The climbing costs of e-commerce

E-commerce providers have seen a surge in demand due to coronavirus, but regulatory changes, pressure on the USPS and high demand levels are creating an environment of higher logistics costs

The e-commerce sector is one of massive growth. A recent report by Transport Intelligence (Ti) for Legal & General said that growth in the e-commerce logistics market is “gathering pace” and grew by 16% in 2019 to €287bn and is expected to top €500bn by 2024, which represents a 12.2% compound average growth rate.

The study, Global e-commerce Logistics: A Covid-19 Update, found that global lockdowns due to the pandemic acted as “a catalyst for a further shift in consumer behaviour” to the benefit of e-retailers: “Lockdown measures have seen consumers turn to e-retailing to fulfil an immediate requirement for home delivery across a range of consumer goods.”

Soaring sales for big e-tailers

Italian supermarket chain Carrefour saw its online customers double to 110,000, while In France, Nielsen Research estimated that online orders for home delivery grew 32% year- on-year in the first week of March.

Meanwhile, US retailers saw even bigger gains. Target reported it strongest second quarter ever for sales growth, rising by 24.3% and propelled by e-commerce sales, which grew by 195%. Walmart, for  its part, experienced e-commerce sales growth of 97% in Q2.    

DHL eCommerce Solutions, part of the global logistics giant Deutsche Post DHL Group, saw e-commerce volumes in the US rise to “holiday peak levels” during the first three months of the pandemic as stay-at-home consumers shopped for health, wellness, and home office supplies.

The e-commerce provider saw a growth of more than 36% in US domestic volume and 28% in cross border volume from the daily averages seen in February.

DHL said that the top fastest growing online lightweight products ordered by US consumers were: Health & beauty, gym apparel, pharmaceuticals and home office accessories and supplies.

DHL eCommerce Solutions Americas chief executive Lee Spratt said: “We believe many of these e-commerce categories will continue strong into the second and third quarter as social distancing practices and precautions continue, and we expect more online retailers to expand their existing online product portfolios to include personal protective equipment.”

Struggling to fulfil

It has not been a case of seamless delivery for the e-commerce providers as they dealt, worldwide, with an unprecedent surge in demand due to the pandemic.

Brendan Sullivan, IATA’s head of e-commerce and cargo operations, told a webinar that e-commerce consumers and businesses were “heavily impacted both positively and negatively” during the pandemic sales surge.

Said Sullivan: “Approximately one in three customer transactions resulted in an out of stock or out of stock like experience which has resulted in up to $1trn loss for the e-commerce industry.”

Sullivan explained that some of the “pain points” behind that massive loss were due to a lack of visibility in the e-commerce supply chain because nobody knows where the goods are because data is not being shared.

Rising costs, rising challenges

There are more tangible threats to e-commerce providers coming down the pipeline, however.

As part of the widening political divide between the US and China, President Trump won significant changes to the Universal Postal Union’s (UPU) longstanding terminal dues system that compensates postal authorities for the cost of handling, transporting and delivering bulky letters and small packets across borders.

The US Postal Service (USPS) can now “self-declare” ­– set its own tariff rates – for international packages entering the US domestic mail system, a move aimed at Chinese e-commerce companies.

US inbound postage and package rates could rise by up to 150% after the changes, and individual UPU members with inbound letter-post volumes in excess of 75,000 tonnes will soon be allowed to follow the same path.

The US move, Trump threatened to withdraw the USPS from the UPU, is designed to create a level playing field for international postal rates which saw China designated a “developing country” by the UPU.

China was able to enjoy lower rates for goods entering the US as airfreight, for example, and then placed in the domestic delivery system at a much lower cost than an end to end express shipment.

According to the most recent research by the International Post Corporation, global e-commerce companies have signed agreements with postal operators in multiple countries to deliver e-commerce volumes through air mail, while the majority (84%) of cross-border parcels weighed up to 2kg which fits the UPU definition of air mail.

Brian Bourke, chief growth officer at US headquartered SEKO Logistics, said: “Retailers, direct-to-consumer brands, marketplaces and marketplace sellers riding the lockdown boom in cross-border e-commerce sales are going to get a massive ‘wake-up call’ in the mail from July 1 as global postal rates into the US start to soar by as much as 150% or more.”

He added: “As postal rates get set to rocket, retailers, e-tailers and marketplaces are having to face up to the reality that despite fuller shopping baskets, the level of competition means consumers will continue to vote with their plastic.

“Some will undoubtedly pay more for faster delivery times, shipment visibility and peace of mind but unless sellers find alternative, more cost effective ways to ship their goods, it’s their margins that will start to dissipate – and that’s before the other 191 member countries in the UPU get to set their own rates for foreign parcel services at the start of 2021.”   

Costs rising outside of postage and packaging too

Bourke told Reuters Events: Supply Chain that there were other cost issues, such as the price of labour in the increasing number of warehouses used for e-commerce: “The economics around e-commerce are changing and costs generally are going up in different areas, and if the hourly wage of a warehouse person in Southern California goes up a dollar overnight, that is definitely a pressure being experienced by retailers.”

Professor Joseph Schwieterman of the School of Public Service at DePaul University has studied Amazon’s growing fleet of dedicated overnight freighter aircraft in the US.

He agrees that labour costs in warehouses are an issue for the global e-tailer giant: “The ultimate strategy of Amazon is to reduce labour cost to a minimum and they are making headway on that in the warehouses, but on the home delivery side it is mostly a highly labour-intensive process.

“You can either consolidate delivery locations or you can consolidate orders and I think that Amazon is probably getting to a critical mass now where it can start consolidating orders for consumers.

“You will probably see some arrangements between multiple online vendors to consolidate shipments just to save the cost of that last mile.”

Prof. Schwieterman thinks that there are two “real risks” for Amazon, the first being labour unionisation: “Right now Amazon is able to use contractors and part-time workers, seasonal workers, but that strategy could ultimately be side-tracked.”

He does not see the evidence that this will happen soon but as Amazon continues to add warehousing staff there may be an issue with labour laws. The second risk is “hostile public policy” and “it may take a few state governments to go bankrupt before that issue skyrockets”.

In terms of logistics economics, Bourke of SEKO thinks that the e-commerce sector is being subsidised so far by a number of different factors.

“The big issue now in the US is that Federal Express or UPS built their companies on the back of B2B mail and packages. One UPS driver would go into an office building with hundreds of packages and then pick up packages with the revenue attached to it.

“But now all these offices around the country are closed and the integrators are not collecting that revenue anymore so even with all these e-commerce movements it cannot replace the revenue they have lost on the B2B side, so they put up rates across the board.”

Bourke added: “The retail stores were subsidising e-commerce and B2B parcels were subsidising e-commerce but now we have the peak surcharges and those subsidies have all disappeared at the same time due to Covid-19 and regulatory changes.

“All of the subsidies together bundled into one have now gone away and now we're going to see a correction in many ways, and it is going to be interesting.”

Europe adds to issues

On the other side of the Atlantic, Europe is modernising its value added tax (VAT) regime for online sales of goods in Europe under which all business-to-consumer (B2C) sales to EU consumers would be taxed in the destination member state.

The European Commission, the executive law-making arm of the European Union (EU), devised its VAT e-commerce directive to tackle VAT fraud, already a problem in other European industry sectors but made even more complex by e-commerce.

The new rules apply to both internal EU e-commerce trade and those by non-EU businesses selling into the single market.

An import scheme will be created covering distance sales of goods imported from third countries or territories to customers in the EU up to a value of €150. The introduction of the import scheme goes hand in hand with the abolition of the current VAT exemption for goods in small consignments of a value of up to €22.

The directive was due to enter force in January 2021 but has been delayed by at least six months until July next year due to the coronavirus.

The commission says that EU businesses will benefit from a “substantial reduction in cross-border VAT compliance costs” and facilitate greater cross-border trade.

“EU Businesses will be able to compete on equal footing with non-EU businesses that are not charging VAT. Member states will gain through an increase in VAT revenues of €7bn annually.”

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