Ocean carriers stirring up the waters for eCommerce

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LinkedIn CTAKemmsies, Walter1by Walter Kemmsies, Managing Director, Economist and Chief Strategist, JLL Ports, Airports and Global Infrastructure

Time-to-delivery is a critical competitive advantage for ecommerce firms. As I think about my own online purchasing, I know I have chosen one store over another because my purchase would arrive sooner. Well, today’s ocean carriers are muddying up the waters. Let me explain.

Bigger is not always better for ecommerce
Ocean carriers need to deploy large vessels stopping at as few ports as possible (ships do not make money when they stand still) in order to remain profitable.  As the global volume of trade has grown, ocean carriers have strategically increased the size of vessels they deploy across all types of cargo, including containers helping them remain profitable. Sounds like a sound business decision, right?

Here’s the crux of the problem. Ecommerce retailers compete not only on price but also on the basis of increasingly shorter order-to-delivery times. As these retailers expand the number of urban locations where they operate, they need to have inventory delivered in more locations. Thus, they are more likely to prefer ocean carriers to support their growth. But this demand for speed and agility are being met with a shipping industry that must deliver more product in as few ports as possible to remain profitable.

How we got here
Until the beginning of the last recession container volumes were becoming increasingly concentrated in fewer ports. This is shown in the chart below of total international container volumes and the share handled by the 10 largest ports each year.

US and Canadian Ports’ International Container Volumes and 10 Largest Ports’ Share: 1990 – 2015

cHART 1Source: AAPA, JLL

After reaching a peak in 2006, the concentration of volumes at the largest ports began to decline. To some extent, this was driven by exports growing faster than imports as exports come from a wider range of ports than imports do. However, in the last few years, exports have declined.

Prior to the recession, ecommerce sales accounted for less than 3% of retail sales. Nonetheless, ecommerce sales continued to gain share of retail sales, particularly those occurring during the peak fourth quarter holiday sales season. This increased sales volume is driven by sales in urban locations where same day delivery is possible and by expanding the strategy to new locations. This, of course requires holding more inventory, in more locations, and therefore a preference for imports to arrive at a wider range of ports.

Quarterly Retail Sales, Ecommerce Sales and Ecommerce Share of Retail Sales: 1999 – 2016

Chart 2Source: US Census Bureau

Ecommerce invests in technology to increase delivery speeds
Many retailers are making solid efforts to improve their online sales and find better means to integrate their omnichannel strategies. This requires investment in online sales technology and delivery scheduling software.

This approach to retail sales is very efficient from a transportation infrastructure investment point of view. A single truck can make a journey from the warehouse to the various delivery locations and has a lesser impact on traffic congestion than if each of the households made a trip to the store. However, ecommerce merchants may also have to invest in additional space as urban distribution centers.

The bottom line
Ecommerce is a proven concept that works well for most physical goods. With road congestion likely to worsen as the population and economy grows and transportation infrastructure investment continues to lag, ecommerce is likely to continue growing its share of retail sales.

As ecommerce sales continue to grow and sellers compete on the basis of time to delivery as well as cost, it is likely that they will prefer to have imported goods arriving at a large number of entry points, such as ports. Against that trend is the deployment of larger vessels, facilitated now by the expansion of the Panama Canal and the Suez Canal, which would indicate more containers will arrive on fewer vessels at fewer ports.

How this pans out depends on how the importers configure their distribution networks. To get a grip on these trends and position properly, it is recommended to seek the advice of companies that have expertise in real estate and logistics. Meanwhile look for forthcoming JLL PAGI research on this issue.

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