 26, 2017, https://www.consumerreports.org/appliances/now-you-can-buy-kenmore-appliances-on-amazon/. 7 Cheng, A., “The $760 Billion US CPG Industry Still Struggles to Sprint,” eMarketer, July 26, 2017, https://retail.emarketer.com/article/cpg-industry-struggles-find-growth/597a639eebd40003acdf2dcf. 8 Terlep, S., Gasparro, A., “From Diapers to Soda, Big Brands Feel Pinch as Consumers Pull Back,” The Wall Street Journal, April 26, 2017, https://www.wsj.com/articles/from-diaper-to-soda-makers-big-brands-feel-the-pinch-of-a-consumer-pullback-1493223098. 9 Soper, S., Giammona, C., “Amazon Wants Cheerios, Oreos and Other Brands to Bypass Wal-Mart,” Bloomberg, March 30, 2017, https://www.bloomberg.com/news/articles/2017-03-30/amazon-wants-cheerios-oreos-and-other-brands-to-bypass-wal-mart.

Brick-and-mortar locations are dwindling, resulting in fewer store deliveries Finally, e-commerce has caused a change in the network of brick-and-mortar stores to which deliveries are made. Stores are closing, retailers are going bankrupt, and big names are leaving malls. In 2017, the closure of nearly 7,000 stores was announced, while just 3,400 were opened.1 More than 20 major retailers filed for bankruptcy protection in 2017.2 The shopping mall, accounting for 8% of U.S. retail space,3 has been hit hard. Credit Suisse anticipates 20–25% of malls will be shuttered within five years.4 E-Commerce’s Impact on Less-than-Truckload, Full Truckload, and Intermodal Transportation The network realignment caused by the rise of e-commerce has a ripple effect on transportation. We view LTL, parcel, and last-mile providers as beneficiaries of the new alignment—shorter lengths of haul and smaller shipments are well suited to these providers—but e-commerce shippers face high rates and tight capacity. E-commerce presents opportunities for full truckload (TL) carriers too; inbound transportation remains largely handled by TL carriers, and methods such as driver teams keep goods moving quickly. Intermodal transport can help e-commerce shippers cut costs, but the net impact of e-commerce on intermodal is still to be seen.

Changing Shipment Characteristics and LTL Network realignment driven by e-commerce results in smaller shipments with shorter lengths of haul As shipments from distribution centers to e-commerce fulfillment centers increase, carriers are faced with a growing proportion of smaller shipments requiring shorter lengths of haul. Because of higher real estate costs for forward stocking inventory locations, facilities near population centers are often smaller. As a result, less inventory can be stored, which results in more frequent, smaller shipments. At the same time, length of haul has decreased. The American Trucking Associations (ATA) reports that the average dry van length of haul has decreased by a third since 2000, to 533 miles,5 and several major carriers have noted that e-commerce has reduced their average length of haul.

Smaller shipments and shorter lengths of haul have made parcel, last-mile, and less-than- truckload carriers beneficiaries of the e-commerce boom Due to shorter lengths of haul and smaller shipments, more and more volume is getting pushed to parcel, last-mile, and LTL carriers, which are seeing significant benefits from the e-commerce boom. Less-than-truckload shipments are usually 150–10,000 pounds, and consist of multiple shipments on a single truck. Equipment consists of mostly dry van and some refrigerated trailers. LTL operates within a static network of terminals (a hub and spoke model) and therefore allows for little flexibility; activities include pickup, origin terminal cross docking, destination terminal cross docking, line-haul, and, if a hub is utilized for an intermediate sort, break bulk sorting. This sector accounts for 9.7% of total trucking

1 Thomas, L., “Store Closures Rocked Retail in 2017. Now 2018 is Set to Bring Another Round of Them,” CNBC, December 26, 2017, https://www.cnbc.com/2017/12/26/store-closures-rocked-retail-in-2017-and-more-should-come-next-year.html. 2 Ruff, C., Unglesbee, B., “The Running List of 2017 Retail Apocalypse Victims,” Retail Dive, December 13, 2017, https://www.retaildive.com/news/retail-bankruptcies-2017/446086/. 3 “The Decline of Established American Retailing Threatens Jobs,” The Economist, May 13, 2017, https://www.economist.com/news/briefing/21721900-love-affair-shopping-has-gone-online-decline-established-american-retailing. 4 Isidore, Chris, “Malls Are Doomed: 25% Will Be Gone in 5 Years,” CNN Money, June 2, 2017, http://money.cnn.com/2017/06/02/news/economy/doomed-malls/index.html. 5 “Trends Shaping the Future of Freight,” Bob Costello via the U.S. Environmental Protection Agency, March 29, 2017, https://www.epa.gov/sites/production/files/2017-04/documents/sw-feight-trends-2017-03-29.pdf.

revenue, or $58.0 billion.1 The ATA anticipates significant near-term revenue growth of 7.1% annually through 2021, and subsequently 5.8% per year through 2026.2

Speed also contributes to the demand for LTL shipments. In most cases, e-commerce consumers expect delivery within two to five days, so goods must be moved rapidly. LTL loads booked on Truckstop.com increased more than 200% in 2017, primarily due to speed, as customers did not want to wait to build full truckload shipments.3

The increase in LTL shipments comes at the expense of full truckload carriers. However, most experts agree that, due to the immense size of the TL segment, e-commerce-driven decreases will not strike a major blow.

Rates and Capacity E-commerce shippers are paying high rates to transport freight The reliance on carriers to transport e-commerce orders will come at a price for shippers. After a few years of low freight rates and a soft LTL market, a confluence of factors—increasing e-commerce demand, tight capacity, the ELD mandate, and a driver shortage—caused surging trucking rates in 2017, hitting a 12-year high in October.4 The trend is expected to continue through 2018, and may perhaps even signal the foundation of a “new normal” in rates.5 Both base rates and contractual rate renewals will be affected; contract rates are expected to increase up to 10% in 2018.6

Additionally, more LTL carriers are moving to dimensional pricing, in which pricing is based on the total dimensions of a package rather than weight and shipment class ratings. The nature of e-commerce freight, with its lighter yet bulkier packages, causes trucks to fill up, space-wise, more quickly. While the estimated rate increase for shippers ranges between 7%–15%, the dimensional data allows for opportunities to optimize LTL capacity utilization, which is currently 70%–80%.7

E-commerce is changing freight rate patterns throughout the year Historically, most freight for the holiday season was moved in October, after seasonal imports reached ports. Now, as retailers are placing more emphasis on tight inventory control and dynamically forecasting throughout the season, ports have been remaining busy through November and December, and freight demand has remained strong through the entire fourth quarter. Other historically soft periods, such as July, have also been affected by e-commerce. Amazon Prime Day, a day of discounts in mid-July, was launched by Amazon in 2015. In 2017, Amazon Prime Day was Amazon’s highest selling day ever, generating revenues equal to 20 times the company’s daily average. The entire retail landscape

1 “CSCMP’s Annual State of Logistics Report: Accelerating into Uncertainty,” A.T. Kearney and CSCMP, 2017. 2 “American Trucking Trends 2015,” American Trucking Associations, 2015. 3 William Cassidy, Twitter post, January 23, 2018, https://twitter.com/wbcassidy_joc/status/955919958516617219. 4 Cassidy, W., “No End in Sight to Rising US Surface Rates,” Journal of Commerce, November 30, 2017, https://www.joc.com/trucking-logistics/no-end-sight-rising-us-surface-rates_20171130.html. 5 Montague, M., “2017 in Review: Disruptions Drive Rates Up,” DAT Solutions, LLC., January 2, 2018, https://www.dat.com/blog/post/2017-in-review-disruptions-drive-rates-up. 6 Smith, J., “Trucking Rates Come Down a Bit but Problems Persist for Shippers,” The Wall Street Journal, February 15, 2018, https://www.wsj.com/articles/trucking-rates-come-down-a-bit-but-problems-persist-for-shippers-1518729334. 7 Schultz, J., “ABF Parent ArcBest Joins Crown in LTL “Space-Based” Pricing, Putting Pressure on Shippers,” Satish Jindel via Logistics Management, July 3, 2017, http://www.logisticsmgmt.com/article/abf_parent_arcbest_joins_crowd_in_ltl_space_based_pricing_putting_pressure.

sees a boost as a result, as many other major retailers have begun to offer sales on that day.1 In 2017, the spot market remained strong in July, instead of posting the typical rate decreases.2

E-commerce results in higher operational costs, which will be factored into freight rates Meanwhile, the impact of e-commerce has resulted in increased repair and maintenance costs for the already costly LTL sector. LTL carries the highest marginal cost of the three types of trucking (LTL, TL, and private/dedicated) due to frequent pickups and delivery, smaller shipment-handling overhead, dock labor costs, and a greater number of terminals and equipment. The American Transportation Research Institute identifies e-commerce’s frequent pick-up and delivery schedule as a driver of the 35% increase in LTL repair & maintenance costs in 2016.3

Rates for e-commerce shippers will remain high while capacity is tight Capacity shortage is inextricably related to surging rates. Van load-to-truck posting ratios rose from about 3:1 to 9:1 during 2017,4 and reached an all-time high in January 2018.

Equipment capacity isn’t the only limitation on carrier capacity. Even when equipment is available, hiring and retaining drivers is a challenge. Low unemployment rates and a tight labor market add to the growing driver shortage.

Orders for new equipment to handle e-commerce delivery will add new capacity Capacity should increase in the second half of 2018. New equipment orders are on the rise, including equipment tailored specifically to e-commerce delivery. Orders for new Class 8 trucks reached a 12-year high in early 2018.5 Medium-duty straight trucks are becoming a popular option for last-mile delivery carriers looking for smaller equipment for e-commerce delivery;6 orders for this equipment also recently hit a 12-year high.

Full Truckload Full truckload carriers still handle inbound transportation for e-commerce shippers The first leg of the journey for e-commerce shipments, either from a port or manufacturer to a distribution center, remains largely unchanged by e-commerce, and continues to be handled by TL carriers. Full truckload shipments are generally greater than 20,000 pounds. Dry van accounts for about 72% of revenue, refrigerated makes up 22%, and flatbed, platform, and bulk make up the remaining 6%.

Truckload carriers have made strides in adapting to the e-commerce environment by improving network densities, expanding last-mile business, partnering with Amazon, and focusing on driver teams TL carriers have responded to the rise of e-commerce in a few ways. Some have increased network densities by adding forward positioning locations to accommodate speedier delivery necessitated by

1 Lipsman, A., Williams, R., “State of the U.S. Online Retail Economy in Q3 2017,” comScore, November 20, 2017, https://www.comscore.com/Insights/Presentations-and-Whitepapers/2017/State-of-the-US-Online-Retail-Economy-in-Q3-2017. 2 Dorf, P., “E-Commerce Disrupts Freight Seasons, Boosts Spot Market Volume,” DAT Solutions, LLC., October 26, 2017, https://www.dat.com/blog/post/e-commerce-disrupts-freight-seasons-boosts-spot-market-volume. 3 Hooper, A., Murray, D., “An Analysis of the operational Costs of Trucking: 2017 Update,” American Transportation Research Institute, October 2017, http://atri-online.org/wp-content/uploads/2017/10/ATRI-Operational-Costs-of-Trucking-2017-10-2017.pdf. 4 “DAT Trendlines,” DAT Solutions, LLC., 2018, https://www.dat.com/industry-trends/trendlines/van/demand-and-capacity. 5 Smith, J., Tita, B., “Trucking Companies Ordered Most Big Rigs in 12 Years,” The Wall Street Journal, February 6, 2018, https://www.wsj.com/articles/trucking-companies-ordered-most-big-rigs-in-over-12-years-1517913000. 6 Ashe, A., “LTL Fleets Offering Short-Term Storage, Shift to Smaller Trucks for E-Commerce,” Transport Topics, March 27, 2017, http://www.ttnews.com/articles/ltl-fleets-offering-short-term-storage-shift-smaller-trucks-e-commerce.

e-commerce. For example, e-commerce was one of the factors cited1 in the $6 billion merger of Knight Transportation and Swift Transportation, now the largest TL carrier in the U.S.

Some have added or expanded their last-mile divisions. Last-mile delivery is discussed in more detail later in this section. Others, such as Covenant Transport and Knight-Swift Transportation, have partnered with Amazon. Amazon has more than 20 LTL and TL carrier partners that transport shipments for its Fulfillment By Amazon program.

Some have implemented strategies like team driving to meet e-commerce’s demanding speed of delivery. E-commerce accounts for a third of Covenant Transport’s business,2 and the carrier has used its driver teams to great effect to carry expedited and long-haul freight. Two-person teams trade off driving, allowing for 22-hour, 1,000-mile stretches on the road, and the ability to meet tight delivery windows. The only other option that can meet such demanding speed over long distances is domestic air freight, which comes with much higher rates.

The essential nature of expedited, long-haul freight during the seasonal time period, can be a double- edged sword, especially when paired with the challenge of recruiting driver teams. Driver team pay during the holidays comes at a premium, and can reach rates two to three times that of non- seasonal pay. US Xpress Enterprises, which wants to potentially double its number of driver teams to accommodate e-commerce business, has created bonus structures to attract driver teams.3

As rapid delivery speeds become the new normal not just for e-commerce, but across the industry, truckload carriers should benefit from deploying techniques like driver teams.

Intermodal E-commerce’s net impact to intermodal transportation is still to be determined While logistics costs increase, with pressure on transportation and warehousing rates, customers continue to expect free, quick delivery. Intermodal rail is one way to diminish costs and find capacity. Intermodal works well for traditional brick-and-mortar retail, with large deliveries to retailer distribution centers. Shifting e-commerce networks, with smaller shipments to dispersed fulfillment centers that are often located in secondary markets, does not align well to the intermodal network. Generally, experts predict that intermodal will continue to grow,4 but we will keep on eye on e-commerce’s impact on intermodal. Generally, we see most intermodal growth instead coming from high fuel prices forcing a conversion from TL to intermodal.

1 Lopez, E., “Swift, Knight Transportation Merger Creates Top 5 Trucking Company,” Supply Chain Dive, April 10, 2017, https://www.supplychaindive.com/news/Knight-Swift-Transportation-trucking-merger-top-5/440130/. 2 “Amazon Fuels Growth at Covenant Despite Overall Rough Road for Trucking,” David Parker via Transport Topics, August 29, 2016, http://www.ttnews.com/articles/amazon-fuels-growth-covenant-despite-overall-rough-road-trucking. 3 Solomon, M., “US Xpress Rolls Out Incentives to Attract and Retain Team Drivers,” DC Velocity, February 12, 2018, http://www.dcvelocity.com/articles/20180212-us-xpress-rolls-out-incentives-to-attract-and-retain-team-drivers/. 4 Ashe, A., “Intermodal Operators Expand in E-Commerce as Online Retailers Seek to Control Costs,” Transport Topics, July 13, 2017, http://www.ttnews.com/articles/intermodal-operators-expand-e-commerce-online-retailers-seek-control-costs.

Third-Party Logistics for E-Commerce Transportation E-commerce shippers often turn to 3PLs to manage transportation, from pick-up at ports to final-mile delivery. With carrier capacity tight, rates high, and inventory allocated across additional storage and distribution facilities, the expertise of 3PLs can help shippers cut costs, manage complex functions, and implement innovative logistics technologies.

E-commerce shippers rely on domestic transportation management 3PLs/freight brokers to manage transportation E-commerce shippers turning to a 3PL for transportation use the services of domestic transportation management (DTM) 3PLs/freight brokers. In addition to the convenience and cost savings of outsourcing complex logistics functions, shippers depend on 3PLs to manage peak season capacity. The ability to deliver to consumers reliably and on time during the holiday season is a bigger challenge every year, and is make-or-break for e-commerce retailers. More than a quarter of retailers rank reliability as the single most important aspect of their decision in selecting a 3PL, and that figure has been on the rise.1 3PLs allow e-commerce retailers to flex up during peak periods.

Modern, large freight brokers have evolved quickly, developing sophisticated DTM skills based on human capital, IT support, and process management capabilities. DTM 3PLs handle thousands of truckload and less-than-truckload shipments daily, relying primarily on electronic communications with shippers and carriers.

Most of the top DTM 3PLs have tight, quality-controlled operations split between carrier procurement and account management. Before carriers are utilized by a DTM provider, they are qualified by providing insurance, operating authorities, and other basic company information. Rates for desired traffic lanes are often furnished.

DTM 3PLs maintain individual carrier files, shipment lane histories, and large electronic rate libraries. Most orders are received electronically from shippers (via electronic data interchange (EDI), systems integrations, email, web portals, etc.). Shipments are then electronically tendered to carriers who are given a short time window to accept them. Once accepted, all parties are notified. Shipments are then picked up and delivered. Exceptions are dealt with electronically and, as a last resort, by phone.

DTM providers now handle an estimated 15% of all LTL and TL shipments in North America. Large shippers look to them more often to increase their options, especially during periods of tight trucking capacity. Trucking demand exceeds supply on a periodic basis in the U.S., especially during peaks in late summer and fall. During these times, shippers are increasingly choosing reliable freight brokerage DTM providers to cover transportation needs. Many shippers have added DTM 3PLs to their core carrier list to ensure ongoing capacity.

While the current DTM 3PL/freight broker market is dominated by truckload dry van shipments (accounting for 85% of revenue), DTM 3PLs/freight brokers have been expanding LTL volumes as they diversify offerings outside of traditional truckload brokerage. Prior to 2009, only 30% of 3PLs surveyed by the Transportation Intermediaries Association handled LTL shipments (the rest being handled directly

1 Rosenblum, P., Baird, N., “Retail Insight: Moving Beyond Omnichannel,” Retail Systems Research, January 2017, https://www.spscommerce.com/resource-center/retail-insight-moving-beyond-omnichannel/.

between shipper and carrier); the proportion has since increased to 71%,1 and LTL accounts for 9% of DTM 3PL/freight broker revenue.

When capacity is tight, securing capacity can be both a defensive move for e-commerce shippers (ensuring available capacity to handle a shipper’s own business), and an offensive one (preemptively keeping capacity out of the hands of competitors). There has been some speculation about the acquisition of a major LTL carrier by Amazon, or else by another party to divert the capacity away from Amazon. Although this remains a rumor, in such a tight market, it would not be surprising to see some strategic, capacity-related acquisitions.

Many e-commerce shippers want to focus on core competencies and are seeking integrated, end-to-end services from 3PLs In addition to transportation management, e-commerce shippers have also been seeking integrated services. 3PLs offering integrated transportation and warehouse management can be an ideal fit for shippers, especially those with operations providing same-day, next-day, or two-day delivery. DHL estimates that the optimum number of warehouses for two- to three-day delivery is five. Next-day delivery works best with 40–50 warehouse locations, and same-day requires 80–100 forward stocking locations.2 Shippers do not need to invest in a wide network of facilities and IT systems to manage inventory across locations. Instead, 3PLs can provide these services as an integrated value-added warehousing and transportation management solution.

Logistics technology providers can help provide instant transmission of data E-commerce shippers also rely on logistics technology providers, such as those providing transportation management systems or warehouse management systems. New technologies are also being adopted within the logistics industry to keep business moving at the speed of e-commerce, such as application program interfaces (APIs) to replace EDI, web scraping, and rating software, and to ensure instant transmission of carrier data. Focus On: Amazon Logistics Overview Amazon is both an e-commerce retail and logistics powerhouse. Its U.S. B2C e-commerce retail market share is estimated at 43%–44%, and we estimate global e-commerce logistics costs for Amazon and third-party sellers on its marketplace have reached $59.9 billion. Amazon has consistently expanded its 3PL service offering, while being a major user of 3PL services itself. It has enriched its logistics functions through partnerships, acquisitions, and technological applications. We predict that its continued growth—in the form of third-party sales, international expansion, and new product categories—will cause Amazon to present increasing competition to 3PLs. This is especially true for its Fulfillment by Amazon business.

1 Cassidy, W., “US Third-Party Logistics Providers Controlling More LTL Freight,” Journal of Commerce, February 19, 2016, https://www.joc.com/trucking-logistics/ltl-shipping/us-third-party-logistics-providers-controlling-more-ltl-freight_20160219.html. 2 Müller, S., “DHL Omni-Channel Day 2017,” DHL Consulting, May 4, 2017.

Amazon is the leading e-commerce retailer in the U.S., and continues to grow rapidly Amazon’s U.S. e-commerce retail market share is estimated at 43%–44%,1,2,3 meaning sales through Amazon account for about 4% of all retail in the U.S. The company has consistently posted rapid growth. North American net sales of its “Electronics and other general merchandise” category—the category most pertinent to our logistics concerns—have been increasing at a rate of 28%–31% for the last several years.

Shipping costs are paid by customers either in the form of Prime memberships or per- order fees The majority of Amazon customers—more than 100 million4—have an Amazon Prime membership. A non-discounted Amazon Prime membership costs $99 per year (or $12.99 per month), and the service includes free two-day shipping on eligible items, free next-day shipping on eligible items with a $35 purchase minimum, and benefits such as music and video streaming. Otherwise, Amazon customers pay per-order shipping fees on purchases less than $25.

Fulfillment By Amazon Amazon provides 3PL services through “Fulfillment by Amazon” Products are sold on Amazon in three ways. Some are sold by Amazon directly: Amazon owns the inventory and fulfillment is handled either through Amazon’s network or via 3PLs. Third-party sellers— which accounted for just over half of Amazon’s unit sales in 20175—own their own inventory but sell on Amazon’s marketplace. They can either manage their own fulfillment, work with a 3PL, or use Amazon’s Fulfillment by Amazon (FBA) service. FBA services include value-added warehousing, domestic and international transportation management, and customer service. Amazon effectively acts as a 3PL.

We estimate that about 12% of all B2C e-commerce retail shipments in the U.S. are fulfilled through FBA, and Amazon controls a third of all B2C e-commerce retail shipments in the U.S. In 2016, the number of active FBA sellers grew more than 70%, and by the end of the year, more than 55% of third-party units were shipped through FBA.6 Doing a back-of-the-envelope calculation, we can assume a little over a quarter of units (27.5%) sold through Amazon are delivered using Fulfillment by Amazon. Extrapolating that to make an assumption about total e-commerce share of market that’s shipped through FBA—a little over a quarter of Amazon’s 44% share—we estimate about 12% of all e-commerce B2C7 shipments in the U.S. are fulfilled through FBA. Another 22%, sales of Amazon’s own inventory, is also handled by Amazon. In total, Amazon has control of about a third of all B2C e-commerce retail shipments in the U.S.

1 “Amazon Accounts for 43% of US Online Retail Sales,” Slice Intelligence via Business Insider, February 3, 2017, http://www.businessinsider.com/amazon-accounts-for-43-of-us-online-retail-sales-2017-2. 2 Howland, D., “Amazon Captured 44% of US Online Sales Last Year,” One Click Retail, January 4, 2018, https://www.retaildive.com/news/amazon-captured-44-of-us-online-sales-last-year/514044/. 3 Molla, R., “Amazon Could Be Responsible for Nearly Half of U.S. E-Commerce Sales in 2017,” eMarketer via Recode, October 24, 2017, https://www.recode.net/2017/10/24/16534100/amazon-market-share-ebay-walmart-apple-ecommerce-sales-2017. 4 “2017: Amazon.com Annual Report,” Amazon.com, Inc., April 2018, http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsannual. 5 “2017: Amazon.com Annual Report,” Amazon.com, Inc., April 2018, http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsannual. 6 “Amazon.com Announces Fourth Quarter Sales up 22% to $43.7 Billion,” Amazon.com, Inc., February 2, 2017, https://www.businesswire.com/news/home/20170202006227/en/Amazon.com-Announces-Fourth-Quarter-Sales-22-43.7. 7 For this calculation, we assume all Amazon shipments are B2C, though to be precise, its B2B business does at least $1 billion in sales.

Figure 4. Percent of Unit Sales, by Seller, Sold on Amazon1

Third-Party Sellers not using FBA, 22.5%

Amazon, 50.0%

Third-Party Sellers using FBA, 27.5%

Amazon generates revenue from third-party sellers in three ways: through commissions (about 15% of the price of an item), per-unit fulfillment fees (pick-and-pack, packaging, shipping, and returns on selected categories), and monthly inventory storage fees, based on cubic feet of inventory, with elevated fees in the fourth quarter.

FBA is an increasingly popular option in international markets Amazon has FBA fulfillment centers across North America, Europe, Asia, and Australia. Third-party sellers can ship products to Amazon’s global fulfillment centers, and Amazon will provide value-added warehousing and transportation. Or, shippers can use “FBA Export.” Shippers based in the U.S. can send inventory to domestic Amazon fulfillment centers, and Amazon handles international transport and customs. Amazon also offers FBA for cross-border sales within Europe. Shippers send inventory to fulfillment centers across Europe and Amazon handles fulfillment. Alternately, shippers can send inventory to a single fulfillment center and Amazon ships either directly to customers or distributes inventory across its European fulfillment centers. Amazon offers country-specific services, such as Fulfilled By Souq (to fulfill orders for souq.com, which Amazon acquired in 2017 for $583 million) in the United Arab Emirates. Amazon’s Logistics+ is offered to Chinese sellers, primarily small- and medium- sized enterprises, selling within the U.S., Europe, and Japan. Through Logisitcs+, Amazon offers end- to-end ocean freight services, including pickups, warehousing, line-haul transportation, and delivery.2 International FBA sales are growing rapidly, with 80% year-over-year growth in 2016.

1 Sources: Amazon, Armstrong & Associates estimates. 2 Hook, L., “Amazon’s China Logistics Push to Pile Pressure on Rival Shippers,” Financial Times, April 5, 2017, https://www.ft.com/content/71f989c6-14ec-11e7-80f4-13e067d5072c.

Amazon’s E-Commerce Logistics Costs We estimate Amazon’s U.S. e-commerce logistics costs total about $30.4 billion, and global e-commerce logistics costs are about $46.0 billion In 2017, Amazon’s global fulfillment costs (which include the costs of fulfillment center staffing, customer service staffing, physical store staffing, and payment processing) totaled $25.2 billion, and outbound shipping costs hit $21.7 billion (which include costs of sortation and delivery centers and transportation).1 Amazon does not break out inbound shipping costs (they are reported within the “Cost of Goods” bucket).

To derive estimates for Amazon’s U.S. and global e-commerce logistics costs, we assume two-thirds of fulfillment costs are attributed to logistics, and that inbound logistics costs are approximately 35%–40% of outbound costs. We estimate the logistics costs attributed to Amazon’s combined own and third- party FBA business in the U.S. accounts for $30.4 billion and $46.0 billion globally (inclusive of U.S. costs). Third-party sellers using Amazon’s marketplace but arranging their own fulfillment account for, approximately, another $9.2 billion in U.S. e-commerce logistics costs and $13.9 billion in global e-commerce logistics costs (inclusive of U.S. costs). Figure 5, below, shows our estimates for Inbound, Fulfillment, and Outbound costs for Amazon and third-party sellers on its marketplace.

Figure 5. Amazon Logistics Costs (for fulfillment of Amazon’s own sales, third-party sales using FBA, and non-FBA third-party sales), US$ Billions2

U.S. $6.5 $14.4 $18.7

Global $9.9 $21.7 $28.3

$0 $10 $20 $30 $40 $50 $60

Inbound Fulfillment (Less payment processing, store staffing, and a percent of customer service staffing) Outbound

FBA Onsite Amazon is expanding its 3PL services with FBA Onsite A new service called FBA Onsite (sometimes referred to as “Seller Flex” in early reports), aims to increase Amazon’s control over the roughly 23% of units sold on Amazon by third-party vendors that are not using FBA. The service was piloted on the West Coast with reports of nationwide rollout in 2018.3 Through FBA Onsite, Amazon, which is a licensed freight broker,4 will manage transportation of products from the warehouses of third-party sellers to consumers. Third-party sellers will assign

1 “2016: Amazon.com Annual Report,” Amazon.com, Inc., April 2017, http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsannual. 2 Inbound, Fulfillment, and Outbound categories as defined in Amazon’s financial reporting. 3 Soper, S., “Amazon is Testing its Own Delivery Service to Rival FedEx and UPS,” Bloomberg, October 5, 2017, https://www.bloomberg.com/news/articles/2017-10-05/amazon-is-said-to-test-own-delivery-service-to-rival-fedex-ups. 4 “Licensing and Insurance Public,” Department of Transportation Federal Motor Carrier Safety Administration.

Amazon-specific inventory within their warehouses, and manage that inventory through Amazon’s WMS (installed on the seller’s servers).1 Though Amazon will manage transportation, shipments could still be sent through UPS, FedEx, the United States Postal Service (USPS), or Amazon couriers, as they are today. We estimate Amazon’s non-FBA third-party sellers in the U.S. account for $4.3 billion in outbound transportation costs.

FBA Onsite allows customer-first Amazon to provide lower costs and faster shipping In the company’s 2016 annual report, Amazon said it seeks “to mitigate costs of shipping over time in part through achieving higher sales volumes, optimizing our fulfillment network, negotiating better terms with our suppliers, and achieving better operational efficiencies. We believe that offering low prices to our customers is fundamental to our future success, and one way we offer lower prices is through shipping offers.”2 Amazon has made significant strides in optimizing logistics for fulfillment of its own inventory and that of FBA sellers. With FBA Onsite, Amazon takes more ownership over the segment of which it has the least control, thereby improving shipping costs, speeds, shipping terms, and efficiencies. Shipping costs can, through increased volumes, be used as leverage with parcel carriers. Rather than clog up capacity in already tight distribution and fulfillment centers, Amazon can rely on third-party warehousing while gaining more control over transportation management. Finally, sales volumes will improve through the addition of two-day shipping on more products.

Non-FBA sellers, who may have avoided FBA or Seller Fulfilled Prime, due to shipping rates, the hassle and expense of inbound shipments to Amazon facilities, or FBA storage fees, may opt instead for FBA Onsite. Inbound shipping to Amazon facilities is obviously avoided, and one estimate puts FBA Onsite rates “as much as 70% less than merchants would pay themselves,”3 giving credence to the speculation that this is a move by Amazon to leverage shipping volume discounts with parcel carriers.

Through FBA Onsite, Amazon poses a threat to 3PLs Reports of FBA Onsite resulted in a temporary ding to shares of UPS and FedEx, innumerable hyperbolic headlines, and the now-familiar (and convincing) rebuttal by parcel carriers referencing the massive size and scale of their networks. We do not presently view the initiative as a significant operational threat to either, nor do we think it will significantly divert volumes. Instead, Amazon could use volumes, previously fragmented among third-party sellers, as pricing leverage with parcel carriers.

A report in the Wall Street Journal4 cites the possibility of extending delivery services to non-Amazon sellers. The program, reportedly called Shipping with Amazon, demonstrates yet another move into logistics territory, and is a notable departure from its previous focus on services for Amazon sellers.

Rather than being a threat to parcel carriers, FBA Onsite exerts a more significant impact to 3PLs working with third-party Amazon sellers. Its recent reported efforts to enlarge its shipper base also hint at the company’s interest in expanding its role as a logistics provider.

1 “FBA Onsite Program,” user ‘ppb’ via Amazon Seller Central, December 2017, https://sellercentral.amazon.com/forums/t/fba-onsite-program/339253. 2 “2016: Amazon.com Annual Report,” Amazon.com, Inc., April 2017, http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsannual. 3 Soper, S., “Amazon Expands Delivery Trial that Could Hurt FedEx, UPS,” Bloomberg, January 29, 2018, https://www.bloomberg.com/news/articles/2018-01-29/amazon-expands-delivery-trial-that-could-hurt-fedex-ups. 4 Stevens, L., “Amazon to Launch Delivery Service that Would Vie with FedEx, UPS,” The Wall Street Journal, February 9, 2018, https://www.wsj.com/articles/amazon-to-launch-delivery-service-that-would-vie-with-fedex-ups-1518175920.

Assets, Partnerships, and Acquisitions Amazon runs an asset-light logistics operation Amazon has a fleet of 4,000 trucks for transport between warehouses and fulfillment centers; most transportation is handled through TL and LTL carrier partners, via 3PL partner capacity, parcel carriers, partnerships with last-mile delivery providers, or independent contractors using their own vehicles for last-mile delivery. Its fulfillment centers, sortation centers, delivery stations, Prime Now hubs, and other facilities comprise more than 121 million square feet of space in the U.S. (with another 26.6 million square feet planned), but Amazon leases nearly all of its facilities. It will also lease its 3-million-square-foot cargo hub at Cincinnati/Northern Kentucky International Airport. The company leases 32 Boeing 767 aircraft. Amazon is licensed as an NVOCC and performs ocean freight forwarding through its Chinese subsidiary, but Amazon does not own any vessels.

Amazon relies on partnerships with carriers, 3PLs, and independent contractors Amazon partners with a number of carriers, 3PLs, and independent contractors. Covenant Transport and Knight-Swift Transportation are major carrier partners. A large portion of packages are delivered by UPS and FedEx, or the U.S. Postal Service. A sample of Amazon’s 3PL relationships is shown below.

Table 1. Amazon Sample 3PL Relationships and Services Performed

Third-Party Logistics Provider Name Other Intermodal International Integrated Solutions Lead Logisitcs Provicer Value-Added TM or WM Warehouse Management Supply Chain Management Transportation Management Dedicated Contract Carriage

AirNet Cargo Charter Services ● ● ●

Alpha Distribution Solutions ● ●

Apex Logistics International ● ● ● ● ● ●

BNSF Logistics ● ● ● ● ● ●

C.H. Robinson ● ● ●

FedEx Supply Chain ● ●

ITS Logistics ● ●

Pantos Logistics ● ● ●

Pilot Freight Services ● ● ●

Shenzhen Dafang Logistics ● ●

Speed Commerce ● ●

Transplace ●

XPO Logistics ●

Amazon’s logistics-related acquisitions have been geared towards warehouse efficiency, international expansion, and fulfillment for new product categories Amazon has advanced its logistics business both organically and through acquisitions. In 2012, Amazon acquired Kiva Systems for $775 million. Kiva’s robots transport products within a warehouse to workers for packing and shipping. As of August 2017, Amazon used a total of 100,000 robots in 25 warehouses.1

1 González, Á., “Amazon’s Robots: Job Destroyers or Dance Partners?,” The Seattle Times, August 11, 2017, https://www.seattletimes.com/business/amazon/amazons-army-of-robots-job-destroyers-or-dance-partners/.

Amazon has also made purchases to provide logistics services for some of its international sites. Amazon has a 25% stake in Colis Privé, a French package-delivery company, and in 2017 acquired WING.ae, an on-demand delivery and courier marketplace to help provide “Fulfilled By Souq” and same-day delivery services in the United Arab Emirates.

More recently, Amazon’s acquisitions have focused on two new areas of expansion: grocery e-commerce and in-home delivery. Amazon’s acquisition of Whole Foods for $13.7 billion in 2017 was its largest acquisition to date, and provides access to Whole Foods’ products, stores, and delivery network. In late 2017, Amazon purchased Blink, followed by the estimated $1 billion acquisition of Ring in early 2018. Both companies make video doorbells. The acquisitions will support “Amazon Key.” Amazon Key allows keyless entry and monitoring for guests and service providers. Amazon Prime members can use Amazon Key to allow in-home delivery.

Technology and Innovation Amazon is a pioneer in pairing technology and logistics Amazon has always experimented with innovative technology applications for its logistics business. Amazon Flex drivers—independent contractors who make last-mile deliveries for Amazon’s Prime Now— use an accompanying app to schedule shifts, access route directions, and scan packages at pick-up and drop-off.1 Another app, Amazon Relay, allows truck drivers to scan a QR code on their device for expedited entry into Amazon fulfillment and sortation centers. Sources have reported Amazon is also developing a Digital Freight Matching (DFM) app, designed to match Shipper demand with Carrier capacity.

In addition to Amazon Key, the company is experimenting with other delivery methods and locations, including delivery to lockers in commercial locations or apartment buildings. It has also piloted delivery to customers’ car trunks.

One of the best ways to get insight to Amazon’s plans and priorities is to keep an eye on its patent applications. Many don’t pan out, and the company isn’t afraid of taking small bets only to decide against them. Unlike many of its retail and logistics competitors, Amazon has a high-margin business (Amazon Web Services) to help subsidize both big logistics investments and smaller tests. The company consistently files logistics patent applications, demonstrating novel technologies for drones, on-demand 3D printing and clothing manufacturing, and new warehouse designs. Other visionary ideas include underground delivery tunnels and floating warehouses.

A&A’s Amazon Predictions As Amazon continues to grow, it will face logistics challenges on several fronts Amazon’s volumes will continue to grow. The company has been making efforts to expand its Prime subscription base across new demographics. By providing third-party logistics services, it will continue to grow its small- and medium-sized seller base. It has also recently attracted major brands to the site, like Nike and Kenmore. Many brick-and-mortar brands are looking to expand their direct-to-consumer presence, and we expect to see Amazon bring more big brands on to its platform. Amazon has a B2B platform, which should also see growth. International expansion will be a focus as Amazon competes for share with international competitors. Finally, while Amazon has established significant market share in certain e-commerce product categories, it will continue to expand its range of products. Within the next year or two, we expect to see the company expand its reach in the furniture and appliances, groceries,

1 “Amazon Flex App Demonstration,” Dave Clark via The Wall Street Journal, September 29, 2015, https://www.youtube.com/watch?v=6djmvemLDag.

and apparel product categories, both with its own private brand launches and via big brands.

In short, Amazon will face logistics challenges on three fronts—it will need to accommodate bigger volumes, geographic expansion, and notoriously challenging product categories.

Amazon will assume more control of logistics for its growing base of third-party sellers To deal with bigger volumes, Amazon will seek to control its rising shipping costs and secure capacity (especially in the fourth quarter). While it has achieved excellent internal efficiencies, the natural next step will be to harness the potential in its rapidly growing third-party seller volumes. Amazon could help streamline processes, achieve greater last-mile density, negotiate better parcel rates, and access carrier capacity by offering additional third-party logistics services to its sellers. While it may appear that the logistics costs of third-party sellers would not be a concern of Amazon’s, the company has proven itself, time and again, a customer-first retailer striving to provide the best assortment and prices, two-day fulfillment, and customer satisfaction. To achieve these goals, control over its own logistics will not be enough, especially as its third-party seller base grows. Amazon has an incentive to help its third-party sellers to offer low-cost, speedy fulfillment.

International expansion will require to Amazon to hit the ground running Amazon will continue its global growth, including expansion efforts in Southeast Asia, South Korea, India, and Australia. Expansion will require corresponding logistics investments. After stumbling in China (the company still has less than 1% market share in China despite presence in the country for over a decade),1 and with increased competition from other major global players, Amazon is willing to make bigger upfront investments when entering new markets. The company no longer has the luxury of making small investments and seeing slow, steady growth in new markets; it has to enter the scene with a bang. As a result, international expansion could result in the acquisition of already established local or regional logistics players. Additionally, due to the growth of cross-border e-commerce, Amazon will likely look for logistics solutions for international cross-border e-commerce fulfillment, especially to and from China.

Amazon will approach new, complex product categories with big logistics solutions Finally, to support new industry verticals, Amazon will need to build a network of fulfillment centers and last-mile transportation to handle increasingly complex logistics challenges. As we have seen with the Whole Foods acquisition (the company’s largest acquisition by a factor of 10), Amazon is not opposed to buying access to infrastructure. Of course, the Whole Foods purchase had many other benefits besides infrastructure, so we would expect any future acquisitions to check several boxes for Amazon, whether it be assortment, customer base, brick-and-mortar locations for Amazon Go stores, or brand partnerships, for example.

Amazon will seek a sustainable solution for the last mile Additionally, Amazon will need to build a sustainable last-mile delivery solution for products ranging from groceries to furniture. To an extent, it can rely on the heavy-goods last-mile services being built out by TL and last-mile carriers, but high rates and tight capacity could cause interrupted service. For last-mile fulfillment of categories like grocery, there are several long-term risks inherent in using a system of independent contractors with their own vehicles, which is how much of its same-day delivery is executed today. In both cases, Amazon has an opportunity to improve the scale, efficiencies, and sustainability of the last mile.

1 Coren, M., Hao, K., “Amazon is Struggling to Duplicate its US Success Overseas,” iResearch via Quartz, February 1, 2018, https://qz.com/1196193/amazon-amzn-is-struggling-to-duplicate-its-us-success-overseas/.