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Going the Extra Mile: E-commerce Logistics Costs Hit $117.2 Billion in 2017

As online shopping rises, so too do the costs associated with getting those goods to their consumers.

E-commerce logistics costs in the U.S. reached $117.2 billion last year, representing 6.9% of total U.S. logistics costs, up from 5.2% in 2016, according to a new report from Armstrong & Associates (A&A), a third-party logistics market and consulting firm.

The report, “E-Commerce Logistics in the United States,” notes that in the last five years, online sales has seen a compound annual growth rate close to 15 percent and is expected to keep growing.

“We can’t overemphasize the role logistics plays in e- commerce retail,” the company said in releasing the report. “Providing two-day delivery for a seemingly endless assortment of products is no small feat. E-commerce as we know it would not be possible in the United States without our vast, efficient logistics infrastructure. Logistics networks are quickly growing and changing to meet the ever-higher bar set by e commerce retailers.”

The logistics journey

A key focus of the report, which analyzes domestic and international transportation, warehousing and fulfillment, as well as reverse logistics, is the importance of the so-called “last mile” delivery.

The study notes that the shift from traditional retail to e-commerce has resulted in a significant shift in the typical logistics journey for consumer products.

The long-established path from a retailer’s distribution center to its stores is being replaced by a much more complex delivery network series of moves: from distribution centers to fulfillment centers to parcel hubs and sortation centers to last-mile delivery providers for residential delivery. As logistically complex product categories such as groceries and furniture make the shift to e-commerce, the “extra mile” is only becoming more cumbersome and costly.

Logistics networks have undergone dramatic changes to accommodate e-commerce, with A&A estimating that U.S. e-commerce logistics costs will grow at a rate of 18.8% through 2020.

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“These network shifts are far from complete, but we have already seen a direct impact on domestic transportation for e-commerce,” the report noted. “Smaller shipments travel shorter distances. Less-than-truckload (LTL) carriers are well-equipped for the transport of e-commerce goods from distribution centers to fulfillment centers, as well as some local last-mile delivery. As demand increases, LTL carriers have been expanding their terminal networks and even using terminals for short-term e-commerce warehousing and distribution. To accommodate demand, new equipment orders are up, including orders for trucks best suited to e-commerce.”

Measuring costs

The report estimates that U.S. e-commerce logistics costs will increase from a compound annual growth rate of 8 percent to reach $196.2 billion in 2020. As e-commerce sales continue to represent an increasing share of total retail sales, development of logistics networks will require greater investment.

Parcel is the most rapidly growing logistics cost segment in the U.S. and shippers face rate increases driven partially by carriers pricing accordingly for an adjusted B2B and B2C business mix, according to the report. Reverse logistics will assume an increasingly significant role, with a high proportion of returns causing reverse logistics costs to increase at an even greater rate than total e-commerce logistics costs.

Software and technology costs will also grow, as omnichannel operations and inventory demands create a need for more sophisticated transportation, warehouse and inventory management systems.

Third-party logistics providers (3PLs) play a key role in helping e-commerce retailers logistics challenges, with services ranging from domestic transportation management, value-added warehousing and distribution, international transportation management and dedicated contract carriage, A&A emphasized. The report said U.S. 3PL e-commerce revenue hit $12.8 billion in 2017 and is expected to increase 18 percent annually through 2020.

Building partnerships

In order to meet same-day delivery demands, e-commerce and omnichannel retailers are building, partnering with, acquiring or investing in delivery platforms to access their delivery networks and technology platforms, the report noted. Same-day delivery platforms like Amazon Flex, Instacart and Shipt are among the top players in this service, were workers are assigned pickup and delivery locations for same-day delivery.

Amazon same-day and Prime Now delivery is handled by a mix of local couriers, such as OnTrac and Dynamex, and Amazon Flex drivers. Amazon Flex relies on a proprietary same-day delivery platform in which drivers use their own vehicles to make same-day, Prime Now, AmazonFresh and restaurant deliveries.

Other retailers have acquired or invested in same-day delivery platforms. Target, for example, acquitted Shipt last year for $550 million, and by the 2018 holiday season, same-day delivery for certain product categories will be offered through Shipt in all major markets.

Shipt has a network of 20,000 “personal shoppers” that will perform deliveries for Target and other retailers. Earlier in 2017, Target acquired Grand Junction, a software startup that connects retailers and carriers to help manage local and same-day deliveries.

The rise of e-commerce has also driven major development of facilities such fulfillment, sortation and parcel fulfillment centers, with estimates that 20 percent of all new development in ‘warehousing” will be devoted to e-commerce.

The report noted that CBRE Group, a commercial real estate services and investment firm, has registered decreases in warehouse and distribution availability rates in all but one quarter in the last seven years and that the 7.7% availability rate in the third quarter of 2017 was the lowest since 2001. Similar results are expected into 2018, with industrial warehousing rents also reaching a record high in the same period.