Friday, December 24, 2010

Web Sales - Who Delivers?

As we close another holiday season, the increasing importance of web based shopping becomes increasingly evident.  Marstercard Advisers reported that Internet sales rose 15.4%.  This increase is consistent with the results generated by the monthly surveys of retail activity conducted by the Commerce Department.   What the Postal Service, FedEx and United Parcel Service need to do is delve a bit deeper into the data as they begin to make their plans for handling the even larger volumes of parcels that will be delivered next year.

Mastercard Advisers estimated that total web-based sales were $36.4 billion in the fourth quarter of 2010.  However, Mastercard Advisers figures underestimate the total value of electronic and mail order sales that the Census Bureau will likely report early next Spring for both the holiday period.    The following chart illustrates the long term trend in e-commerce and catalog sales from retailers that generate most if not all of their business from catalog and e-commerce sales.  These figures most likely do not include the e-commence sales from some of the largest web retailers including Best Buy, Macy's, J.C. Penney's, Radio Shack, Target, and Walmart and dozens of others that sell most of their merchandise through standard brick and mortar outlets..  

These figures are still small relative to all retail sales other than gasoline, heating oil, and food and beverages sold in restaurants and bars.   In 2010, 7.4% of retail sales that could be purchased via the web or catalog and delivered were purchased in this way.   While a small proportion the share is a significant increase from 5.8% that such sales represented in 2009.  Expanded access to high speed web, shifting demographics, and new mobile-based means of ordering items to be delivered will likely increase the share of deliverable retail sales that are delivered to homes and offices.

The growth in e-commerce while strong across all sectors this season, appears to be strongest for products that are in many ways that create the most challenges for home delivery as they are lighter in weight and bulkier than shipments that the large parcel carriers handle for their business-to-business deliveries.    The Wall Street Journal reported that SpendingPulse reported that Web based sales from apparel specialty stores grew by 25%.   According to Bloomberg, Macy's, a large mid to upper end department store retailer saw its online sales in November grow by 32%.   The mix of products that Macy's needs delivered most likely reflects a large proportion of apparel and domestics (e.g. towels, and sheets) as those categories reflect the largest share of Macy's overall sales.

The private sector carriers have handled the challenge of delivering the increased volume of apparel and domestic items purchased for home delivery through a combination of operating and pricing changes. (The Postal Service handles a very small portion of these shipments without involvement of FedEx Ground, United Parcel Service, or another parcel consolidator.) These include:
  • Shifting delivery of parcels under 2 pounds to the Postal Service.    FedEx Ground uses the Postal Service for nearly 30% of all of its deliveries and much of its volume growth reflects Postal Service delivered parcels.
  • Increasing prices for home delivery.   Home delivery is more expensive than delivering to businesses due to the lower density of parcels delivered per address or stop and the distance between stops.    Home delivery charges have existed for many years but they have increased at a much faster rate than the base transportation rates that the carriers charge.
  • Modification of the factor used to measure dimensional weight.  Both UPS and FedEx reduced the factor that they use to calculate dimensional weight.   This affects bulky shipments of apparel and domestics more than other product categories.  The dimensional weight factor will have the greatest impact on expedited shipments.
 For the Postal Service, the e-commerce trend requires that their delivery network and the tracking software and hardware used can seamlessly work with the sales and transportation networks of its partners.  Ensuring that the Postal Service can do this will require significant capital expenditures for vehicles, hand-held scanners, software and communications infrastructure upgrades.  If the Postal Service cannot raise the capital, then consumers will face higher delivery costs, and may reduce their purchases via all retail modes thereby slowing retail sales and economic growth for many years to come.  

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