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Issues, consequences, and solutions for e-commerce merchants
Since the outbreak of the Coronavirus in 2020 the supply chains around the globe have been heavily disrupted which has led to delays, labour shortages, and increasing logistics costs. One major reason for that development is the imbalances in the production and demand for goods with countries going into lockdown and opening up at different times. With global demand recovering while some countries are still facing lockdowns due to Covid-19, the competition for production and freight capacities has been intensified. The supply chain constraints have a major impact on the economy worldwide but also especially on the whole e-commerce sector. This is why, with this article, we are going to look into the issues, consequences, and possible solutions for e-commerce merchants.
Exploding shipping prices
The supply chain bottlenecks have led to soaring shipping prices. In fact, transporting a 40-foot steel container of cargo by sea from Shanghai to Rotterdam has increased by 547% compared to the seasonal average over the last 5 years. It now amounts to a whopping $10,522. This is mainly due to the fact that transportation capacities have been squeezed because of soaring demand, the shortage of containers, and saturated ports. The bad news is that industry experts don’t expect the prices to decrease significantly anytime soon.
Source: China Ministry of Transport, Harper Petersen & Co. and Baltic Exchange via Macrobond, ING Year on year growth in freight rate indices, 2018 - May 2021
European e-commerce companies are hit especially severely by those developments as freight prices from Asia to Europe have increased more than to the U.S. However, not only the freight rates from the Asian countries to the rest of the world have surged, but also the costs for transportation from the U.S. to Asia.
The increasing prices are also fueled by petrol and diesel becoming more expensive. As the demand for fuel has climbed up again over the last months the supply-side has not kept up with this development, partly because oil-producing countries have maintained an artificial lid on supply. As a consequence, we currently see the highest prices since the Global Financial Crisis in 2008.
The explosion of worldwide shipping prices created economic and business tensions, leading to fewer margins for retailers, and in the end, higher prices for retail products. Further down in this article we are going to explain the effects in a bit more detail.
Shortage of labor across the supply chain
In addition to the imbalance of supply and demand due to the effects of the Coronavirus, there is also the lack of workforce in logistics which has intensified the squeeze in transportation capacity. The shortage of labor has an impact on all kinds of companies around the world and is affecting economic growth. One example is Nike, which recently announced that it was forced to adjust its fiscal 2022 outlook due to longer transit times, labor shortages, and production shutdowns.
The effects of labor shortage on delivery delays can become even more obvious with the following incident that happened at the ports in Los Angeles and Long Beach. 70 container ships were stuck due to a lack of workforce. As a result, they were unable to unload goods which prevented other container ships from unloading their deliveries.
Logistics companies like FedEx have also adjusted their financial forecast due to increased costs. As a result, competition in the labor market has exploded as well. According to the company, the surge in expenses has been also caused by overtime working hours and increased transportation costs in general.
The role of logistics costs in inflation and online retail
The developments described in the previous sections will significantly increase prices for goods and services around the world, especially since 80% of all goods are transported by sea. As a consequence, this results in a noticeable effect on the inflation rate.
According to Gary Grant, the founder and executive chairman of the U.K. toy shop The Entertainer, the effects of the increasing shipping prices will also have an impact on the upcoming holiday season since consumers will face increasing retailer prices in general.
E-commerce merchants also need to be aware that the prices for cardboard packaging are getting increasingly expensive. This is mostly due to the very high demand caused by the e-commerce boom. The price increase of raw materials has further intensified the surge. In fact, the price of common brown waste paper grades has increased by €110 per ton between September 2020 and February 2021.
In addition to that, pallet prices have also risen significantly this year. In fact, pallet prices in Eastern Europe jumped from €5 to €25 this year. This is mainly caused by the increasing demand paired with the reduced timber availability.
The impact on e-commerce fulfillment
The developments over the last months will have a significant impact on e-commerce merchants and their e-commerce fulfillment. The fragile supply chains, shortage of labor, and increasing prices will add more complexity to doing e-commerce business. One major implication is that you need to order products well ahead of time in order to secure sufficient stock levels and avoid stock-outs. The latest research shows that the share of shipped sea-freight arriving on-time has significantly dropped in 2020 and 2021.
Source: Sea-Intelligence, ING
Retailers should be aware that parcel service providers are going to increase their prices as well in order to secure their margins. DHL, for example, has already announced that it will increase shipping costs in 2022, partly due to the fact the costs for transportation and personnel have surged.
Also, the wages for warehouse workers will increase just like the costs for packaging material. As a consequence, pick and pack costs will become more expensive as well, making fulfillment centers more costly.
One possible solution to overcome this challenge is shortening the supply chain with local production facilities which could make the whole logistics process more efficient and reliable. However, this could also have major implications on the business model in general and therefore can be a complex endeavor.
Since those effects can be observed across countries and sectors, there is no simple answer on how to avoid increasing logistics costs in general. Most e-commerce companies are going to face similar challenges and will need to adjust their strategy in order to keep their margins. Increasing the AOV, adjusting the minimum basket sizes for free shipping, and the prices, in general, are just some of the available options that will help merchants succeed in the long run despite those challenging times.
Additionally, finding a logistics company that offers fair fulfillment prices and fits their requirements is a crucial part of the strategy going forward