Bricks and mortar merchandise retailers across the country are singing the blues. Screaming the blues may be more accurate. The plight of the now gone Radio Shack, the soon to be gone HH Gregg, and a long list of shrinking retailers including Sears/K-Mart closing stores tell the story. It seems almost a certainty the story line won’t be changing any time soon. Arbitrarily pick the name of a major U.S. big box merchandise retailer. Chances are the retailer is in a world of hurt. Even Gander Mountain is feeling the pinch and just filed for Chapter 11 and stated intent on closing 32 stores.
Of course there are also growing retailers like O’Reilly Auto Parts, Ross Stores, and Dollar Tree stores, but the list of shrinking retailers like Macy’s, Payless, and JC Penny, cast a tall shadow over what growth there is. One reason of course is Amazon and the success of some other online retailers. People are buying things differently and that goes double for Millennials. Our changing buying habits create the second reason. There are just too many bricks and mortar retailers in the market for the demand. Like ocean container lines, the retail market has too much capacity and ultimately will shrink.
The ripple effect of the bricks and mortar shrinkage will be broad. It doesn’t take a calculator to figure out retail employment and property owners who lease to large retailers will take a hit among others. One area I have not heard mentioned yet will be a shrinking 3rd and 4th party logistics market. When you eventually go to a large retailer for something not available on Amazon, pay attention to the tractor trailers delivering inventory. Many have trailers touting the retailer’s name, but upon closer inspection of the tractor you will likely see a logistics company’s name on the cab door.
Retailers realized long ago it was easier and more economical to outsource logistics to third and fourth party logistics companies (3PL’s and 4PL’s) than it is to keep it in house. To allow true global supply chain management 4PL’s are often the choice of larger retailers. Consequently to meet demand, the 3PL, and especially the 4PL, market growth reached gigantic proportions. Not so much in the numbers of 4PL’s has increased, but the size of the top companies has grown to a grand scale.
Along with healthy growth, the logistics industry developed sophisticated supply chain models that reached efficiencies never imagined 30 years ago. To best serve the retailers needs 3PL’s/4PL’s developed lean responsive supply chains built for speed and customer-centric focus. These very achievements paved the way for e-commerce giant Amazon in 1994 to envision direct to consumer delivery of goods with no bricks and mortar presence. Up until then the consumer retailer relationship heavily favored the bricks and mortar retailers. Consumers were disadvantaged having only the goods the retailer offered to choose from due to geographical limits and ‘mail order’ delivery took weeks. Fast forward to today and consumers have never been so close to various manufacturers globally, have greater selection of the retail goods to buy, and in many cases delivery time is only a day or two. Amazon is even offering same day delivery in certain markets. The closer the buying public is to the manufacturer, the less supply chain logistics are needed to deliver the product.
With the continued demise of large bricks and mortar retailers, the question is will the non-asset based logistics companies shrink as well? The retail market number is so big representing two-thirds of the USA’s GDP, it’s even used as a key economic indicator. To give scope to retail volume, according to Investopedia (http://www.investopedia.com/terms/r/retail-sales.asp) , in just May of 2016 retail sales were $455 billion. As stated by U.S. Census Bureau e-commerce only accounted for 8.3 percent of total retail sales ( https://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf ) in the fourth quarter of 2016 leaving plenty of room for e-commerce growth. If the bricks and mortar segment of the retail market that leans on 4PL’s to manage their complex supply chains continue to shrink, it only stands to reason the 4PL’s would lose business.
Of course there is, and will be, increased activity in some non-asset based sectors due to expanding e-commerce. Large 4PL’s are well aware they have to change the way they do business to continue to flourish in the e-commerce world. Warehousing, some transportation management, and fulfillment of goods purchased online will be a great place to be. Although it would be a reasonable conclusion not all the current 3PL and 4PL players can move there. Moreover if we use Amazon as our best business model, not all e-commerce retailers will run to outside vendors for logistics as there may be relatively short supply chains. Theoretically, not including raw materials logistics to a manufacturer, the supply chain cycle to the buying public can be as short as manufacturer or importer, to Amazon distribution center, to last mile delivery conveyance (USPS, UPS, FedEx) to consumer.
It is a fact not all outsourced logistics is retail driven. There will still be opportunities in the industrial sector and continued global growth to help fuel the need for logistics companies. There are also many consumer products not suited for the e-commerce supply chain. Even Amazon doesn’t sell puppies, yet. Although with the decline of bricks and mortar retail and the possibility of ‘Amazon type’ of e-commerce philosophy becoming the norm and continuing to grow, there is the real possibility there will be reduced business opportunities for logistics companies. Could the demise of retail as we know it be the kryptonite for the third and fourth party logistics market growth streak? Time will tell.