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Thinking Ahead–Letter from Chaille: The Amazon Effect – Will More Online Retailing Reduce Pallet Demand?
Supply chain guru discusses the future of palletization as online retail grows and replaces some traditional store-based retail.
By Chaille M. Brindley
Date Posted: 11/1/2012
Before you know it Christmas will be upon us. It is the time of year when retailers try to move their profit levels from the red to the black. Increasingly, online retail is becoming a larger part of the overall retail landscape, especially for the holidays. Thinking back to last year, I bought at least half of the gifts I gave other people on websites, such as Amazon, Barnes & Noble, etc. Given the proliferation of free, fast shipping, look for even more e-tail growth.
Noted supply chain and logistics consultant, Jim Tompkins of Tompkins International recently highlighted the importance of Amazon, the online retailing giant, to the business and logistics landscape. A complete copy of Tompkins presentation can be downloaded from http://www.tompkinsinc.com/amazon-effect/
Contrary to popular opinion, Wal-Mart is not the only mega retailer shaping the retail market. Tompkins said, “So how big is Amazon? Amazon is $25 billion of product they sell themselves, plus $250 billion of the product that they sell through marketplace, for a total of about $275 billion. The reality is in 2012, Wal-Mart and Amazon are about the same size, and Amazon is growing a lot quicker.”
One of the keys to Amazon’s success is its wide breadth of products offered. Amazon owns Wag.com for pets, Fabric.com for knitting and quilting, and Zappos.com and ShopBop.com for fashion. Amazon is more than just a retailer. It helps other retailers set up a spot on its marketplace offering everything from publishing to website design, billing and fulfillment services. And Amazon Prime, which is known as the company’s special shipping program, is actually the world’s best loyalty program according to Tompkins.
The renewal rate for Amazon Prime members is 92%. And these customers tend to significantly increase the amount they buy on Amazon because they get expedited shipping. According to Tompkins, Amazon Prime has allowed the retailer to grow 2.7 times faster than the online business in the United States over the last three years.
Amazon is working toward developing same-day or next-day delivery infrastructure by boosting its local fulfillment capabilities. Tompkins commented that between 2003 and 2009, Amazon had around 13 million square feet of fulfillment centers. If you look at 2010-2012 – that 3-year period – it increased an additional 44 million square feet of fulfillment centers. And when you look from 2013-2016, the retailer will add an extra 47 million square feet of fulfillment centers. It also plans to put lockers in local convenience stores and drugstores where you can go and pick up items on the way home.
The idea is to build an extensive network of fulfillment capabilities near major metropolitan markets. Other retailers must take notice that Amazon is building logistics infrastructure to speed its products to market without requiring traditional retail stores. However, the company still plans to develop some retail stores similar to Starbucks and the Apple store concept. These stores will be designed to encourage interaction and playing with Amazon products, such as Kindle devices and other things.
Pallet Enterprise columnist, Rick LeBlanc wrote on his website Packaging Revolution.Net, “One of the growing trends we have talked about in this space is the increase in urban delivery challenges and the need for sophisticated urban delivery models, including what types of pallet and reusable packaging will best meet those needs going forward.”
Some options that LeBlanc pointed out were low-noise roll cage wheels to smaller footprint pallets and containers, to pallets with retractable wheels.
So if online retail is the major growth area of the future, what does that mean in terms of pallet demand? Back in 2001, Dr. Mark White of Virginia Tech published a report on E-Tailing and Pallet Demand. He concluded, “Retailing methods of the future will require greater levels of product unitization and pallet use.” It doesn’t appear that pallet usage has dropped since White first released his report more than ten years ago despite the massive growth in online retailing. Palletization has changed and more of it has moved to rental and block pallets, which has significantly reduced the number of loads shipped on 48x40s. But unit loads continue to be palletized.
Total pallet demand drops only if the number of unit loads decreases or fewer parts of retail supply chains require palletization. But this doesn’t seem to be the case because in the typical online retail scenario the only part that is different is the final part of the supply chain where loads are shipped to stores on pallets versus shipped to consumers in boxes. And in reality, many of those retail shipments are not currently palletized. For example, products are delivered all the time to retail boutique stores in boxes or totes not full pallet loads. Fast moving consumer goods (especially items you find in a grocery store) are likely to continue to be palletized as well as bought in retail stores more than online.
In an interview with Pallet Enterprise, Tompkins said, “It is clear to me that in the future 60-85% of all products will still be bought in stores. It is not like stores will be going away. There will still be a lot of products that go from the manufacturer to a retail distribution center that is finally delivered on a pallet to a store.”
He added, “Let’s look at Amazon. Except for the non-conveyable products, the majority of items that Amazon ships come off a pallet that is stored in its warehouse.”
Tompkins explained, “The pallet has had one less move. But the pallet is still going to have the same existence. You are still going to need that pallet for storage in the warehouse. You are not going to move that pallet out of the supply chain until the last item is sold. An increase in online retail is not going to have a big impact on the total number of pallets required.”
The big change is that the amount of corrugated boxes will significantly increase, according to Tompkins. Greater levels of online retail do mean fewer pallet load shipments to stores, which is also the greatest source of pallet loss or theft. Pallets would be used in more closed loop distribution center environments where a durable, cost-effective pallet seems like a good solution.
Tompkins suggested, “I see Amazon as a great opportunity for pallet rental. It is very clear that Amazon is not into owning assets. Jeff Bezos doesn’t like physical assets on the books.” Bezos is the founder and chief executive officer of Amazon.
Given Amazon’s focus on low costs, it is likely to stick with wooden pallets suggested Tompkins. Tompkins said, “Bezos is the electronic Sam Walton.” This suggests he will opt for wood and other low-cost alternatives when it comes to pallets and containers. Currently, the online retailer giant has a flexible pallet standard although it is increasingly trying to improve pallet quality, he added.
Amazon and other online retailers are growing at a much faster clip than brick and mortar stores. Look for growth in shipping lockers in nearby convenience stores and other retail environments designed to protect and reduce the cost of direct to consumer shipments. These have been in development for years and are just starting to get some traction in the United States. One thing is clear – the retail environment is evolving. And this looks like an opportunity for the enterprising pallet and transport packaging companies in the market.