The Q4 Disaster You Don't Realize Is Coming

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TL;DR:

• The US will see dramatic increases in ecom demand this fourth quarter as Covid has greatly accelerated the growth of online shopping.
  
  
• With fulfillment capabilities not having scaled enough to keep pace with growth in online demand AND existing capacity being impaired (e.g. staffing/processing/fulfillment due to Covid, potential Covid outbreaks, hampered USPS, etc.) consumers and merchants alike are in for the mother of all messes with major delays and stranded inventory.
  
  
• A major portion of Q4 strategy this year should be focused on 1) running promotions earlier in the calendar year to avoid last minute crunches, and 2) finding the right fulfillment partner(s) to maximize the duration of fast shipping options for your customers.
  
  
• Big box stores are uniquely positioned for an advantage, the question is whether or not they seize the opportunity

We are headed for a spectacular holiday logistics tragedy no one is talking about and I don’t believe there is any way to avoid it. How many of us have waited until late December (20th+) to order a few last minute gifts? Or scurried out to the local mall late December to do the same?  Unfortunately, I don’t see either of these scenarios existing in our strange reality of 2020 and ecom players need to be strategically positioning themselves to mitigate the impact and maximize Q4 revenue.

The Good - Increased Demand

Let’s start with the good news first. Ecom sales in the US are up. Way up!

While it is very difficult to predict just how retail and ecommerce sales volumes will trend this year amid such unprecedented times (record unemployment, global pandemic, I’m afraid to ask what is coming next lol), I think it is quite safe to assume that ecommerce will see a significant increase in GMV year over year. Will it be 1.5X, 2X, or more?  I’m not certain, but it will be substantial.

Skeptics may point out that April was sort of peak pandemic lockdown in the US, and that it is not fair to extrapolate out to the end of the year.

A couple things to consider though:

1) this was APRIL, not November or December. Sure people were stocking up on various items and ordering things to adjust to their quarantine lives, but this was NOT holiday shopping.

2) for consumers that have recently adjusted to ordering online, what will be the reason/catalyst to revert that shopping back to in-store? There’s been a systemic shift in consumer shopping behavior which we can attribute a substantial portion of the 11% growth to.

3) Politics aside, data is showing that Covid will be an unavoidable reality this winter which will underline some function of store closures and a reduction in in-person shopping in the US this winter.

4) Stores such as Walmart, Target, and Best Buy have already announced they will not be open for shopping on Thanksgiving pushing more shoppers online this Black Friday. Closure on Thanksgiving is likely just the tip of the iceberg as companies work to roll out their online initiatives before announcing prolonged closures so as to save their stock prices.

Many are saying that the pandemic has simply accelerated ecom demand by 10 years.

If you are an ecommerce seller, the demand potential has to be exhilarating, and perhaps even a bit intimidating.

But here is where the bad news comes in. The financial benefits of demand can only be realized if customers can receive their products, and unlike back in April, consumers have a very limited appetite for delayed shipping.

The Bad - Fulfillment Infrastructure Isn’t Ready

It took 10 years in the US for ecommerce’s share of retail sales to move from ~6% to ~16%. Over this ten year period the logistics infrastructure supporting this GMV also had 10 years to expand and grow alongside. We’ve seen similar growth in demand (estimated 10%-12%) in the last 6 months or so, but what about fulfillment?

Meaningful fulfillment capabilities (warehouses, delivery drivers, etc.) cannot be built and integrated overnight. This is why we saw unprecedented delays in delivery times on a vast swath of products on Amazon and across the greater ecommerce world in March, April, and May (fair to note that supply was also tight with Chinese New Year and Covid driven factory closures).

But I think Q2 was a perfect omen for what is to come this Q4. Here are a handful of factors that will contribute to a logistics nightmare this holiday shopping season:

Covid-19; Revenge of the Sick:

Health guidelines in warehouses and fulfilment centers are taking a toll on operational efficiency (e.g. limits on the number of employees allowed to unload a truck are reduced to adhere to social distancing guidelines).

This spring we also saw warehouses temporarily suspending operations to contain Covid outbreaks. (I don’t envy warehouse managers working on containment and worker safety as this will be a real possibility this winter.)

USPS Woes:

At the time of writing this, there are some major changes going on at the Post Office, and this may be just the beginning. Here is an internal memo showing no overtime and a willingness for deliveries to run late. It feels like the timing couldn’t be worse as this will likely harm many small businesses (and a vast swath of others) that rely on USPS for fulfillment. This will cause delays and congestion on orders fulfilled by USPS, and push more volume to other carriers who are also unprepared for this upcoming holiday season.

Lack of New Fulfillment Infrastructure:

• UPS CapEx projections are down YoY highlighting lack of investment in new trucks/distribution to support growth. They’ve just added an additional surcharge of $1-4 per package targeted at major retailers (such as Amazon) that will squeeze margins and force retailers to look at alternatives (as if there were any). UPS’s CFO mentioned on the earnings call that they were essentially more focused on maximizing margin given their capacity than they were ramping up capacity to meet demand as they have in the past.
• Amazon is looking to increase fulfillment square footage by 50% in 2020, most of which is supposed to come online late Q3 and into Q4. From a trusted source I’m hearing they are struggling to meet their targets in building and bringing that new infrastructure online.
• Keep in mind Amazon fulfills roughly 50% of their orders, relying on partners for the remainder. I’m hearing that Amazon is putting increased energy into partnerships with FedEx, UPS, and regional carriers to help them with fulfillment. A clear sign that Amazon knows that they are not prepared for the tsunami to come.

Amazon Gyrations, Fee Increases, and Delays:

If you need yet another canary in the coal mine, Amazon has recently made last minute changes to storage fees and the amount of inventory sellers are allowed to send in for fulfillment. These changes are designed to significantly reduce seller’s usage of FBA (particularly with slow moving products).

• Sellers have been experiencing uncharacteristically long delays: inventory may take months to be received.
• Some sellers have already experienced issues within Amazon FBA. One Fulfillment center is already “overloaded” in mid-August and isdiverting inventory to others. This is mid-August!!
• Amazon is already pushing back delivery dates on some Prime/FBA items. Here’s a notification my wife and I received in regards to a prime package whose delivery date is now delayed. Reminder, it’s August and Amazon is already pushing delivery dates back.

To summarize, ecommerce demand is going to set massive new records as ecommerce has seen significant growth which will only amplify this winter. In addition to temporary circumstances impairing fulfillment providers (a la Covid and USPS), fulfillment providers have not been able to deploy new fulfillment at the scale needed to keep up with demand. NOT EVEN CLOSE!

Predictions - What’s Going to Happen - And How To Prepare

Fulfillment is going to be a bloodbath this year. Plain and simple.

My guess is that in the first half of October, fulfillment providers and retailers alike will realize just how much trouble they are in. Delivery times on certain categories of items will begin being pushed back, starting slowly at first. By the end of October to early November, the alarm will sound to the public, sparking a panicked frenzy of online orders, and the rest will be history.

We will see major delays, customers ordering from sketchy sites, weighing the risk of not being able to get their kids’ presents on time, sellers with all their inventory stranded in some FBA warehouses not able to be fulfilled or moved, and so much more.

If you don’t plan in advance, by the time you realize that you’re in a bad place, it will likely be too late. Back in March and April when delivery times stretched out 3-6 weeks+ for many products, Amazon also suspended the ability to remove inventory from FBA. This left sellers with no option but to watch competitors who had inventory in 3rd party warehouses grab market share because customers could receive their products sooner.

Traditional Q4 strategy is all about staying in stock, improving SEO, and taking advantage of smartly timed promotions like lightning deals. This year the products with the fastest delivery times will have a major advantage. If a product is ranking at the bottom of the first page in search results on Amazon but can be delivered a week before Christmas while other competitors can’t, they will win the vast majority of the sales this holiday season.

You should be focused on diversifying fulfillment providers.

A couple Covid outbreaks in warehouses can break a 3PL provider. Amazon IS GOING to get backed up this year (they already are lol). Having multiple fulfillment options will allow you to enable the fastest provider at any given point. This is not an easy task and not for the new seller. Don’t concern yourself with not having a Prime badge. A Prime badge means nothing if the customer can’t get your product in time for Christmas - meaning FBM will be a major lever this holiday season. You don’t want to have a ton of inventory sitting in FBA not moving because Amazon has pushed your delivery window past Christmas. Deliverr is my personal recommendation for 3rd party fulfillment as I think they’re head and shoulders ahead of the competition, but there are many alternatives. Make sure to do your research to make the best decision for yourself!

Prediction - “Last Day”

December 9th will be the cutoff date for products guaranteed to be delivered in time for Christmas on Amazon from FBA. Traditionally this cutoff has been in the Dec. 20-23rd range .

You should be focused on pulling demand forward.

The more you can pull demand forward (earlier in the shopping season) this year, the more inventory you’ll be able to guarantee to move this year. Later into the holidays means increased risk of extended delivery times.

Prediction -  Too Little Too Late

The media will alert shoppers of the delivery concerns helping to pull demand forward, but it will ultimately be too little too late. This will likely cause hysteria, adding to the issues as shoppers begin panic buying. We’ll see more sophisticated retailers/manufacturers running early promotions to move stock early.

Prediction - DTC Winners

We will see Shopify / DTC drive significant growth this year as customers will search every corner of the internet for gifts that can be delivered on time.

Prediction - Retailers Leverage the Brick & Mortar Advantage

Big box retailers will have a competitive advantage this year and will offer a Covid safe drive-thru order pick up program at unprecedented scale. The largest bottleneck in delivery is the last mile. There’s only so many delivery vehicles to handle the many households ordering an extraordinary amount of packages. It’s much easier to move product between warehouses, distribution centers, and large brick and mortar stores. Clever retailers will realize the best way to get products to customers will be to repurpose much of their in-store staff and retail space to help customers get their products through a Covid safe drive-thru pick up. Best Buy has been doing this to a lesser degree with their Fast Store Pickup. While in general customers will limit going out in public, it’s significantly less convenient to not have your Christmas presents in time for Christmas than it is to hop in your car and drive down to the local Walmart/Target/Best Buy/etc.

I’ve been meaning to get this piece out for the last 6 weeks, but had a couple personal hurdles to clear prior to. I hope this has been helpful. I hope there is still enough time for you to make meaningful adjustments to take advantage of the Everest sized mountain of holiday sales.

Let’s talk in the comments:

What are you doing to prepare?

Any more data I missed? Anything you’re seeing?

How should people be preparing that I missed?

Any additional predictions?