“Turnabout” is fair play

“Retail stores become shipping hubs to battle Amazon”, headlined a September 28, 2013 story seen on wtsp.com. Here are some very interesting excerpts:

“SAN FRANCISCO – Some of the world’s largest retailers are turning their stores into mini distribution hubs to help them compete better online against Amazon.com.

“Instead of fulfilling Web orders from warehouses hundreds of miles from shoppers’ homes, companies including Wal-Mart, Best Buy and Gap are routing orders to stores nearby.

“Store employees pick orders from shelves, pack them into boxes and drop them into waiting FedEx and UPS trucks that zip them off to homes a few miles away.

“The trend, known as Ship-from-Store, saves money through shorter delivery routes. More important, it speeds deliveries, avoids costly markdowns and recoups sales that have been lost to Amazon, the world’s largest internet retailer.

“‘This is the most important thing that will change physical retailers over the next five years,’ said Matt Nemer, a retail industry analyst at Wells Fargo Securities.

“A network of large stores – with high overhead costs – has become a liability rather than an asset in recent years. Amazon, which has no stores, won market share with lower prices and huge selection. But retailers have begun fighting back by using technology to get more sales out of stores – and ship-from-store is a big part of the effort …

“‘Amazon has already beaten most retailers on price and selection …’ said Tom Allason, founder of start-up Shutl, which helps retailers deliver online orders from stores.

“Shutl’s service covers most shoppers in the U.K., where the firm partners with retailers including Argos, Oasis and Karen Millen. The start-up is also in Manhattan and plans to expand soon to other big U.S. cities including Los Angeles, Miami and San Francisco …

“Wal-Mart, the world’s largest retailer, has been shipping online orders for about two years and about 35 stores do this now.

“‘We started ship-from-store as a test. It has exceeded every expectation we’ve had for it,” said Neil Ashe, head of Global eCommerce at Wal-Mart. ‘We will probably scale this to hundreds of stores. Already, 10% of the items ordered on Wal-Mart.com are shipped from stores and the majority of those packages are delivered in two days or less, according to the company. Two-thirds of the U.S. population live within five miles of a Wal-Mart store, so the company is using these locations as ‘nodes’ in a broader distribution network that includes storage warehouses and specific fulfillment centers for online orders, Ashe explained.

“Shipping from stores lets Wal-Mart offer faster delivery of online purchases ‘at very low cost’, said Joel Anderson, president of walmart.com.

“The retailer saves money on fees it pays to carriers such as FedEx and UPS because most delivery distances from store are much shorter …

“Best Buy shares have more than tripled so far this year on optimism about a turnaround plan led by new Chief Executive Hubert Joly.

“The plan focuses on ‘turning its store base from a costly liability to an offensive weapon,’ Gary Balter, an analyst at Credit Suisse, said …

“‘Unlocking this potential is an enormous opportunity,’ Joly said earlier this year.

“Shipping online orders from Best Buy stores could generate an extra $ 5.8 billion in sales and $ 168 million in profit next year for the company, according to Balter’s estimates …

“Other retailers that have started doing this in recent years include Target, Nordstrom, Macy’s, Lowe’s, Gap, Dick’s Sporting Goods, Ann Foods and Finish Line …” –

Hmm-mm. Sounds like a great idea. Sounds familiar, too. Back on November 2nd, 2004, in what we titled, “A Fitting Solution” – in our very first Volume – we quoted some very far-sighted people. Excerpts from that commentary are as follows:

“Here’s a question that requires logical analysis. Why should containers carrying products destined for U.S. consumers be diverted to container ports in Canada and in Mexico? This diversion extends delivery time, (and) increases the cost of these goods to the end users … The shipping lines show little concern for the consumer’s added burdens, however, because these detours save time and money for them, and like any well-run business entity, shipping lines will gladly accept whatever subsidies the consumers and unwitting taxpayers unwillingly grant them. Let’s put the pieces of this puzzle together by reviewing some of what we’ve heard from transportation authorities, and let’s begin at the very top.

“1. Mr. Norman Mineta, Secretary of the DOT, stated a while back that … another 200 of the country’s 361 ports must be converted to container handling facilities and the logic of his assessment becomes more and more apparent as time passes … When Mr. Mineta’s logic begins to sink in, considerable financial benefits will be realized by these new container handling ports and by the communities adjacent to these ports.

“2. Mr. Chuck Raymond has endorsed short sea shipping as an efficient and cost-effective way of transporting containers from one U.S. port to another … He has in the past directed our attention to the unacceptable levels of pollution generated by truck traffic as well as to the cost of building new highways … Until we embrace the logic behind Mr. Raymond’s reasoning, and until more ports are equipped to handle containers, problems with our infrastructure and the cost of goods will continue to mount.

“3. At Port Industry Day sponsored by the Port Authority of NY/NJ four years ago, Moderator Conrad Everhard questioned the wisdom of expensive dredging projects in order to accommodate mega-ships. He noted that larger vessels cause increased traffic congestion and higher levels of pollution because of the additional trucks required … and that public funding of dredging amounts to a subsidy of shipping companies … Establishing additional container handling ports, and locating them closer to end users, would provide relief to those large port communities now forced to contend with unhealthy pollution levels and unacceptable highway congestion, and would eliminate the need for expensive dredging projects and costly transshipment from distant hub-ports to end users.

“4. Mr. James Hartung, when speaking on behalf of the AAPA, stated that port officials would oppose a hub-and-spoke system as a solution to congestion. At a Capitol Hill briefing sponsored by the AAPA in 2001, Mr. Hartung affirmed that concentrating truck and rail traffic at a few ports would worsen congestion and create extraordinary logistic challenges. ‘To king-make and favor a few ports would decrease the efficiency of the marine transportation system and skew the economic benefits,’ he said. Conversely, it should be apparent that increasing the number of container handling ports, and even reducing the size of our largest ports, would increase the efficiency of the marine transportation system and generate more favorable economic results.

“5. In discussions about the cost of dredging to accommodate the new generation of oversized container ships, the U.S. Office of Management and Budget has cited the prohibitive cost of such projects … Additional ports servicing smaller vessels, rather than hub-and-spoke ports catering to mega-ships, will serve the interests of all U.S. consumers and taxpayers …

“6. Mr. Nolan Gimpel of Axiom Consulting has stated that mega-ships strain the capacity of inland infrastructure, terminal operators and rail and truck carriers … The most logical and least costly to expand without straining the capacity of inland infrastructure, terminal operators and rail and truck carriers is to establish smaller container ports closer to end users. The benefits … will accrue to all taxpayers and consumers.

“7. Neil Davidson of Drewry Shipping Consultants at Navis World 2004 in San Francisco called attention to the operational and commercial limitations that reduce the effectiveness of mega-ships. Mr. Davidson foresees carriers having a more difficult time in filling these large vessels, thereby cancelling out the economies of scale these ships are supposed to produce. He also cites the limited number of ports able to service these larger vessels … and the inability of these vessels to accommodate importers and exporters who prefer more direct, less costly service … This is another example of an unwitting subsidy paid to shipping lines by consumers, and emphasizes the need for smaller container handling ports in closer proximity to end users.” –

So there you have it. Transportation authorities knew all about the disadvantages of servicing end users from king-ports hundreds of miles away, but carriers and terminal operators just yawned. Today’s retailers, however, the ones feeling the negative economic effects of long-distance servicing arrangements, are quick to acknowledge the advantages gained by local distribution hubs. Even though they’re engaged – relatively speaking – in nickel and dime UPS and FedEx package operations, those retailers are light years ahead of the multi-million dollar container-sized segment of the nation’s supply chain – where the “turnabout” is more desperately needed.