On Friday Stifel analyst David Ross hosted a conference call with Marc Iampieri and Jim Blaeser of AlixPartners on the topic of trends in home and final mile delivery and logistics. Iampieri and Blaeser presented AlixPartners’ proprietary survey data of over 1,000 shoppers’ preferences across a range of demographics, and discussed the implications for the logistics business.
The Amazon Effect’s progress
AlixPartners estimates that over 50% of online shoppers are Amazon Prime members and expected 2 day shipping, about a day faster than average. 96% of survey respondents say that free shipping significantly impacts their online shopping decisions as well as the decision whether to buy online or in-store; AlixPartners says free shipping is now ‘table stakes’ for e-commerce retailers.
“It’s not surprising that every year people want and have an expectation of receiving these goods within a shorter time frame year after year. While that may be what the customer wants, being able to deliver on that promise is very costly, and we’re also seeing some shifts in the market place, which will allow for that,” said Marc Iampieri. Iampieri was referring to AlixPartners’ biannual survey data showing that the maximum delivery time customers are willing to accept in order to obtain free shipping has fallen from 5.5 days in 2012 to 4.1 days today.
“I’d like to say that you really can’t defy the laws of physics,” said Iampieri. “If you want to be able to offer next day, same day within a couple of our services, the products have to be within close proximity to the customers. That’s kind of a given, but that has really caused the retail supply chains to move a little closer to the customer. You’ve got to make a decision on which products are going to be deployed at those key DCs that are smaller and more regional in nature, so that you actually have the ability to fulfill them.”
Amazon is clearly succeeding in changing consumer preferences, but it’s coming at a cost to the company’s margins. In 2006, shipping and fulfillment costs were 8% and 9% of net sales, respectively (17% total); that number has steadily risen to 12% for shipping and 14% for fulfillment, a total of 26% of net sales in 2017. AlixPartners noted that fulfillment costs consist of costs incurred in operating and staffing fulfillment centers, customer service centers, and physical stores as well as payment processing costs.
“I just want to give a call out to an interesting teleconference that Dave and Stifel hosted a couple of weeks ago with Bob Costello,” said Blaeser. “I heard [Costello] mentioning that the average length of haul has now dropped to a historic low of 499 miles. That really speaks volumes about some of the trends that are going on in the industry right now.” Iampieri said that ELD hard enforcement has shortened the length of haul for guaranteed one day delivery from under 450 miles to 400-420 miles. “Basically the way your network is set up – if it creates efficiency and you’ve got drivers that actually are following all of the rules – it’s going to slow down what a traditional solo driver can do in a day in terms of mileage. With teams, you can overcome that, but then you’re going to introduce significantly more cost for each one of those units that you’ve got in the trailer,” said Iampieri.
Warehousing
AlixPartners’ data shows that distribution costs are rising faster in high-density consumer markets compared to traditional distribution markets: price per square footage in Columbus, Indianapolis, and Louisville has held steady between $3-4 since 2009, while New York has climbed from about $7 per square foot in 2009 to about $9.50 in 2017; Boston has grown from $5 in 2009 to $7.50 in 2017; Houston has moved up from $5 per square foot to $6.50.
“What we tried to compare here were two or three traditional distribution markets sort of in our assessment versus high density markets,” said Blaeser. “The challenge here was that there are some high density markets like Chicago and LA that are also traditional distribution markets that kind of create a false comparison. So we looked that a few lower density population centers that have traditionally hosted a large variety of retail apparel distribution centers and looked at the cost per square foot for lease rates for those spaces over the last eight years and then compared that to some markets with not as big of a distribution hub for retail but more of a high density consumer market.”
Iampieri discussed how 3PLs can try to enter the industrial real estate market and create plug-and-play, multi-user facilities. “I think if you are a retailer or a retail brand, and you know Amazon’s already got the density of customers either that are going to participate through the market place or are fulfilled through as a normal Amazon product, they already are positioning in these markets,” said Iampieri. “If you’re a 3PL, you need to quickly line up meetings with your customers that are trying to compete and talk about how a multi-user facility could work for them. The challenge with multi-user is that if you don’t have enough and one out of three pulls out and you still have a lease for a couple of more years, you’re under water and so there’s risk. But if you could broaden that and align your contract expiration with your lease with a couple customers, you certainly reduce that risk.”
LTL, mergers & acquisitions
“We talked about the increasing interest in delivery for grocery and consumer staples,” said Blaeser, “which we have continued to track for years now, and I think one of the first reasons we started to do the survey a few years ago was the growth in home delivery for large goods, bulky items and some of the opportunity that comes around that. Because it’s a little different from when the guy comes from Amazon and drops off the dog food or the dog bones. He just sort of drops it, takes a picture of it and runs away.”
“Often when somebody is dropping off a couch or a TV or something large—I guess TVs aren’t large anymore—but something of that size, they often have to provide some other sorts of services,” continued Blaeser. “They often enter the home, sometimes for installation set up and other sorts of ancillary services. We continue to see increasing consumer interest in more home delivery and ancillary services related to large items… From a 3PL standpoint, there’s the opportunity here to set up delivery networks and offer ancillary services beyond just your blocking and tackling delivery and the same for retailers This is one of the few times here in the supply chain where they can offer a chance to differentiate through value added services in the home.”
But he bottom line for last mile logistics M&A, Blaeser and Iampieri said, is that investors may be disappointed by the remaining opportunities in a highly localized market fraught with challenges that undermine scale.
M&A comparables in last mile and LTL are shooting up, as widespread interest in the market has led to an increase in the EBITDA multiples offered for acquisitions. “Every conference that I’ve been at in the last five years in the logistic space has been something talking about the last mile and there’s just a tremendous amount of interest in the space,” said Blaeser. “You know, my experience in the space has led me to understand that there are a ton of players in the space. It’s a highly fragmented, highly localized market place, but there aren’t a lot of players at scale. So the challenge I think that we’re going to see and probably what’s driving multiples up is that there’s recognition within the logistics companies that last mile is a strategic area to play.”
Iampieri commented on the possibilities for consolidation in last mile logistics. “Yeah, I think it really depends on the capital investment required. If you’re doing package sortation that’s one thing, but if you’re doing deliveries in a sprinter van or even a 24 straight truck that does not require a CDL, there are literally zero barriers to entry. You can go to your favorite truck rental place, rent a truck, have some employees do some basic background screenings and you can haul freight. So with minimal barriers to entry, it’s kind of hard to get scale.”
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