The Impact of E-Commerce Growth on Logistics Companies
The rise of e-commerce and the digital marketplace phenomenon, also known as "The Amazon Effect," has changed the composition of consumer buying behavior and expectations, as consumers now expect fast, free shipping and competitive pricing. This demanding delivery schedule challenges traditional logistics and supply chain models, and companies are now forced to adjust their strategies to provide the low-cost and on-demand delivery service that consumers now demand.
E-commerce represents a growing share of the retail market. Reports indicate that e-commerce accounted for 14.3% of all retail sales in 2018, up 15 percent year-over-year. In fact, it's estimated that e-commerce sales will reach 17.5 percent of retail sales worldwide by 2021. This exponential growth and demand will undoubtedly impact the logistics and transportation industry as they will need to be prepared to manage increased volume and delivery expectations.
By engaging with a trusted financial partner with deep knowledge of the industry and collateral, logistics companies can determine how best to remain competitive and successful amidst industry changes.
Managing Changing Consumer Expectations
Consumers have become accustomed to extremely quick delivery and, as more retailers offer fast, free shipping options, logistics companies will need to adapt to the ever-increasing delivery pressures that align to evolving consumer expectations and preferences.
In doing so, the dynamics of the supply chain are fundamentally shifting as companies are augmenting traditional long-haul delivery with just-in-time (JIT) delivery and suppliers are transitioning from multiple storage facilities to single warehouse locations to meet local needs. This often results in a need to change the composition of fleets and invest in smaller trucks and vans that can provide the shorter, more frequent runs needed to accommodate an increase in last-mile delivery. In fact, 44 percent of fleet managers surveyed in April at the NAFA Institute & Expo, said that they will invest in different asset classes to address these priorities. Seventeen percent indicated they plan to adjust their fleet composition to favor last-mile delivery, and 33 percent are expecting to increase the size of their fleets.
As e-commerce continues to rise, it's likely that companies will need to continue to adjust business models to accommodate the fast, free and convenient delivery service that consumers demand. Last-mile delivery especially will be a key area of focus for companies looking to compete in the e-commerce realm against giants like Amazon.
Understanding Financial Solutions
As companies look to upgrade to smaller vehicles that support more frequent deliveries, it's important to engage with a financial partner who brings deep industry expertise and provides extensive asset-class and collateral experience to help determine effective financing strategies.
An increase in frequent short-duration trips means that many companies may need shorter lease or loan term options to account for the higher rate of wear on vehicles and take advantage of updated models. In addition to providing low cost and short-term options, tax-oriented leases allow the lessor to claim the tax benefits of ownership through depreciation deductions and pass those benefits through to the lessee in the form of reduced payments, delivering the lowest possible rate.
TRAC (Terminal Rental Adjustment Clause) leases, which allow companies to purchase equipment at the end of lease maturity at a pre-determined residual amount that is agreed upon when the lease begins, are often a desirable option for companies looking to purchase or resell these assets in the secondary market. Fair Market Value, or Operating, Leases, however, which provide the flexibility for lessees to either return, re-rent or purchase the equipment at the then market value of the assets, are ideal for fleet companies looking to upgrade models in a relatively short period of time. This type of lease enables fleet managers to take advantage of rapidly changing technology, as they can re-evaluate their equipment needs at the end of each lease cycle.
To meet the changing expectations of consumers while remaining profitable and generating growth, logistics and transportation companies should consider solutions that offer a combination of flexibility, convenience and competitive pricing. By utilizing shorter equipment life cycles, companies can successfully evolve to meet the ever-changing consumer demands.