The retail industry is currently undergoing massive changes, because as consumers continue to become digitally networked, their shopping habits are also changing more and more. They are increasingly ordering goods on computers and mobile end devices such as tablets and smartphones instead of buying them from stores. Sales reached almost 34 billion euros in Germany last year. And this is just the start, because continued strong growth in online retailing has been forecast for the coming years.
At the same time, the incredible dynamism of e-commerce presents completely new challenges for the area of logistics. This partly applies to the market for courier, express, and parcel (CEP) services in relation to the processing of deliveries and returns. But it also affects intralogistics, which is concerned with the storage, transporting, and picking of goods. Due to the extraordinary competitive pressure and slimmer margins, an increasing number of suppliers are endeavoring to establish a more efficient cost situation while also optimizing delivery times, a factor which is critical to success.
In addition, over the coming weeks we will publish further articles on the subject. In each case, we will look at issues critical to storage logistics, including:
- A comparison of different storage types (chaotic vs. fixed location)
- Efficient returns handling
- Delivery times and speed (keyword: same-day delivery)
- Automation and the use of machinery in the warehouse
- Networking/digitalizing storage and logistics
Overview: The rapid growth of the e-commerce market
Global sales of 1,220 billion US dollars in 2013
According to a study conducted by the market research company emarketer.com, around one billion active online buyers were responsible for global sales totaling approximately 1,220 billion US dollars in the area of B2C e-commerce in 2013. Despite the rapid growth witnessed by the market in recent years, sales are expected to continue to rise. The forecast by eMarketer assumes a total sales volume of 1,860 billion US dollars in 2016. However, growth rates will fall from their current global level of around 18 percent to 11 percent in 2016, which is still an extraordinarily high figure compared to general economic growth of three to four percent seen around the world at present.
With sales worth 340 billion US dollars and 240 million buyers, Europe is currently home to the world’s third-largest market behind the USA and Asia, and although growth in Europe is weaker compared to the rest of the world, steady growth in the market volume to 455 billion US dollars is still expected by 2016.
The global drivers of growth are primarily the Asian countries, emerging markets such as Brazil and India, and Africa. One reason for the weaker growth in both Europe and the USA is the fact that these regions are comparatively already much further advanced in terms of the prevalence and acceptance of e-commerce. The proportion of online buyers in relation to the total number of Internet users in Western Europe and the USA is more than 70 percent, while the figure in Asia and Eastern Europe is below 45 percent and in Central America and Africa it is only around a third.
Germany is the second-biggest market in Europe
If we take a look at Europe, Germany represents the second-biggest market there with sales worth 34 billion euros. Leading the way by some distance is Great Britain, where income reached almost 70 billion euros in 2013. France (25 billion), Spain (15 billion), and Italy (14 billion) occupy the other leading places.
Besides Germany’s high population figure, the comparatively high acceptance of online shopping in relation to the total number of Internet users (around 80 percent) is primarily responsible for the high ranking. After Great Britain (87 percent), this is the second-highest figure in Europe and also higher than, for instance, the USA (73 percent). Another reason for the size of the market in Germany is the relatively high amount of money spent per shopper each year (Study: e-commerce in Europe 2014, PostNord). The figure here is almost 800 euros, which puts the country in a leading position in a comparison of European countries. Only Great Britain is ahead here – and by some distance – with a figure of 1,180 euros.
However, at almost 13 percent in 2013, growth in Germany is comparatively low. There is evidence of much stronger growth in certain other European countries (Italy 22 percent, Spain 16 percent).
Clothing the biggest segment in Germany
Yet even with figures slightly below the European average, the e-commerce sales channel will remain the driver of growth in retail for the foreseeable future. If nothing else, this is the reason why almost 500,000 online sellers had flocked to the Internet in Germany by 2012. From Amazon, Otto, and Zalando to one of more than 170,000 business sellers on eBay, the Internet will be the key platform for more and more retailers wishing to sell their products, where the 100 biggest shops already generate a good 50 percent of their total income with sales of around 18.5 billion euros. In recent years online retailing has grown to a figure of eight percent of the total amount of retail sales, although electronic items and fashion already account for around 30 percent.
So it is little wonder that clothing and shoes are the main drivers of events in e-commerce and represent the largest segment by some distance. This is followed by electronic goods and books. Together these segments are responsible for over 60 percent of total income.
Impact on storage logistics
Increased competition and cost pressure is putting a strain on companies
Buyers in Germany are characterized by their comparatively high price sensitivity, which keeps an immense amount of pressure on the prices of retailers operating in this market. The fact that German customers also value fast and, above all else, free delivery and returns – and are responsible for one of the highest return rates in Europe – exacerbates the cost situation for retailers quite considerably. The practice of paying for goods after an invoice has been issued, which is widespread in Germany, also has unfavorable consequences for retailers, because it means that they sometimes have to wait weeks before they can access their income.
The resulting drop in margins is forcing companies operating in this market to constantly examine their own cost structure in order to continue to hold their ground successfully against the competition. Due to the high costs associated with the area of logistics across the sector, this especially includes measures aimed at efficiently organizing storage operations.
Investing in increasing efficiency in the area of storage and logistics
The rapid development of e-commerce, the need to be flexible, and the income situation are all presenting both retailers and suppliers of solutions with major challenges.
In an interview with the industry website etailment, Dieter Urbanke, CEO of Hermes Fulfilment GmbH, replied to a question about the main challenges brought about by the rapidly growing e-commerce market as follows (entire interview): “The biggest challenge lies in efficiently processing the steadily growing number of customer orders and meeting market demands in relation to customer service, availability of goods, and transparency. The end customer is demanding ever greater flexibility and a stronger focus on the overall experience. This not only goes for the online shop itself, but also the area of fulfillment.”
Market players are faced with high investment costs if they are to meet this challenge and it is the mail-order businesses in particular that have been investing many millions of euros in logistics and especially intralogistics in recent years.
Below are just a few examples of the extensive measures taken by the big players in online retailing to modernize their storage structures:
- Tchibo expanded its main European warehouse in Bremen, with capacity for 200,000 pallets, at a cost of 50 million euros in 2014 to allow it to keep up with demand in future. The expansion included the construction of a mini load system, a sorting building, and technical infrastructure for a total of 17 kilometers of conveying systems. There has also been extensive investment in IT.
- Bosch has invested over 100 million euros in a shuttle storage system at its logistics center in Karlsruhe. It stands more than 20 meters high, is equipped with RFID (radio frequency identification) technology, and has space for around 200,000 boxes. This has increased capacity by 50 percent, which is equivalent to 20,000 square meters of extra storage space available to the company. In future (from 2016), this main warehouse is set to serve as a base for delivering spare parts to car workshops and wholesalers in more than 140 countries around the world.
- Hermes Fulfillment, a subsidiary of OTTO, has opened the world’s largest returns warehouse. A total of 470 million euros was spent on building the logistics center in Haldensleben. The world’s largest shuttle system has been in operation there since 2011. It has storage capacity for around one million items and up to 15,000 articles can be picked per hour at peak times.
- Zalando uses a modular warehouse to deliver its comprehensive product range. It extends across a total of 120,000 square meters and employs around 1,000 people. There are already plans to expand the complex.
However, it is not only the soaring number of goods which need to be stored and picked that is responsible for the constant need to optimize a company’s storage logistics. Aspects related to the safety of employees (keyword: ergonomics in the workplace) and the slimmer margins expected as a result of increasing competitive pressure will necessitate a much higher level of automation in the warehouses and distribution centers of online retailers in future.
This trend towards greater automation can be seen everywhere in intralogistics. Ever more sophisticated software systems are now frequently managing the entire production flow. Tasks such as stocktaking, coordinating ordering and shipping activities, and monitoring picking processes, which until recently were performed by humans, are now being done by machines.
Yet how much automation makes economic sense and will actually be adopted by the retailers? After all, a high level of automation also means that, in addition to the investment costs, the companies will have to sacrifice flexibility in certain circumstances if they rely too heavily on the partial upgrading of the technology in their warehouses. As such, in future e-commerce businesses will most likely use flexible automation technology which is also capable of achieving high picking performance, low error rates, and optimal storage density.
Accordingly, storage logistics specialists have to answer the following questions if they are to continue to hold their ground successfully in the market:
- What are the most pressing problems with which the current methods of storage are confronted as a result of the massive growth in e-commerce?
- Which technologies and level of automation will gain acceptance in the area of storage and order picking?
- How much can be spent on purchasing the necessary solutions?
These questions will be addressed and examined in detail over the coming weeks in a series of articles, and solutions will be analyzed to establish how efficiently they can be employed in the area of storage logistics.