3PLs in Latin America are modernizing and restructuring as quickly as they can to keep up with booming e-commerce demand. In 2019, Latin American e-commerce will grow approximately 20% from $98bn USD to $118bn USD. Of that, almost $60bn will be retail e-commerce traffic in 2019, i.e. involves the sourcing, warehousing, tracking, and delivery of physical products. E-commerce merchants in Latin America need to partner with established 3PLs — but also demand of them a level of service that is faster, cheaper, more customer responsive and more traceable than logistics has operated in the past. The expectations of e-commerce customers oblige 3PLs to modernize their warehousing, streamline fulfillment, improve cross-border speed, and service a consumer client, all of which is straining the operational flexibility of incumbent logistics players in LatAm. The 3PLs that adapt to this larger but far more demanding marketplace will reap profit and benefit. Those that fail to change will suffer revenue decline and profit collapse.
#1 Overcoming the Challenges of E-commerce Returns
One of the biggest obstacles to e-commerce development in Latin America is the profit-killing practice of product returns. E-commerce returns across all product categories in semi-mature markets like the U.K., Germany and the U.S. is close to 35%, while in Mexico, the figure is closer to 20%.
Online retailers in Mexico and Brazil have begun to prioritize and evaluate the reverse logistics capabilities and flexibility of their 3PL suppliers. Gradually, 3PLs in Latin America have begun to offer a wider array of reverse logistics services, including product repairs and refurbishing, repackaging, re-delivery and, when necessary, the re-sale via used product intermediaries.
Cross-border e-commerce represents a growing opportunity for foreign merchants to access new customers who want more choice and better pricing than their less competitive domestic markets provide. According to interviews AMI has conducted with over 100 merchants, cross-border e-commerce sales are growing at twice the clip of domestic sales. But without smarter reverse logistics, the headache of servicing cross-border returns can outweigh the benefits of a new market.
Today, retailers selling in Mercado Libre, Aliexpress or Linio prefer to ship a new product to customers without asking them to return the faulty or incorrect product because the reverse logistics costs (including navigating customs) are almost always higher than the cost of goods sold of a replacement product. Some online sellers found in Aliexpress don’t even have a returns policy for cross-border transactions while couriers and postal operators struggle to work with customs to find the best way to process returns in a cost-obsessed environment.
Another approach to ease the pain of returns involves collecting returned products in the country where it was sold and then auction the opened but unused product in local marketplace sites. Those with significant cross-border returns volumes, like Aliexpress or DH Gate, are analyzing the idea of consolidating those returns until they can fill a container with multiple returns, a process that might take 1-2 weeks. In the interim, they replace the returned product with a new one.
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#2 Warehouse Automation and Customer Data Analytics
The e-commerce boom in Latin America forces change upon where and how warehousing is managed by logistics customers. Today, most inventory stocking warehouses are built on cheap commercial real-estate, outside of important urban markets. E-commerce, which demands rapid (often same day) delivery, obliges 3PLs to position their warehousing closer to city centers.
Warehouse operators and 3PLs anticipate that warehouse automation will begin with autonomous mobile robots that stack and move ordered items to packers to fulfill orders and increase their productivity. Soon after that, warehousing will focus on managing customer data via predictive analytics to help anticipate warehouse needs and optimize inventory positioning. As we have witnessed in Europe and the US, big data management lowers costs, speeds fulfilment and improves fulfillment accuracy.
Frost & Sullivan’s latest analysis of Latin America’s Big Data and Analytics (BDA) market finds that the industry generated revenues of $2.9 billion in 2017 and is expected to reach $8.5 billion by 2023, with a compound annual growth rate (CAGR) of 19.2%. Today, Brazil leads the race, accounting for 46.7% of the overall sales, followed by with Mexico (26.7%), Colombia (7.9%), Chile (6.9%), Argentina (5.6%) and Peru (2.4%). A maturing mindset about data-driven organizations, increased productivity, customer loyalty and Internet of Things (IoT) are key factors driving the regional business.
#3 Last-Mile Cost Reduction and Speed Acceleration
According to 3PLs, the last-mile delivery represents the greatest cost for their e-commerce operations. In LatAm urban logistics, companies spend a great deal of time finding unloading areas and identifying un-named streets, as well as sitting in traffic. As a result, the first and last mile of freight transportation are becoming increasingly Uberized, as startups like Rappi, CargoX and Chazki bring to market their network of drivers and vehicles to deliver items. These companies are still small but growing at alarming rates and as they grow, they will force vertically integrated firms and 3PLs to drop their pricing.
But e-commerce in Latin America also creates opportunities for legacy logistics providers. E-tailers are discovering the market expanding potential of Cash-On-Delivery fulfillment. The 3PLs who can provide this service will find a market of needy merchants.
#4 Disruptive Start-Ups
Disruptive start-ups have begun to sting the reputations and profit margins of legacy logistics operators. What appear as pin-pricks today will grow into more threatening blows to an industry that has enjoyed over two decades of consolidation and profit growth from 1995-2018.
Latin American logistics start-ups focus on bringing down costs and accelerating service speed in the most inefficient stages of the supply chain by employing three weapons of change: productivity enhancing technology, “uberization” of labor-intensive activities and the use of marketplaces to level the playing field for competitors. All three approaches drive down costs.
To survive the disruption revolution, logistics operators in Latin America are starting to shed unproductive assets, lowering head counts and focusing on moving further upstream in the value chain by commanding the customer tower so they can better understand business requirements and offer superior service. Owning the customer ensures revenue while the strategic deployment of technology ensures profitability. Big and heavy is out. Light and agile is in.
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#5 Logistics Customers Need to Cut Costs
In today’s climate, logistics customers in Latin America have little choice but to cut costs if they wish to expand profits, because price increases are not realistic given global pricing pressures.
Latin American-owned firms used to be distrustful of outsourcing value-added logistics services. However, for companies rapidly growing in the e-commerce space, outsourcing their supply-chain management functions enables them to focus on what they do best: marketing and selling their products. Stock-outs are a costly risk for a high growth young company, and yet, in the world of LatAm e-commerce, stock-outs are all too common.
Companies in Mexico increasingly shed underutilized vehicle fleets and warehousing facilities, preferring to outsource these costs on a variable basis. For many consumer good companies (and some B2B firms), their largest single cost line item, outside of labor, is logistics.
In most of LatAm, the trucking industry is highly fragmented with providers ranging from hombre camiones (owner-operators) to sizeable fleet operators and experienced freight forwarders who may own no trucks at all. Choosing a logistics vendor is difficult, to balance costs with reliability and geographic coverage. Without a steady flow of backhaul contracts, 3PL firms in Latin America are quickly priced out of the market because they rely on a few multinational clients to sustain their business but do not pursue smaller clients to provide backhaul volumes while missing out the opportunity of working closely with on-demand and crowd-shipping platforms.
Contact us to learn more about our expertise in the LatAm logistics market and how we can help you as a logistics provider to better understand the market, the competition and generate leads. If you are a logistics customer, our practice can help you save costs by studying your competition and how they compete through logistics.