Australians have been forced online by COVID-19, accelerating the pace of digital adoption across the sectors of the economy which are adjusting to a new way of doing business. This is part one in a series examining how Australia’s infrastructure is holding up under unprecedented — and unexpected — demand across the digital economy.
Australian ecommerce has had a steady and inevitable evolution over the last two decades, growing into a $30 billion business which accounts for just under ten per cent of Australia’s total retail sales, according to the latest NAB Online Sales Index.
But then overnight, store closures and a national social distancing regime fundamentally reshaped the retail landscape. Online sales formerly made up ten per cent of a major Australian retailer’s revenue, and they’re now the only channel contributing to revenue for many businesses.
However, the national logistic infrastructure was not designed, nor is it equipped, to deal with such a sudden and dramatic change. The shift to online spending is straining the capacity of carriers to deliver packages to homes, with parcel volumes exceeding those of peak holiday periods.
Even Amazon, the world’s most advanced and efficient delivery machine, is struggling to keep up with the unprecedented levels of demand. According to reports, the ecommerce giant is scaling back automatic product recommendations, cancelling Mother’s Day sales and restricting coupons in an attempt to sell fewer products that need to be delivered to US homes.
Locally, Australia Post is warning of delivery delays caused by additional safety measures, fewer flights and increased volumes as more people start shopping online.
Aramex Australia (formerly Fastway Couriers) reported a record increase in deliveries — up 34 per cent compared to this time last year.
Over the past four to six weeks CouriersPlease has seen a massive spike in volume. Last Tuesday — an unremarkable date in any other year — was the busiest day on record for the delivery business, with a 20 per cent increase in volume year-on-year.
“It’s been huge. We’ve seen a massive spike in the volume being processed by our drivers, which is unprecedented for this time of the year. Normally this sort of volume we see around the peak period from October to December. It’s literally that level every day, if not more,” said Paul Roper, Chief Commercial Officer of CouriersPlease.
Australia’s online sales volumes have already hit peaks which are 20 per cent higher than Black Friday and Cyber Monday sales last year, according to data from Shippit, a retail logistics software platform.
“We’ve already seen volumes exceed those two days, which are kind of by far the biggest online events in recent history,” said Rob Hango-Zada, Director of Shippit.
In some categories, store closures have moved sales online, and for certain retailers on the platform the average online order volume has increased 50 per cent.
While still small in comparison to physical store sales the jump in order volume is straining the existing fulfilment networks, leading to longer delivery times.
“One in five deliveries will be late, but courier companies are actively saying expect delays on your parcels due to increased demand,” Hango-Zada said.
“I think that there’s a little bit more patience in the general public, because people are now in isolation at home, or predominantly, so there’s less missed deliveries as well. First-time delivery ratings are improving, and people are getting less frustrated with missing the delivery.”
In March, Sendle’s parcel volumes in Australia exceeded Christmas levels.
“There was a day last month where we experienced a 50 per cent increase in new customers sending a parcel with Sendle for the first time,” said Eva Ross, Chief Marketing & Customer Officer at Sendle.
“To cope with the extra demand, our courier partners are hiring more drivers, and many drivers are working on Saturdays to minimise parcel delivery delays where possible.”
Ross said the team are working harder than ever to deliver parcels for small business customers during the Coronavirus lockdowns, but the increase in volumes and new restrictions will create delays.
“Coronavirus is no doubt causing disruptions and challenges for local and global supply chains and delivery networks. Due to the cancellation of an increasing number of international flights and country-specific lockdowns, people may need to plan ahead, be patient and assume that their parcels might take longer to be delivered than normal.”
Rachel Caton, Sales & Marketing Director, Doddle APAC, notes the current climate is a double-edged sword for many ecommerce retailers.
“First-time delivery rates are the best they’ve ever been, as the majority of us are home. However, carriers are now warning of growing delays, exacerbated by state border controls delaying interstate deliveries upwards of seven days, stretching some deliveries to two weeks plus,” Caton said.
“Broadly, ecommerce growth has been predictable for the last 20 years, and then seemingly overnight, online order volumes have surged — in some cases volumes increasing over 100 per cent in a matter of days. It’s like we jumped to 2030 in terms of demand for online retail, but without the whole decade of the 2020s to build up the delivery capacity.”
Gartner analyst Thomas O’Connor also noted the lead times for deliveries are increasing but that they can vary widely by retailer and distribution partner. He highlighted additional layers of complexity which are causing delays — in particular when it comes to moving goods across borders.
For one, air freight capacity is drastically reduced due to the restrictions on domestic and international travel. There is less capacity on domestic flights from the likes of Qantas or Virgin, where storage space is assigned to freight.
“Planes just aren’t in the sky at the moment,” O’Connor said.
New safety precautions in warehouses are also making operations less efficient. For example fewer workers may be allowed to work, or one worker must pick and pack an order, rather than establish a production line, to reduce the risk of spreading COVID-19 between workers.
Coping with demand
CouriersPlease, wholly owned by Singapore Post, is a domestic delivery company with more than 750 franchisee drivers around the country.
The business is in the fortunate position of having invested in a high-tech automated sorting system which was rolled out at the beginning of the year.
Chief Commercial Officer, Paul Roper explained how the system helps process the higher volumes, which minimises manual handling requirements on depot staff to sort parcels.
“It’s really just allowing us to handle more throughput automatically with less manual intervention. It just makes us more efficient.”
CouriersPlease has also tapped the on-demand economy to process extra deliveries, including after-hours deliveries up until 10pm, and a point-to-point courier service between consumers.
“We are working with a couple of crowdsourcing partners that are allowing us to expand and scale up beyond our traditional hub and spoke model,” Roper said.
Earlier this year CouriersPlease launched Boomerang, a returns service which involves a courier picking up the returns from a consumer’s home.
To keep up with the demand, courier services have been renting extra capacity, through temporary contractors and gig economy services rather than large capex investments.
“I would imagine that the majority of carriers or logistics providers are not investing in long-term fixes, but more so short-term fixes to just cope with the increased demand,” Hango-Zada said.
“Because there’s no long-term projection that anyone has confidence in, there’s a lack of willingness to invest in infrastructure.”
Hango-Zada noted that shipping costs are the third largest cost, following goods and wages, for any online retailer. The short-term and unpredictable nature of delivery volumes is also putting pressure on costs.
“In logistics you don’t tend to get a great deal of benefit as your volume increases once you’re beyond a certain level,” he said.
“Most of the enterprise retailers in the market have already got the absolute best floor price. As the volume increases, they are not going to be saving anymore, if anything. Yeah, some of the carriers are taking the bullish steps to increase their costs at this time because the cost of operating may increase for them as well.”
Another solution to relieve pressure on the logistics network is parcel collection points, which more retailers are trialling or quickly adapting to include extra hygiene precautions.
“An alternative to this is increasing the prominence of out-of-home delivery options such as click and collect or pick-up and drop-off,” Rachel Caton, Sales & Marketing Director, Doddle APAC.
“Educating able consumers to use these options increases the overall capacity of the final mile, but also ensures there is capacity for home delivery for those who really need it.”
Caton, which has operations in the UK and US, said supermarkets in those geographies doubled up on click and collect.
“Some grocers in the UK like Morrisons, who previously didn’t even have a click and collect offer, rushed a new solution out in weeks and had queues round the car park from desperate customers.”
Locally, shopping centre operator Scentre Group launched its own kerbside pickup service last week, which allows its retailer tenants to offer click and collect services. Through a central web site, Westfield Direct enables customers to purchase products online from multiple Westfield retailers in one transaction, and pick them up from the convenience of their car via a contactless drive-thru location at their local centre.
The group says the solution was fast-tracked so trade could continue in a format which keeps both customers and employees safe.
“In these challenging times, we understand more than ever the need to be agile and respond to the fast-changing needs of our customers,” said Phil McAveety, Scentre Group Director Customer Experience.
“For our retail partners who are still able to trade within government restrictions, Westfield Direct provides a new way for them to continue reaching their customers. The response from our retailers so far has been overwhelmingly positive, with dozens joining each day and we’re looking forward to seeing where the Westfield Direct service takes us in the coming months.”
Store inventory is also being thought about differently as it sits on the shelves and stockrooms of closed retail locations.
In the US, Lululemon and Levi’s are turning closed stores into mini-fulfilment centres and in Australia Kmart, which is still open, has closed three stores which will become fulfilment hubs for online orders.
Some retailers, such as Accent Group and Super Retail Group have already made investments which allow them to ship products from stores — a trend which is expected to pick up pace among retailers that have capital to invest.
A rethink required
The SARS outbreak of 2003 is credited with boosting the online adoption of China’s nascent online retailers Alibaba and JD.com. COVID-19 is expected to have a similar transformational impact on digital commerce.
The rapid acceleration in ecommerce penetration means the old forecasts and infrastructure are obsolete. The experts Which-50 spoke to said this period will lead to deeper consideration of strategy and cost structure to cope with a larger ecommerce market.
Hango-Zada, for instance, said we’ve leapfrogged three to five years of online penetration in the space of four weeks.
“Online penetration will have increased overnight once this whole pandemic has subsided,” said Hango-Zada.
“So what we’re going to see is a need for really big sweeping structural changes in the industry to make it more efficient.”
Gartner’s Thomas O’Connor also argued that this period will cause retailers to rethink structural cost bases.
“There are a lot of structural components which lead ecommerce to be perceived as a higher cost structure. So for example, Amazon, if you look at their financial statements, they are at slightly more than 14 per cent of their total retail sales are being applied to fulfilment costs. And so, that’s significantly higher than a typical omnichannel retailer which is more in the order of about six per cent of warehousing transportation costs to those organisations.”
Overall the analyst predicts an acceleration of what Gartner calls unified commerce — the integration of backend operations so inventory can include all of the inventory across the whole network, creating more visibility across the supply chain.
The carriers are also planning for increased order volumes after the current peaks subside and isolation policies are releaxed.
At CouriersPlease Roper says the company is reviewing its sustainability strategy in terms of a potential move to electric vehicles and reducing carbon emissions.
“Increasingly our customers are demanding more sustainable or environmentally friendly solutions from us,” he said. “That is becoming an increasing focus for us as a company and the market and the industry at large.”
Eva Ross, Chief Marketing & Customer Officer at Sendle, a carbon-neutral delivery service, is hopeful last mile solutions will emerge more sustainable.
“If this really is Australia’s big shift to online retail, we will undoubtedly see moves towards innovation in the delivery fleet such as autonomous vehicles and predictive shipping,” Ross said.
“It’s our hope that we will also see moves towards more sustainable solutions such as electric and solar-powered vehicles. And with such growth in volumes, we would hope to see network optimisation that will allow for further reductions in emissions in future.”
Read part two of which-50 COVID-19 Disruption Series here.