Q1 2022 Market Watch: Downstream Supply Chain Challenges

March 14, 2022

Upstream disruptions aren’t the only thing crunching retailers and brands.

Market Watch Header Image March2022

The explosion of eCommerce and its outgrowths exacerbate downstream supply chain challenges.

Key Takeaways

  • Online purchases represented 19.2% of total retail sales in 2021, a 50% increase from pre-pandemic levels
  • 26% of enterprise retailers offer same-day delivery, with up to 73% planning to offer it by 2025
  • Truckload rates year-over-year are holding around 12% higher
  • Warehouse vacancy rates hit 3.2%, an all-time low

Commerce landscape remade post-Covid #

As little as a decade ago, consumers had far less choice about the way they shopped. If they wanted an item, there was just one option—go to a store. That is no longer the case. After decades of incremental growth, eCommerce exploded during the pandemic, shuffling retailers' and brands' strategies seemingly overnight.

Previously underutilized options like "buy online, pick up in-store" (BOPIS) and same-day delivery options emerged as era favorites for consumers who wanted to retain some of the instantaneousness of the in-person shopping experience without visiting a store.

New purchasing channels are gaining so much traction that they have become a buying decision for some consumers. Fifty-seven percent of shoppers now use retailers' delivery option flexibility as a consideration when buying.

Features that are important to U.S. adults when shopping digitally
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Features Activities that are important to US Adults 1

But as new shopping options emerged, so too did supply chain challenges. Similar to upstream supply chain disruptions, Covid and the eCommerce boom have also created downstream disruptions for retailers, brands, logistics service providers (LSPs), and consumers.

eCommerce growth #

Online purchases represented 19.2% of total retail sales in 2021, a 50% increase from pre-pandemic levels. And the channel's spotlight won't dim anytime soon. In fact, it's growing quicker than projected.

Analysts estimate U.S. eCommerce sales will cross the $1 trillion threshold in 2022. Before the pandemic, experts did not foresee this happening until 2024.

US E Commerce Sales 1

In addition to giving retailers and brands a more significant revenue stream, eCommerce’s prevalence accelerated already-growing consumer expectations for fast, free delivery—giving rise to alternative eCommerce fulfillment methods that expedite delivery faster than traditional options.

Same-day store fulfillment #

Same-day fulfillment has emerged as ever-faster eCommerce delivery speeds remade consumer expectations. More than half of online shoppers aged 18-34 now expect same-day delivery. And more than 60% of them say they'd pay extra to have their packages delivered the same day.

Currently, 26% of enterprise retailers offer same-day delivery, with up to 73% planning to offer it by 2025. Though it's poised to further its reach over the next few years, enterprises are capitalizing on the momentum now.

Target grew its same-day services by nearly 60% this year. And Walmart unveiled a same-day solution called GoLocal, which even enables merchants to utilize its same-day delivery infrastructure to get orders to their customers faster. This initiative leverages the retailer's Express Delivery service, which offers to get purchases to 70% of the domestic population in two hours or less. Home Depot's goal is to reach 90% of the U.S. with same-day or next-day delivery within the next few years.

Same-day operations increase supply chain complexity for both retailers and suppliers. Many retailers don’t have the infrastructure to implement same-day and have turned to various last-mile and inventory solutions.

Online purchases represented 19.2% of total retail sales in 2021, a 50% increase from pre-pandemic levels
Digital Commerce 360, 2022

Buy-online-pick-up-in-store and curbside pickup #

Another increasingly popular variation of eCommerce, buy-online-pickup-in-store (BOPIS) utilizes online purchasing to circumvent in-store shopping. Customers finalize selections digitally before physically retrieving their items from the stores. This option has grown in popularity due to Covid restrictions and hesitancy to convene indoors.

In 2022, analysts predict BOPIS will top $100B in sales, a 21% jump in YoY comparisons. Moreover, the channel will likely account for 11% of eCommerce sales. While many traditional retailers have entered the BOPIS game, Walmart maintains a significant lead over its competitors. Last year, it claimed 25% of all BOPIS sales.

US Click and Collect Sales 1

Additionally, retailers have recently begun to offer a subset of BOPIS called buy-online, pick-up-anywhere. As many as 18% of U.S. online shoppers continually opt to pick up their purchases from a designated location outside a retailer's physical footprint.

Like same-day delivery or standard direct-to-consumer fulfillment, these purchasing choices increase pressure on retailers, especially with their inventory management practices. For BOPIS and curbside pickup, combining online purchases and grabbing items off shelves destabilizes inventory counts and availability. Companies must have inventory ready for however and wherever customers purchase and receive their goods.

Challenges abound for downstream supply chain
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Although new purchasing channels are an effective way for retailers and brands to reach consumers, each comes with challenges felt across the logistics market. They are both subject to and contribute to supply chain difficulties. Here are some of the trouble spots that have been a downstream sticking point over the past few quarters.

Labor scarcity stretches capacity thin #

The pandemic has created a shortage of labor throughout many sectors. Between Sept. and Nov. 2021, approximately 13.1 million Americans quit their jobs. Of those, more than 11% worked in logistics, often citing pay or physical demand issues as reasons for leaving.

Last summer, the industry hit a record high in job openings with 490,000 available positions. While these numbers don't specify whether the open role is in warehousing or transportation, it is a glimpse into the gap between supply and demand for talent. The driver shortage could balloon to 160,000 by 2030. This collective deficiency contributes to a significant capacity crunch, leaving retailers and brands in a bind.

In 2022, analysts predict BOPIS will top $100B in sales, a 21% jump in YoY comparisons.
eMarketer, 2022

Warehouse space is hard to come by #

Industrial vacancy rates hit new records last year and continue to trend down. In January, just 3.2% of warehousing space was available. Through September 2021, lessees in the U.S. signed for a net total of 292 million square feet of warehousing space, a 135% increase in YoY comparisons. Warehouse demand outstripped supply by some 41 million square feet in Q3 2021 alone.

Resultantly, space came attached to a premium price tag for all that wanted it. The average U.S. rental rate is $9.10 per square foot, a 10% increase over 2020. High-demand areas like Inland Empire and Los Angeles had the lowest vacancy rates in the country. They sat at 0.7% and 1%, respectively, at the end of Q3. Rates in the Inland Empire were up 30% YoY at the end of September.

Warehouse vacancies near major US ports 1

Demand for transportation creates a supply gap #

Due to increased consumer goods purchases, demand for transportation services increased throughout 2021. As a result, total miles traveled was up 2% in 2021, hitting an all-time high of nearly 300 billion. FTR Transportation Intelligence estimates that truck mileage will grow another 7.4% because of continued demand over the next two years.

But as freight volume flooded the market, there were fewer drivers than needed to accommodate demand growth. Although it’s a decades-old topic in trucking, the driver shortage in the past two years became apparent. And by some estimates, it grew by 23% during the pandemic.

To compound the situation, even if carriers could find drivers to fill to close the shortage gap, industry providers struggle to right-size their fleets. Trucks are the latest pandemic-induced shortage. Volvo delivered 60,000 trucks in Q4 of 2021, but the manufacturer is falling short of demand because of input shortages. These factors combined to create freight market chaos.

The imbalance between labor, fleets, and fluctuating inventory levels increased rates significantly throughout 2021. Total truckload rates year-over-year are holding around 12% higher, and forecasts suggest 2.5-3% growth across the board in 2022.

Without the ability to add drivers or trucks to support them, the transportation sector will likely remain tight for at least the remainder of H1 2022, suggesting that shippers will encounter difficulty finding capacity. Cowen Research and AFS Logistics Freight Index analysts predict that truckload rates per mile will be 28.2% higher in Q1 2022 compared to Jan 2018—the start of the last capacity crunch in the industry.

Total truckload rates year-over-year are holding around 12% higher, and forecasts suggest 2.5-3% growth across the board in 2022.
Transportation Topics, 2022

Solutions for downstream difficulties #

Because of the disruption in downstream supply chain processes, retailers and brands implement fulfillment strategies to mitigate rising costs and challenges. Companies are employing various methods to expand their logistics and transportation networks.

Investing in compensation and automation to improve employee morale
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To circumvent the labor shortage, companies are paying more to attract and retain talent. Wages and benefits are up 4% in YoY comparisons. But this may not be enough to reduce labor strife as inflation continues to rise, outstripping wage gains. Other companies are getting creative to keep employees with flexible scheduling and more paid time off for long-tenured drivers.

Others are turning to automation. Some firms invest in new technology automation to improve job satisfaction by making workers' lives easier and alleviating the physically demanding nature of some logistics jobs.

Others have allocated spend to reduce the need for employees altogether. Puma, Best Buy, and Victoria's Secret are utilizing robotic arms to supplement worker deficits, providing more predictable cost inputs than rising worker wages. Although automation can be a reliable solution, it requires large upfront investments, infrastructure improvements, and ongoing maintenance and updates.

Overprovisioning warehousing space #

To compensate for the historically tight warehousing market, companies are hoarding space. To ensure businesses get the capacity they need, some have gone as far as signing deals for new space before they break ground. They're even sacrificing profitability in the name of square footage.

"Companies are grabbing warehouses with 50% more space than they need," said Greg Sanguinetti, president of Pro Group Logistics in Sparks, Nev. "They are lowering operating margins just to increase infrastructure so they have it."

The strategy has further pushed organizations to look outside traditional markets. Secondary and tertiary locations are getting attention from all parties in the supply chain. While this may be a sound temporary strategy to increase warehousing space for firms, it could be damaging if market dynamics shift and companies hold more physical capital than they need.

Dropshipping to avoid supply chain snares #

To sidestep some of the headaches associated with traditional fulfillment modifications, retailers have begun relying on dropshipping to complete orders. This fulfillment method offloads the order building and shipping to pre-arranged channel partners.

Approximately 22% to 33% of online retailers use dropshipping as a primary fulfillment method. Currently, Wayfair dropships 95% of its products. In 2020, 78% of U.S. retailers implemented some form of dropshipping, with another 18% planning to implement dropshipping within two years. While dropshipping reduces overhead supply chain costs, retailers also forfeit inventory control, lose logistics visibility, and have difficulty maintaining margins.

Looking forward: Leaning into logistics network optimization and diversification #

The supply chain services market is at record levels across the board due to many factors that are proving to be more than transitory. Brands and retailers are searching for network strategies that expand capabilities and meet consumer demands without making steep capital investments.

While the above options provide retailers and shippers temporary relief, they are only short-term solutions to a dislocated supply chain. Longer-term solutions like network redesign and optimization allow companies to navigate today’s ongoing age of disruption.

Network design and optimization provide three ways to control cost while servicing demand effectively: Reduce final mile transportation rates, control labor costs, and find advantageous industrial leases.

For shippers
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Take stock of current market conditions ahead of expanding network footprints, specifically, market-based lease rates and labor conditions. These two factors make primary markets especially difficult—capacity is scarce, prices are high, and labor markets are tighter in popular regions.

Meanwhile, secondary and tertiary warehouse markets like Las Vegas, NV and Greenville / Spartanburg, SC make excellent choices to find lower labor and space costs while still servicing the critical regions of the West Coast and South / Midwest, respectively.

Furthermore, finding ways to rapidly deploy inventory flexibly in new markets allows brands to meet today's demand while analyzing long-term strategies for facility placement.

For Warehouse Providers
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Warehouse operators are currently questioning building “long-term or short-term” strategies depending on business needs. While on the surface, there are apparent advantages to locking in today’s high pricing over the long term, uncertainty around input costs, especially wage rates, means that shorter-term deals may be advantageous. Markets like SoCal and the Inland Empire are moving to shorter-term leases to suit shippers and warehouse operators alike but at a premium.

Although there isn't a universal answer to the challenges that brands, retailers, and LSPs face in 2022, rethinking inflexible supply chain strategies can be a great place to start. Stay tuned to the Flexe Institute to see how shippers and service providers navigate ongoing supply chain disruption.

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