Even before the pandemic, distributed last-mile logistics hubs was feted by many as the future of retail. This model turns physical locations into temporary or permanent fulfilment nodes to enable faster delivery. The physical store is no longer the place the consumer spends their time, with shopping now done online. But since COVID-19, what was once a nice-to-have has now become essential for retailers.
To understand what is happening in the wider retail sector, it’s worth drilling down into the grocery sector, where e-commerce penetration has risen from 2 to 3 percent before the crisis to 8 to 10 percent during its peak. By current estimates, it is expected to settle at twice the previous “normal” level, 5 to 7 percent, by year’s end. The grocery sector has necessarily had to be faster to adapt – people need food more frequently than they need clothes. However, the behavioural shift from buying food in-store to getting in delivered is likely to have a knock-on effect on other types of commerce.
In the US, e-commerce penetration grew to 33% in April 2020 vs. 16% in 2019. From our own experience, we have seen that warehouse capacity and labour for last-mile logistics are now the largest constraints to growth in e-commerce, with demand outpacing supply. This was further exacerbated by COVID.
For those stuck at home, out of choice or necessity, the ability to shop online has been essential. 71% British consumers indicated recently that they are reluctant to shop in-store in the leadup to Christmas. Quick and accessible online delivery has allowed people to access the same goods as efficiently as if they had entered a physical shop. For many, in the face of a pandemic, shopping online has become a no-brainer.
Growing appeal of online shopping
By partnering with next-gen logistics providers, e-commerce companies have been able to dramatically cut wait times for online purchases. Until recently, traditional brick and mortar stores relied on the immediacy of purchases to attract customers to shops. However, with guaranteed next-day delivery or even scheduled deliveries in city centers, many customers have shunned in-person shopping in favour of online purchases.
Of course, this is not to dismiss the physical store out of hand. As I argued recently, savvy retailers will see opportunities to improve in-store experiences to draw customers to shops. Likewise, there is scope for physical stores to combine with last-mile logistic hubs. One area that has seen strong recovery following the first wave of COVID lockdown is retail parks. Retail parks have two major advantages: they have a good mix of retail offerings, from clothes to homeware, and they are often anchored by supermarkets, which have continued to trade throughout the pandemic. By pairing anchor stores with logistics centres, we could see the advent of decentralised retails hubs, in which online and in-store shopping work in tandem, thus expanding the reach of retailers everywhere
For investors, understanding this point is crucial. Although bricks and mortar stores will continue to exist, and even prosper, their layout and location is likely to change dramatically. The dominance of city centre retail looks to be over – companies are increasingly likely to position last-mile logistics hubs closer to residential areas.
Technology and last-mile logistics
The enormous disruption caused by COVID-19 in the retail sector is creating the foundations for amazing innovation. Now more than ever, we are on the brink of seeing technological breakthrough that dramatically improves last-mile logistics and the retail experience more generally.
Speed has long been the name of the game for last-mile logistics. By getting products to customers faster and when they want them, companies can improve the online experience and increase the chance of customer retention.
Automation holds the key to improving efficiency. For investors, understanding which companies are doing this well and which sectors benefit the most from automation is important. For instance, automated delivery of groceries requires a different level of quality and care, and until the robotics scale to handle milk and eggs differently, automated grocery delivery services may not operate efficiently. We are clearly at an inflection point where innovation meets a new need – and one in which both big business and entrepreneurs are working to address pain points which have suddenly become more noticeable in an environment where adoption has become far quicker. It remains to be seen to what extent and in which method, optimal automation can be plugged into our supply chains.
New solutions to old problems
The way people shop is also likely to change. One of the big transformations in the retail sector is likely to be in subscription services, where people sign up to daily, weekly, or monthly deliveries instead of making individual purchases. More structured demands will undoubtedly change the way supply chains work in the future, and the extent to which we rely on delivery services to bring goods to our door.
For investors, it’s important not to view bricks and mortar and online retail as being in direct competition with one another. E-commerce can only succeed with a strong brick and mortar foundation. Helped by efficient automation, companies are able to reduce wait times and improve the overall customer experience. The big transformation created by COVID is that, where once brick and mortar was king, the retail sector is now controlled by e-commerce. Understanding that the latter controls the former will help investors make sense of the changing retail landscape and provide an insight into the future of the sector.
To see other articles on how technology and retail are adapting due to COVID-19, click here.