CFS: E-commerce unleashed

This is a recording of a presentation on e-commerce at this year’s virtual Cargo Facts Symposium, featuring Frederic Horst, managing director of Cargo Facts Consulting. See all our previous coverage of this year’s Symposium. A transcript is available below. This transcript has been generated by software and is being presented as is. Some transcription errors may remain. JJ Hornblass Hi everyone and welcome back. Before I introduce our next speaker, I want to thank our sponsor airborne global solutions for sponsoring this session. And we'll have a word from our sponsor now.Thank you everyone global solutions to now it is my pleasure to introduce Frederick Horst, Managing Director of cargo facts consulting cool present this next session, entitled ecommerce unleashed the temporary surge or the new normal this session is in part derived from cargo fast consulting new exceptional report on e commerce logistics which was released yesterday. The global e commerce logistics outlook is an essential resource for understanding growth trends in e commerce and how they will shape the air logistics business, you can visit CFC insights.com. For more details, Frederick joins cocofax Consulting as managing director in 2019 and runs the day to day operations of the practice based in Luxembourg. He has extensive experience in strategy planning, commercial, operational, and government experience across the air cargo Express, aviation and transportation infrastructure businesses. It is my great pleasure to introduce Frederick course to you, Frederick. Frederic Horst Thanks. Thanks, JJ, and Welcome, everyone. So I'd like to talk about sort of three areas today one to give a bit of context of what things were looking like an e commerce business, before the onset of pandemic and the key trends and developments that we've seen that then looking at some really what's happened throughout 2020 and the growth we've seen and how that's impacted different players in our business and then venture some some thoughts about how things actually may continue beyond 2020 in the in the coming years. So if you look at the overall context, this this chart here shows the size of different consumer markets worldwide, and it's important to realize that a large part of worldwide consumer spending two thirds in fact takes place in the United States in the European Union, including the UK and China and and Japan and most other markets even though they may be important markets in their own right, relatively small compared to these large box if we look at how that transfers into into e commerce markets, what what we see is that free markets, China being the biggest and the US being the second largest in the European Union are by far the world's largest e commerce markets within Europe. It's really Germany, the UK and to a degree also France that drive most of the business activity there. Japan very large ecommerce market and it's in its own right beyond that, most ecommerce markets are are quite small in in relative relative terms. And in general with ecommerce most activity takes place in in domestic ecommerce markets rather than than in in cross border ecommerce markets. That being said most of the growth in the past few years has been in cross border markets rather than in in domestic markets. And if we take the EU as an example, cross border ecommerce growth has been in the order of about 33% per year. Over the last three years, whereas ecommerce from from national sales have been about 10% growth per year, which is still substantial. At the cross border e commerce markets a much smaller overall than the domestic ones. To give you a bit of a data point there. Alibaba is domestic China business accounts for about 64% of its gross merchandise value, whereas the cross border business about 7%. So we're looking at a factor of nine. And in this case 12 platforms account for about half of global merchandise value. And a global merchandise value is a standard figure that's used in the e commerce business to essentially describe gross sales that a platform generates a lot of platforms, they report their results in terms of net sales, which is which is the revenue of the platform itself makes as opposed to the revenue the platform generates with its with itself. And so these 12 platforms account for about half of of gross merchant global gross merchandise value with Alibaba, Amazon and jd.com dominating the business. And what we see here is there's in 2019, all three of these as well as a lot of the regional platforms showed some quite strong growth. So Alibaba increased its gmv by 70%, Amazon 28%, JD comm 21%, eBay dropped by 5%. And what really happened there is that there were there was some currency effects in that, but eBay lost actually a lot of business to Shopify. And that that picked up a lot of extra seller business. Now Shopify and eBay are very, very, very different different business model. Shopify is very different to say Alibaba or Amazon or JD and as much that it provides a platform for for sellers to actually host their own house, their own shops, and Shopify grew its gmv by about 48% last year. And if you couple that with sort of the increased social media type selling that we're we're seeing that's really fueled Shopify growth. Walmart has also seen quite strong growth in the last year grew its gmv off a much smaller base. By 39%, in some of the regional platforms like Flipkart in India, jamir in Africa, and Canada, Libra have been doing in Latin America, they're doing quite well there as as well.So the reason why we focus on the on the global platforms is not just because because of volumes, they generate them the market share that they have, but also how they drive logistics opportunities, and also a logistics opportunity. And in you know, report, we really identified three key trends that are driving logistics opportunities, the one I would say major one is that home controlled logistics is seen as a major source of competitive advantage by platforms. And some have also started becoming logistics providers in their own in their own right. And that has the implication that these platforms are generating very, very large volumes for third party providers. But as soon as these platforms start insourcing volumes, and carry previously carried by third parties, this also has the potential to yank volumes away from from other places. And we've seen that with the United States Postal Service. For example, last year, ecommerce growth, Amazon's growth was, was was quite, was quite large. So in, in, in 2019, Amazon grew its net growth net sales in North America by about 21%. But a lot of that volume started moving through in house networks or with ups and UPS is quite dependent. In its volumes on on Amazon last year, UPS generated 11.6% of its revenue with Amazon and by our estimates, about a quarter of Amazon's global shipping standard was actually with ups. The other thing that we've seen is a shift from today to faster overnight shipping has seen for the platform's fulfillment costs growing faster than revenues. Now, that had some advantages and some disadvantages. So increases use of expedited shipping with Express carriers and air capacity as has led to extra volumes. But there's been pressure on on yields, as well. From a platform perspective, that's also created some problems because shipping costs have grown much faster than than their than their revenue. So if we look at Amazon as an example, sort of total 920 1720 18 shipping costs grew more or less in line with with, with revenues. But since 2019, we've really had a situation where shipping costs have essentially grown by a factor of about 1.6 1.7. To two revenues, and that that brings us back to the central question of, of e commerce business who's paying for free shipping. So something has to has to give them. Another thing that we've seen with with platforms across the world is an increased reliance on on third party sellers, with growth in third party sales, outpacing in house sales, and the consequence there is that etailers have become very different to to brick and mortar retailers in as much as become integrated commerce, logistics platforms, and finance providers all in one. And one example of a company that's really making this transition pretty late is is also based based in Germany that traditionally relied hundred percent on its own sales, and has now started opening up its its its platform, and its network of third party sellers and intends to transition to that as well. So that's that. So that's the trend so far in 2019. So 2020, what we've really seen is an exhilaration of a lot of these growth rates for many of the platform not for all of the platforms. So if we look at Shopify Shopify is and this looks at net sales growth as opposed to gmv. Shopify has grown by 86% in the first year of 2020. Mercado Libre in Latin America, 55%, Amazon 34%, Alibaba 31%, jd 23%, eBay, not a lot of growth, Julia, the primary African platform has been struggling somewhat this year, and has actually seen its volumes, volumes decline. And a lot of that has to do with with capacity that's just been taken out of African markets that the media has relied on for its for its for its growth.And the effects are widespread and seen across different sectors of the logistics business being an express industry bid be in the contract line business, building postal network service, as well. So this chart here shows how Amazon's both number of flights are they operating their dedicated USA Network, as well as the traffic that is carried has has changed over the last over the last four and a half years since they've since I started this network, what we've seen is in the first seven months of 2020 pounds carried in that network was up by almost 50%. And the number of flights operating in that network were up by more than 30% compared to the same period, same period last year. And we have seen increased capacity utilization in this network as demand is increased at both sites. And that's a good thing. On the Express side, what we've really seen is a is a switch from from business to business traffic to business to consumer traffic and and we've seen that both in terms of volume growth, but also the impact that it's had on on yield. So if we look at the US domestic market, for example, we see ups with for the first six months of this year, and and in the next week or so most most of these companies will be reporting their third quarter results and all the e commerce platforms are going to be reporting their results as well for the third quarter. So that'll be interesting. Interesting to see. So ups domestic volumes, and this is I'm just looking at an X expedited and deferred vines and we're looking at the ground network. So essentially the things that moving in it works up by 13% but package yields down by 7.7%. FedEx slightly up and when we FedEx we have to realize that that there's also the effectively loss of the Amazon contract middle last year in there, yields are down quite a strongly. If we look at the Chinese domestic market, SF Express has had a phenomenal nine months in terms of in terms of growth with volumes on chip and volumes up 75% year on year, but per package yields down by about 20% and we're seeing similar effects in international markets as well with with FedEx and UPS both up in terms of volumes, but the yield levels yield levels down. DHL has not seen the same level of volume growth on on the international but has actually managed to increase yield both in both in euro Tanzania US dollars. If we look at the share of business to consumer shipments and we just published an express report that dives into more detail on this. DHL traditionally, last year, generated about 30% of its time deaf and international shipments with business to consumer shipments for the second quarter of this year that went up to 45%. Ups generally and missing info ups is that case includes both ground and air generated about 50% of its shipment volumes with businesses consumer shipment that's gone up to 69%, with FedEx, express and ground, and that's gone from 44 to 50 50%. And we've seen that in the postal service as well. And USPS is is a representative of what we've seen in some postal services. Across across the world where spend on air package revenues package volumes have also increased quite quite substantially. So while last year, there wasn't much of an increase primarily because of insourcing from from ecommerce platforms, particularly Amazon. In 20, Postal Service's picked up a lot of additional volume so package revenues were up 54% volumes were up 58% and its air spend was was up quite substantially as well because of the requirement for them to shift from from commercial to charter and air capacity because there's a lot of the volumes outside the FedEx contract are off the back of passenger flights operated by by United, delta and American primarily. So this development is also reflected in in airport data with combination carrier hubs.The combination carrier hubs up and a combination carrier hubs down sorry and expressing ecommerce hub up so we'll look at that specifically. For example, Cincinnati this year today, cargo tonnage volumes are actually up by 14%. In fact, DHL and Amazon for that Ontario's up 20%. Even Chicago's up 3%, with a lot of extra freight traffic that's been coming in from from from Asia, and Memphis and Louisville, both up by about 3%. But then if we look at New York, New York is down 23%, San Francisco is down 22%, Los Angeles is fairly flat, Miami down by about 4% and Dallas down by about 11%. So we're really seeing those, those airports that are focused on on cargo and express are doing quite well, so far and so far in this year. So what happens next? Well, first of all, it's been interesting to see in our research that the level of ecommerce adoption in 2020 has increased. But the real increase is not as big as the perceived increase. So if we're looking at the first nine months of this year, and comparing that to the full year 2019, the ecommerce share of total retail sales has gone up from about 16% to about 18%. In the US in the European Union, it's gone up from about 13 to 15%. What we've seen over the last years is the general trend has always been that the increase in ecommerce penetration. For these, these markets at least has sort of been in the order of point seven to 1%. Now we did have some some some, some months where with e commerce penetration was was very, very, very high. And you've probably seen some stats about the US going from from 16% to 27%. But that can argue is not representative of the overall picture what's happening in the market. And it's actually important to realize as well, that if we're looking at the first nine months of this year, and we're staying with the US that overall retail sales in the first nine months of 2020 are actually only down by about a cent overall, although there's some big differences in in, in product groups there. So furniture sales down by about 9%, electronics and appliances down by about 16% aurel down by about 33% when you're sitting at home, I guess there's not much need to buy clothes anymore. And it gets gas purchases down by 16% by building materials up by about 13% food and beverages purchased in stores up by about 12 13% as well. So there's been a big shift in the type of things that the people that people by the growth trajectory, we think beyond the pandemic is going to depend on on a number of things and it's going to depend on people ability to spend. So if we look at, I'm just going to jump to the next slide quickly and then go back to this. And if we if we look at the forecast for economic activity over the next couple of years, and by the end of 2021, not end of 2020, by the end of 2021, most large economies by China are expected to be smaller than they were in 2009 19. That applies quite strongly to Europe, that applies to North America that applies to key economies in in Latin America, as well. And that's important, because that means we're all going to be overall poorer than we, then we were in 2019. And that's going to affect our ability to spend in our ability to spend on on all sorts of things. And the second part that's really linked to that is the willingness to spend. So most ecommerce spend, is actually discretionary spend on clothes, which is the biggest, biggest group, and household items, electronics, computers, and so on. And then books is actually a still a big commodity group as well, in terms of in terms of ecommerce spent. And so the question there is, whether the ability to spend is lower is the willingness to keep spending on on these kind of products also going to be there. The other part is the choice about it. So a lot of the surge in e commerce in the past 6 to 7 months has driven been driven by by lack of retail alternatives. And once we come out of this situation, the question is what's the level of damage that has been done to the traditional brick and mortar retail how many of these brick and mortar retailers are going to go bust and actually never come back? forcing us to to continue to buy things online. Change of habits isn't is another aspect, the long term trend so far has been for people to buy more often, and spend more money and also make more cross border purchases. Now, we don't think that the 2020 has fundamentally changed any of these trends, we have seen an exhilaration of this, but we do think that some of the growth that was going to that we've seen in this year is going to fall back to a much more normal level. So in some ecommerce sales grew strongly in 2019, and received a boost in in 2020. That's been good for postal lines, particularly domestic postal volumes. and international postal volumes are actually expected to decline by about 20%. This year, it's been good for Express volumes, particularly domestic violence, it has also been good for air cargo volumes and contract buying. The e commerce share of retail sales has increased your independent and mainly due to the lack of brick and mortar options. And more than more than anything else. The growth trajectory going forward will depend very much on the ability to spend and how our habits, our spending habits. Evil. JJ Hornblass Okay. Thank you, Frederick. Thank you, Frederick, for the presentation. I want to remind everyone that they could submit questions in the platform chat, and I'll be happy to ask them of Frederick. I guess I wanted to ask a couple of quick questions to you. Which is, you know, those those change of habit dynamics that you're talking about? Fredrik? Are you considering them? You know, what's the timeframe? Do you you know, if you have a pandemic that lasts, let's say, into 2022, for example, or just, you know, the full 2021. And it does that, does that change your view? Do you do you have a feeling that, that we can have different expectations of e commerce trends as a result of that? Frederic Horst Yeah, I mean, yeah, the more the more people get used to a certain mode of shopping, and particularly if that mode works, and they get the stuff delivered on time, and it said, and preferably has free shipping as well. And, you know, they might well, stick with that. I mean, there's certain commodity groups and that's the thing why, actually, the overall share of ecommerce as a percentage of total retail retail hasn't actually increased as much as we think it's increased. If we look at that if we just look at the e commerce programs, a lot of things and don't lend themselves very well to online shopping. I mean, Home Improvement building material type stuff doesn't lend itself very well to timeline shopping or Although if you look at them for days results, they said they've moved actually a lot more of this kind of stuff as well. online, you know, we're still not buying cars online where, where there has been, I mean, groceries has been a segment that's that's probably even before the pandemic has seen the largest growth rates in terms of in terms of online adoption. So that, but you know, not all of these are going to impact the impact capacity there, a lot of these are very localized delivery chains. The grocery is an example. It's a very localized delivery chain, ordering food online, it's very localized delivery chain. JJ Hornblass But let's talk about what impact impacts the air side of things, I mean, take us to distill out your view on e commerce trends to fleet implications, if you can, what are if you had to make some deductions, Visa v. Fleet or certain segments of the air logistics chain now kind of connect the dots for us forever. Frederic Horst All right. With fleet implications, there's there's two areas that we need to look at one is the cross border, and one is the the domestic or intra regional type stuff. And as as cross border, e commerce increases, the requirement for air capacity also increases. And that's large, wide body type a capacity that's operating on on childhood or a dedicated service. And we saw the turnout increased its charter activity quite substantially this year to to accommodate for additional demand that we're seeing. And in domestic networks, it's I guess, twofold. On the one side, we have the kind of thing that that Amazon is doing. And in terms of a dedicated air operation. So by the end of next year, they'll have about 85 planes that are going to be operating in a dedicated air operation. They've grown their us network substantially. They've also been growing their, their European network. So far, no other platforms have followed to that scale, they preferred to rely on on third party carriers for their expedited options. The third party carriers are essentially your Express carriers, so ups your FedEx or DHL, and they have seen growth in bones, they've seen growth in in air volumes, they've seen even more growth in groundwater. So that has, that has implications for fleet requirements going going forward as well. So we have the domestic requirement from the platform's themselves. And so far, we don't see any sign of the Walmart is going to follow in Amazon's footsteps. And in doing that, and we see the stuff that moves through three Express networks. The one thing that that that really worries me about that what I see with with e commerce, particularly Express networks, is is is the downward pressure that it has. Now so far up to 2019. It, the Express industry has dealt with that quite well. So even though ups, for example, is increasing business to consumer share, and its margins, its operating margins have stayed at a very, very high level around 1212 and a half percent 2020 overall, would want to see lower margins just because of the extra costs that the companies across the board are incurring, in terms of dealing with pandemic extra pee pee for their staff, and sick leave, and so on things, things like that, that wouldn't you wouldn't have to that extent in a in a in a normal year, but there is a big risk for the Express business that some of this volume gets yanked out of their networks, and and back into and into the dedicated networks that we're seeing, which is, which is why the underlying albu is the underlying growth rates for the Express industry are much lower than what we've been seeing. So last year, express grew by about 7% in the us this year, or probably around 9%. But the underlying growth rates should normally be more in line with sort of 123. JJ Hornblass So Fred, Fred, if somebody asks from the audience, then how do you reconcile your this view that you have or your forecast, you know, with Express fleets seemingly expanding in anticipation of growth in global e commerce? Frederic Horst Well, I mean, we see expansion, but it's not it's not it's not crazy expansion either. I mean, that's one thing that we've been tracking, particularly in this year is other orders and deliveries that we're seeing are in line with what our long term 20 year forecast says And so far, the answer is yes, it is. and there hasn't there's been a surge of interest in the narrowbody side And on a medium wide body side, but there haven't been a surge in pleated additions and rich pointed out yesterday in the fire side as well. But yeah, they they faced a lot of planes to Amazon, but they've actually leased a lot of planes to other people across multiple businesses, as well. JJ Hornblass You mentioned the this is a question from the audience. You mentioned the free shipping conundrum for sellers, will this drive shippers towards ground as opposed to air in a strategy to better control fulfillment costs? Frederic Horst It's gonna have to, because something's gonna something's going to give at some point in time. I mean, it's it's not a win shipping. Well, there's two, there's, there's two options, right? I mean, one is, one is shippers are actually willing to pay for expedited shipping. So far, they're only willing to pay in the form of in the form of a prime membership, which is, which is not enough to cover the the US or it needs to move to cheaper, cheaper modes of transport transportation. JJ Hornblass Let's do one more question. And then we're going to direct everyone to the meetup where we'll have an open zoom and allow, Frederick will be there. And you'll allow to, you'll be able to ask him questions directly, as well as Charles Kauffman and Jim Edgar, formerly of Boeing, also on our team will will be in the zoom as well. Let's just do one more question. One last question, Frederick. So yesterday, one panelist indicated that there is an increased frequency of flights between cargo destinations, due to same day delivery requirements. Would you anticipate this continuing? And how will this change fleet makeup? For example, will smaller aircraft? Will there be a need for smaller aircraft flying routes more frequently? Yeah, that's Frederic Horst a good question. I mean, what we have seen in in in Amazon's networks is that contrary to the traditional Express network, which is an overnight type thing, there's more triangular Point to Point flying, higher utilization on the on the aircraft that you'd normally see in an express network, generally, same day delivery. My view is, as a general rule, air doesn't actually help you a lot with same day delivery, you need you need warehouses that are actually located closer to where the distribution points of the delivery points are for that, for that to where, and it really actually a failure in inventory management if you have to fly stuff around to make same day delivery requirements. JJ Hornblass Okay. So this conclude. Thank you, Frederick. And this concludes our session of science, again to airborne global solutions for their sponsorship, you can do one on one meetings. Now within the platform visit with our sponsors. There's an on demand panel. There's an on demand panel entitled, what packs aviation weakness means for regional fleets in the Americas, and that's sponsored by three to one precision conversions. And then as I mentioned, you're welcome to join us in the freighter market trends meetup, which is an open zoom, for attendees to engage in discussion on market issues. You can find the zoom link here in in the chat for this session. And as well in the conference agenda. And of course, a reminder, there is additional content from our sponsors, available in the stream tab of the event platform. Don't forget to join us live for our next live session session nine at 1:30pm. Eastern Time, and that's a presentation from Boeing. Thank you all so much for joining us.

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