A VC in Vacationland

I've seen a number of articles lately predicting an end to free product shipping, perhaps as early as this year for some retailers.

The general argument is that rapidly rising freight labor costs, especially among the parcel carriers (UPS, USPS, FedEx, DHL), are already resulting in at least another 5% rate increase in January 2019 (with more likely to come). The ability of shippers to absorb new freight rate increases in landed product prices is becoming increasingly constrained by rising manufacturing costs (due to tariffs and higher wages in developing countries). Will the latest rate increases be the tipping point?

It is too early to predict the end of free shipping.  Much depends on the ability of carriers to adopt new technologies and adapt to changing inventory positioning strategies by shippers. Let's be honest–the trend of consumer convenience and instant gratification is not going away. Retailers and other product companies are dependent on parcel companies to get their products to customers when they want them or lose market share. Amazon is building their own delivery fleets. They will siphon off the best freight for their network, leaving the more difficult deliveries (rural, inner city) to parcel carriers or outsourced contractors. This will not improve the cost situation for parcel carriers, leading perhaps to further rate increases as freight quality diminishes.

From a carrier perspective, incorporating better real-time information into supply chain planning and execution decisions will provide some relief, but such changes to legacy technologies can take years to populate across global networks. Finding new lift capabilities, such as surplus belly air cargo routes is another option, especially to expand e-commerce deliveries into less developed parts of the world. Both these options are, again, multi-year solutions.

On the shipper side, the trend to forward position more inventory, whether in brick & mortar stores or in small near-urban warehouses, will satisfy consumer desires, but at a higher cost to shippers. Retailers and manufacturers have spent the last three or so decades have been spent consolidating warehouses and inventory in large regional facilities, and are generally not well equipped to handle e-commerce shipping. Shippers now face the double-cost challenges of expanded inventory and local warehouses along with rising freight costs. Robotics may help some in the new facilities, but it is not a panacea.

Can these consumer desire/shipper cost conundrums resolve themselves? We'll see, but the retailer, manufacturer and freight industries need to undergo some radical transformations if we are to maintain free shipping without significant product cost increases. Stay tuned…