[📈 Investing] Part 2: What is e-commerce fulfillment and how is it changing?
If you’re looking to read the first part of my analysis, here’s Part 1: Changing landscape for online merchants
Tl;dr: I believe we will see some of the biggest changes within the fragmented and antiquated process of fulfillment, where online purchases meet the offline delivery of physical products in the next few years.
Here are some big trends in the next 1-2 years:
Any e-commerce merchant will have a full-stack shipping experience, whether it is a full suite integration for fulfillment or by building up into a verticalized experience for a specific type of product.
The next generation of founders will cater SMBs rather than large retailers. We’ll see the opportunity of “business-in-a-box” for specific merchants, then expanding to cover other product verticals.
We’re going to continue seeing innovation in the space of high cost of returns and reverse logistics. This is one of the biggest and unsustainable costs for an e-commerce brand.
The cost of building an online shop has been reduced thanks to a merchant-forward platform like Shopify. However, fulfilling your own small shipments can be quite costly without benefitting from bulk shipping and existing partner relationships. Most SMB merchants will start with outsourcing their fulfillment to other start-ups because hiring and managing warehouses is a lot of work.
The simple definition of “fulfillment” are the steps taken for receiving, processing, and delivering orders to customers. It’s basically the entire process behind getting an order delivered to a customer after they order it online. It’s where the online and offline of e-commerce connect.
Fulfillment costs represent ~10% of the e-commerce market. With back of the envelope math, this represents ~$70.9B in the US.
Look through it, fulfillment bundles a lot of different services into "fulfillment”:
Inventory forecasting: Understanding how much inventory there already is and whether you will be able to fulfill it, understanding when you might need to produce or acquire more units ahead of a peak season (e.g. Black Friday, Christmas)
Order management: Keeping track of incoming orders and customer communication in case of delays or losing a shipment
Packaging: What packaging (and unboxing experience) you will give the customer, how the package will actually get to the customer, which carrier you might use, whether you have insurance in case something goes wrong with it
Shipping: The shipper will typically be a 3rd party logistics (3PL) company that will get a shipment from point A to point B to get to the consumer and also to return to the merchants for returns.
Warehouse: Since you're producing these units of goods, you need to keep them somewhere so that you can fulfill an order once it comes in. Most 3PLs will also manage their own warehouse. According to Kevin Gibbon, it takes 6 months to spin up a new warehouse working at a regular clip and most smaller businesses can’t manage this for the volume they ship on their own, hence the reliance on 3PLs and networked specialized businesses focused on this. These 3PLs have antiquated software and aren’t good at marketing but are good at operations and running the logistics network.
Returns management: Being able to get the good back through easy prepaid return labels. Return policies have been a critical point for consumers to become comfortable with purchasing online rather than in a store. In exchange for not being able to "try" an item in person before they purchase it, buyers expect a smooth return policy.
Each service described within fulfillment is an opportunity in and of itself for start-ups to support the change to e-commerce.
Why build within fulfillment now?
I’m bullish on there being successful venture-backed B2B start-ups within e-commerce fulfillment built in 2021 and beyond with tailwinds that will accelerate their growth with merchants.
The barriers of entry to becoming a brand have been lowered by:
Emerging technologies that is replacing manual work. We’re seeing increased automation in warehouses have been lowering costs in warehouses, making it cheaper to fulfill orders and outsource them (Digitalcommerce 360). We also see emerging technologies such as A/R and just in time data analysis is making the warehouse logistics stronger quickly (Digitalcommerce 360).
Changes in regulation, pushing merchants to build an adaptable supply chain. Most goods are currently made in China, though there's a move toward more local, and diversified manufacturing because of the recent political play and increase in tariffs with China. These days merchants want a reliable supply chain that is more local or spread across different regions to reduce potential disruption. In addition, with the recent changes in NAFTA and international trade agreements, we’re seeing volume from certain trade routes grow while others diminish.
As we see the need for an adaptable supply chain, we might also see merchants build supply chains that skip intermediate warehouses altogether where brands ship directly to the consumers’ location. As we integrate more data for the supply chain and transparency across the different stages of shipping (e.g. manufacturing, assembling, packing, shipping), this becomes a better possibility. We’re also seeing the market for American goods continue to grow and become accessible. With the growing group of influencers and brands in the US, we’re seeing a continued shipment of culture and goods outside of the US, starting with Canada but building out further. This is possible especially as the logistics infrastructure from the US to international becomes more possible.
What will the next generation of startups focus on?
The product they build will easily support a full fulfillment stack for merchants, whether it is integration to support a full journey or by building out a verticalized experience for a specific merchant type within fulfillment. On top of that, having a console for merchants to tie all these integrations together and understanding how to use the data to build predictive insights for merchants to gain an even better understanding of customers is crucial.
I’m interested in fulfillment and I think the full stack experience becomes extremely important. For shipping, managing the whole experience is important to be able to solve it. According to Kevin Gibbon: “You can solve all these problems [of moving physical things around] if you control everything.”
We will see some founders tackle the verticalization of fulfillment: a start-up that can support the full supply chain for their customers but focusing on a specific customer target first (e.g. sunglasses, apparel, make-up, etc.) and building a “business-in-a-box” for specific merchants, then expanding to cover other product verticals (e.g. Badaboom).
The next generation of founders will be catering towards SMBs rather than large retailers. Founders will build a best in class service that rivals the Fulfilled by Amazon retailer but will make it accessible for small businesses: offering integrated returns, promotional shipping options, and supporting thousands of SKUs.
On the buyer’s side, I believe there is a strong need to help merchants manage returns, and is one of the biggest unanticipated costs that merchants have. Complementary to that, having an out of the box customer support service for consumers in a low-cost manner will be important for merchants and for e-commerce to continue to grow.
Conclusion
No matter what innovations we see, we have to ask ourselves why fulfillment remains fragmented and we haven’t seen much innovation yet. It’s important to keep in mind that logistics is a slow-moving industry due to fragmentation, an older workforce, the big upfront costs with setting up warehouses, and high costs with any logistics network.
If you’re interested in talking more about e-commerce infrastructure or you’re building in the space, feel free to reach out on Twitter (@jeune_sage).
I aim to invest, and advise female founders and am particularly interested in helping you find the mentorship and funding that you need.
I want to thank those that helped review this essay and give some thoughts on the e-commerce logistics industry, including Mercedes Bent, Elaine Zelby, Kevin Gibbon, and Katherine Sun.
(PS: Here’s a great podcast episode between Elaine and Kevin where they discuss Airhouse. Also, Benedict Evans posted a great slide deck called the Great Unbundling with a section on e-commerce that’s a good visualization of how the industry is changing.)
Other e-commerce references
Lightspeed's eCommerce 3.0: Defining the Next Generation of Purchasing
The third generation of commerce companies that we’re seeing starting in 2020.
CM Ventures Zooming out the headless e-commerce vertical
Deep dive into the headless commerce world with CM Ventures
Ecommerce is Having a Moment: Why We’re Excited & What’s Next (Sapphire Ventures)
Sapphire’s investment thesis which focuses on three parts:
Infrastructure: The Shift to Headless.
Pre-Purchase: All About Social.
At-Purchase: Speed is Everything.
Sara Du, founder of Alloy on Twitter
Sara is knowledgeable on e-commerce infrastructure, she’s building a start-up that focuses on workflow automation. I love this diagram she provided on the e-commerce stack
Our top 10 trends for 2021 (Accelerated)
One of their trends is the growth of e-commerce infrastructure.
These are my personal thoughts and don’t represent my employer’s thoughts.