Within the fashion e-commerce supply chain, we see that logistic costs are increasing year on year for e-tailers and parcel companies. This means that, despite their increases in revenue, the EBIT of these companies is either stable or in decline, with some experiencing falls in share prices following 2018 financial results.
The reasons behind the rising logistic costs include: larger assortments, higher costs for bigger warehouses, shorter delivery times, and a complex and costly returns process. The cost of a typical return is €10-20, and the fashion sector has the highest percentage of returns, averaging 30%, and rising as high as 70%. Clearly, this has a significant impact on profitability – in fact, one e-tailer has said the costs of returns equalled almost 5% of its revenue.
Automation improves efficiency
In light of this, e-tailers are turning their focus from increasing revenue and market share to improving EBIT. To do this, they are investing in warehouse automation to enable growth and decrease costs, as well as offering excellent customer service.
Zalando, for example, has built a new logistic centre in Sweden as part of its network to enable future growth, and deliver 30% of its products next day by 2020. ASOS is building a new automated warehouse to drive efficiency, and Boohoo is creating a distribution network capable of generating £3 billion of global annual sales.
Automation is a key theme for parcel companies too, with leading players already investing heavily in their networks to optimise current operations, and prepare for continuous growth. DHL cited in a 2019 presentation to investors that, “Highly efficient and automated sorting capability enables high quality mail and parcel delivery.”
While looking for opportunities to increase revenue and reduce costs to improve EBIT, it seems that e-tailers have been shifting away from free delivery and returns in the first half of 2019.
ASOS has updated its terms and conditions to tackle ‘suspicious’ returns, such as those they suspect to have been worn, or from customers who order and return items in huge quantities. Zalando now only accepts returns if an oversized tag is still attached (to prevent clothes from being worn before they are returned). Along with H&M, it has started asking for shipping costs for small orders in certain countries, including the UK, Ireland and Spain. Other e-tailers are expected to follow.
Parcel companies have also increased prices in early 2019 to compensate for higher costs. This has been more significant than in previous years to reflect the considerable rise in transport and personnel costs, and to adapt to the growing demands through the parcel market.
Equally, there has been a shift in the consumer’s perspective. Until recently, free delivery and returns were the two most important aspects in their decision to choose an e-tailer. Now, however, they are generally more loyal, and are prepared to pay for flexible, reliable, fast and environmentally friendly services.
In a 2018 report conducted by PWC (Ways out of the Parcel Dilemma), four out of ten German citizens were willing to accept an additional charge of €2.40 on average for parcel delivery within a self-selected time window.
This paradigm shift presents e-tailers and parcel companies with an opportunity to differentiate themselves on performance and quality, not only on price. Meanwhile, it could signal the beginning of the end for free delivery and returns.