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White PaperDelivering the Goods:E‑commerce LogisticsTransformationOctober 2018

World Economic Forum91‑93 route de la CapiteCH‑1223 Cologny/GenevaSwitzerlandTel.: 41 (0)22 869 1212Fax: 41 (0)22 786 2744Email: [email protected] 2018 World Economic Forum. All rightsreserved. No part of this publication may bereproduced or transmitted in any form or by anymeans, including photocopying and recording, orby any information storage and retrieval system.This white paper has been published by the World Economic Forum as a contribution to a project,insight area or interaction. The findings, interpretations and conclusions expressed herein area result of a collaborative process facilitated and endorsed by the World Economic Forum, butwhose results do not necessarily represent the views of the World Economic Forum, nor theentirety of its Members, Partners or other stakeholders.

ContentsIntroduction4The e‑commerce game changer5Mapping logistics players6Associated e‑commerce challenges9Roadblocks for small business11Emerging economies13Logistics and trade policy14Trade facilitation: What’s relevant?15Scaling logistics and delivery services19Handling tax22Postal modernization24Next steps25Acknowledgements26Endnote27Delivering the Goods: E-commerce logistics transformation3

IntroductionE‑commerce has the potential to offer micro‑, small‑ andmedium‑sized enterprises (MSMEs) almost instant accessto the global market like never before. Small businesses cantrade with a higher number of customers and partners thanmight otherwise walk past their door. In turn, a number ofimportant enablers play a role in moving the e‑commerceenvironment forward. Among these, logistics and deliveryservices are critical for ensuring goods ordered onlinephysically reach the consumer, and are returned whensomething is not right.This paper focuses on global logistics systems, both interms of the industry evolution in response to e‑commerceas well as specific challenges that need to be overcometo ensure that the benefits of global e‑commerce arewidely spread. The substantive focus is on issuesrelating to the physical delivery of goods bought onlineand leaves aside any discussion of the digital delivery ofe‑commerce services. The paper does not seek to prescribea specific path forward for countries’ trade policies orlogistics environment. Instead, it aims to serve, under theresponsibility of the World Economic Forum and with inputfrom experts, as a conversation starter within the context ofthe Enabling E‑commerce public‑private dialogue initiative.4Delivering the Goods: E-commerce logistics transformation

The e‑commerce game changerE‑commerce has transformed the retail sector over the pasttwo decades. Well‑known players have faced restructuring,or even bankruptcy, amid fierce competition from emergentonline platforms. The latter developed innovative businessmodels based on the spread of the internet and othertechnologies – stores open 24/7 via a laptop or mobiledevice, the ability to compare products and prices, anddelivery to the consumer’s door or even their fridge. Lastyear, Walmart started piloting a service that would allow itsdelivery drivers entry to consumers’ homes via a passcodeand a “smart lock”. Amazon is also testing a similar service.The new retail environment has led to shifts in theassociated logistics and transport sector. Companies agileenough to embrace changing distribution channels witha host of new services have prospered. Not least amongthese have been stakeholders responsible for last‑milebusiness‑to‑consumer (B2C) and consumer‑to‑consumer(C2C) deliveries. New logistics service providers large andsmall have been born. The postal sector has also changeddramatically in the past two decades, with some previouslynationalized postal operators transformed into commercialindependent actors, and some postal operations riding thee‑commerce wave offering services akin to couriers.At the outset, it was far from certain that many of themajor express players, such as UPS, FedEx or DHL,would embrace home delivery due to the higher costsinvolved in the number of undelivered parcels caused byabsent end‑recipients. E‑commerce also required logisticscompanies to work with smaller businesses less used toshipping locally, much less globally. Yet today it is hard toconvey the extent of the change in management sentimentas well as operational and technological focus, with B2Cnow an important part of the major players’ thinking andrevenues. Several smaller new logistics players havealso emerged, aiming to capture a share of the growingsmall‑package trade in specifically targeting the needs ofsmall businesses on fulfilment, warehousing and logisticsservices. Examples include wnDirect and ILG.e‑commerce orders are delivered first time. Many logisticsproviders have tailored value‑added solutions for transport,fulfilment and returns.Cross‑border e‑commerce is growing in popularity thanks tothe borderless potential of the digital economy. Consultancyfirm Forrester forecasts annual global e‑commerce growthof 17% between 2017 and 2022, compared with 12%for overall e‑commerce (cross‑border and domestic, B2Band B2C).1 A report by DHL suggests that cross‑bordere‑commerce already accounts for 15% of total e‑commercesales and will expand to 22% by 2020.2 One signal, howeverimprecise, of cross‑border B2C e‑commerce expansioncan be seen in the uptick of international parcel shipments.According to the Universal Postal Union (UPU), theseincreased by 73% between 2011 and 2015.The scope of what is sold globally online is also changing.Fashion and electronics have long been cross‑border topsellers, but consumers are now branching out further toproduce categories including beauty and cosmetics, petcare, food and beverage items, pharmaceuticals, homedecor and sporting goods. An increase in e‑commerce onperishable goods or medicine refills undoubtedly requiresrapid and efficient cross‑border delivery logistics.Despite significant opportunities, however, the supportsystems for cross‑border e‑commerce may not always beup to scratch. Small businesses, in particular, which are lessable to shoulder frictional costs, point to trade challengesrelated to customs clearance and advanced knowledge ofduties or taxes. Often, cross‑border e‑commerce operationsrely on establishing separate warehouses or centrallocations in different countries, as a way of minimizingborder hassle, shipping costs and other challenges relatedto global logistics. Although a workaround for some,the associated costs and inconvenience underscore theimportance of examining logistics and delivery as a vitalenabler of more inclusive global e‑commerce.Looking to the future, delivery times are getting evershorter, with the number of same‑day and one‑ or two‑hourdelivery services rising. The result is a knock‑on effect oncustomer expectations. End‑recipients are demandinggreater flexibility as well as more delivery options, fittingaround their lifestyles, rather than around the operationalprocesses of parcel delivery companies. Technology is beingharnessed to bridge the gap – leading to more responsivecustomer service and convenience for both shippers andend‑recipients. Technology solutions are, however, morefrequently applied by large firms due to the high costsinvolved.Alternative delivery solutions are being developed. Lockers,in‑car and pick‑up/drop‑off networks are growing inpopularity as retailers face rising cost pressures to ensureDelivering the Goods: E-commerce logistics transformation5

Mapping logistics playersThe logistics environment and its interaction withe‑commerce is complex, with different types of providersand services, competing and cooperating – Figure 1 offersa snapshot. The various actors can simplify by categorizinginto e‑fulfilment providers; consolidators; last‑mile deliveryoperators; cross‑border delivery; and reverse logistics (alsoknown as returns).E‑fulfilment providersThe fulfilment of orders placed online by a customer caneither be undertaken by the retailer (“in‑house”) or by athird‑party logistics company (3PL) (“out‑sourced”). Somelarge e‑retailers, such as Zulily (a home decor and fashioncompany), will undertake the order processing, picking,packing, labelling and dispatch themselves in order to havea greater level of control over the process, whereas smallere‑retailers or omni‑channel outfits may opt to use 3PLs inorder to benefit from their investment in technology systemsand operational know‑how.The market has become blurred in recent years as Amazon,a multinational e‑commerce marketplace, has alsoprovided logistics services to other retailers. “Fulfilment byAmazon”, as its offering is known, allows MSMEs to storetheir products in Amazon warehouses in various locationsaround the world. The company will then take care of thewhole order process and distribution, and will managethe last‑mile delivery. The move has brought Amazon intodirect competition with many 3PLs, although, for the timebeing, some have entered into what has been termed“co‑opetition” – with Amazon not only being a competitorbut also a major customer to 3PLs. Incumbent logisticsservice providers (LSPs) – such as UPS and FedEx – havealso started to provide e‑fulfilment services to MSMEs.Figure 1: Logistics e‑commerce arenaMajor online retailers (largestglobal e-fulfilment providers)Logistics service providersStart-upsOther major online ormulti-channel retailers!!Major last-mile players that coulscale up to e-fulfilment rapidly!Others!Source: www.ti‑insight.com6Delivering the Goods: E-commerce logistics transformation

ConsolidatorsIn view of the exponential growth of small‑parcel shipment– which by default tend to be single‑item shipments – fromB2C and C2C, there is an increasing need for two logisticssolutions, notably consolidation and a “pipeline approach”combined with local distribution centres.First, with countless small parcels travelling together overparts of the total journey, the classical role of the freightforwarder to consolidate and deconsolidate the parcelsbecomes increasingly important. Reducing handling atdifferent trans‑shipment locations by combining parcels inlarger units/containers will reduce costs.price to deliver to a farmer on a mountaintop must be thesame as the price to deliver to an apartment in the city.More remote and expensive delivery destinations can beoffset by operations in urban centres.One challenge for policy‑makers is to encourageprivate‑sector investment and innovation around logistics,while avoiding both monopolies and market inefficiencies.This sector may be prone to these inequalities due to theeconomies of scale and differential treatment betweenpostal operators and private express carriers or otherentities when it comes to customs declarations, liability andso on.Cross‑border deliverySecond, for goods that are identical or can be substituted,there is a need to make larger use of regional or localdistribution centres. If a customer orders a book, a part,or a banana online, the original product may come fromabroad and from a considerable distance, yet quickdelivery is made possible if the same item is stored closerto home. Once ordered, it will be delivered from the closerlocation; however, a replacement is then delivered to thelocal distribution centre through the “pipeline”. The pipelinedoes not need to be that fast, nor does the item need tobe in a small parcel, and it can even make use of slowermodes of transport such as sea or rail freight. These twoconcepts are nothing new, but will become increasinglyimportant in the context of the exponential growth ofsmall‑parcel trade. Such solutions can be helped by bothincreased digitalization and the exchange of data amongcarriers, ports and other logistics centres, and shippers.However, although technological solutions often exist, manystakeholders are not yet equipped for, or have sufficient trustin, data‑sharing systems.3Historically, the cross‑border delivery market was relativelyconcentrated, particularly at the one‑ to three‑day premiumend, with household names such as DHL, FedEx and UPSleading the pack. New technologies and services offeredby retailers and e‑commerce platforms such as Alibaba,Amazon or Walmart are pushing into the field, too.Recipients may also be willing to accept a three‑ to six‑daywait time for delivery at low, if not free, shipping prices.The lower end of the market is more diverse, with postoffices playing a more significant role alongside othermarket service providers. In Europe, for example, wherecross‑border delivery services by road are significant, inaddition to the three aforementioned integrators (DHL,FedEx and UPS) and postal operators, DPD (a subsidiary ofthe French post office La Poste) and GLS (a subsidiary ofthe British postal service Royal Mail) have also developedpan‑European networks to participate in Europe’s growinge‑commerce delivery market.Last‑mile delivery operatorsReverse logisticsPerforming the last‑mile delivery has become increasinglycritical as more e‑commerce end‑recipients look for quick,low‑cost, convenient and high‑quality delivery, requiringproviders to reshape the way goods are moved throughthe final stage of their journey.4 Operational differencesfrom traditional trade, particularly in B2C contexts, includemore stops per route; greater spread of delivery locations;and a higher number of unsuccessful deliveries. A failureto successfully deliver goods the first time round meansthe last‑mile provider usually incurs the expense of anysubsequent delivery attempt. Along with increased online purchases, so too come morereturns. Returns may be shipped back to retailers or takento physical locations, such as the retailer storefront, carrierretailer outlets or other acceptance locations. In an effortto improve the online customer buying experience, retailershave adopted solutions that facilitate smooth and efficientreturns services, including:Higher last‑mile delivery costs inherent in some residentialdestinations have created new players, including domesticregional carriers, local couriers and crowd‑sourcedindependent contractors. Some e‑commerce platforms arenow using technology advances to deploy in‑house last‑miledelivery solutions.5Postal operators are a major last‑mile delivery serviceprovider. In many countries, these are required to serve allcitizens and villages without price discrimination throughUniversal Service Obligations (USOs) – in other words, the–– Pre‑printed returns labels and re‑sealable packagingincluded in parcels –– An automated refund process with simple instructions and clear procedures–– An option to return merchandise to a physical location– either a bricks‑and‑mortar outlet, a post office or alocation in an alternative delivery network, such as aparcel store or locker. In many scenarios, though, the introduction of such servicesmeans that the retailer is dependent on the last‑mileprovider to facilitate the returns process. The trend canhave an impact throughout the delivery service network,Delivering the Goods: E-commerce logistics transformation7

not least in terms of the volume it generates, and the costimplications, which exert downward pressure on already thinmargins. Logistics solutions involve the gathering of returneditems, determining if the items can be resold or disposedof and then submitting the items into the proper channelof distribution. Due to varying individual country laws andregulations, much of this handling is done in the country inwhich the returns occur. Last‑mile providers have investedin supporting returns operations and niche‑market entrantshave developed. Perhaps the most notable example isFedEx’s acquisition in 2015 of reverse logistics specialistGenco Distribution Systems for 1.4 billion. National post offices have also increased returns offerings,either paid for or not by the seller. In either case, postalnetworks provide low‑cost options and typically have a widerange of geographic locations to accept package returns.8Delivering the Goods: E-commerce logistics transformation

Associated e‑commerce challengesAs has been described, e‑commerce sales require logisticssystems that are often more complex than storefront sales.The following section takes a closer look at a few of theoperational, regulatory and social challenges in this newlandscape.Sustainable transportCities across the world, in both developed markets andalso emerging economies, are experiencing rapid increasesin their population, as well as suffering from unacceptablyhigh vehicle emissions.6 The trend has a knock‑on impacton the movement of parcels into, and around, these largepopulation conurbations. Many cities have implementedstrategies to combat both congestion and pollution. Somecities are going further and have proposed the outrightbanning of diesel and, in some instances, petrol vehiclesfrom city centres within a very short time frame. The impactof these moves on last‑mile deliveries is yet to be fullyunderstood. Aware of the trends, however, many parcelcompanies and national post operators are investing heavilyin vehicles powered by electricity as well as alternativefuels.7Handling paymentsMany emerging economies still have consumers with ahigh preference for cash.9 In particular, in sub‑SaharanAfrica, only 34% of residents over the age of 15 have abank account, and 50% of e‑commerce transactions arepaid by “cash on delivery” (COD).10 Handing cash over tothe delivery driver incurs a very high return rate, especiallyon cross‑border transactions where the transit time is farlonger. Sometimes during the time that it takes to deliverthe goods, the consumer has found a similar productlocally. As there is no penalty, or need to request a refund,the purchaser simply refuses to accept the item. The resultis additional cost for the e‑commerce seller. Even whenpurchases are completed, the last‑mile operator musttransport the cash payment back to a secure facility, withcorresponding steps thereafter for it reach the merchant.Some companies use the services of local retail outlets thatoffer cash‑collection services to reduce the risk. The fundsare then sent electronically back to the merchant. In someinstances, retailers will offer the option for customers topay cash for items purchased online, which can reduce theburden on the delivery‑service portion of the e‑commercesupply chain.The ‘gig economy’Managing returnsVolatility in the e‑commerce logistics market, characterizedby frequent peaks and troughs of demand, has meantthat the vast majority of last‑mile delivery companies haveadopted an outsourced model. Subcontractors bear notonly the cost of investment in transport assets, but alsocarry the risk of revenues by being paid “by the drop” orby the mile. The e‑commerce market is such that so‑called“free shipping” is a major selling point for many companies.8The costs of this marketing device are often shared by thecarrier, resulting in ultra‑low rates of remuneration. The lowbarriers to market entry and a plentiful supply of peoplewilling to take on a low‑skilled job have meant that theamount paid by some carriers is barely enough to cover thecost of running a vehicle. Some governments are concernedthat the outsourced model has resulted in tax or socialbenefits avoidance by some workers and employers withinformal work contracts or new types of employer‑employeerelationships. Increased regulation of gig‑economy labourmarkets could transform the cost base of the sector andaffect its ability to balance supply with the peaks andtroughs of demand. This would have implications forcarriers, e‑commerce companies and consumers.Following on from the above, how retailers deal with returnsis among the most pressing issues facing the industry. TheColography Group Inc., a market research company thatsolely studies the package shipping market, has found therate of online returns can average anywhere between 25%and 60% depending on the country and the type of goodsbeing returned.11 In the USA alone, one specialist techcompany, Optoro, puts the value of 2017 holiday returns at 90 billion and a staggering 260 billion across the year as awhole. Up to 30% of e‑retail consumers will return gifts, withjewellery, electronics, fashion and household goods amongthe most frequent items. On 3 January 2018, dubbed“National Returns Day” by UPS, the express providerexpected 1.4 million items to be returned – an 8% increaseon the previous year.12UPS estimates that the costs associated with returns itprocesses range from 20% to 65% of the total value ofthe goods sold, depending on the commodity involved.13US‑based technology provider Datex estimates thatreturning a shop‑bought good costs the retailer on average 3 and it is usually back on the shelf by the next day.However, a return can cost an online retailer 6 and, due tothe complexity of the process, take at least four days beforeit becomes available for resale.14 Another consultancy,Clear Returns, estimates that 600 million ( 785 million) ofstock in the UK bought over the Black Friday weekend inNovember was on average still tied up in the return loop inmid‑December.15Delivering the Goods: E-commerce logistics transformation9

Cross‑border conundrumsSome of the challenges mentioned above are compoundedwhen sellers and customers interact overseas. For a start,customs authorities and other regulators have to deal with:–– Increased volumes of small‑parcel and low‑valueshipments that require different handling capacities–– Traders that may not be well versed on the rules anddocumentation required to move goods internationally–– Traders who have little or no understanding of tax andduties payable on their consignmentsFrom a business perspective, cross‑border returns are moreexpensive. Some have adopted different strategies to cope.For example, when UK‑based e‑retailer ASOS started toserve US customers, it did so from its UK stockholding. Toreduce returns outlays – which can be as high as 50–60%in the fashion sector – ASOS directed all US returns to aUS distribution centre, the intention being not just to avoiddouble duties, transport and other costs, but to also buildup some inventory in the country.It should be noted that consumers, too, can face significantchallenges trying to return goods purchased internationally– particularly when sellers have not put in place adequateprocesses or may be fraudulent. There is no international“consumer protection agency”, and the means for settlingdisputes with a merchant in another country are patchy.The topic of online consumer protection and e‑commerce isgaining increasing importance in various international policyforums, and is the subject of a forthcoming World EconomicForum white paper.10Delivering the Goods: E-commerce logistics transformation

Roadblocks for small businessAlthough MSMEs know of global e‑commerce opportunities,many may still be unsure how best to navigate difficultwaters when it comes to cross‑border exports or unableto sink the costs. Logistics challenges seen from theperspective of small businesses include:(40%); difficulty understanding documentation requirements(40%); logistics providers being slow to respond to theirneeds (39%); cargo being stopped in customs (39%); goodsbeing lost or untraceable (27%); and suppliers letting themdown (26%).–– Pricing: some MSMEs complain that the rates chargedby large express companies for individual B2C packagesare not competitive for their business model. Butalthough postal operators offer better prices, these lacka range of important services such as traceability andsupport for customs clearance.According to MSME respondents to the 2017 InternationalTrade Centre (ITC) competitiveness survey, high costs inpostal and courier delivery were the top bottleneck for thecross‑border deliver of e‑commerce goods, followed byfinding warehouses and delivery at destination, customsprocedures and duties, limited access to delivery withtracking ability, anticipating payable duties, data localizationand preparing documentation.17 The study also noted thatthe share of logistics costs within final price tended to benearly double for small businesses in developing countriescompared with developed countries. This could be theresult either of lower‑value e‑commerce shipments or thehigher costs of logistics services in the former. Unpackingthe particular needs of MSMEs in developing countries willbe important to ensure new e‑commerce trends work fordevelopment – Figure 2 offers a snapshot comparison.–– Traceability: though often cheaper, postal operators lackthe end‑to‑end visibility provided by express carriers.One small business commentator described the processof transition from one postal operator’s network toanother’s as a “black hole”. There may be several hoursor even days during which the parcel cannot be trackedand there is little accountability.–– Customs duties and tax: many businesses and onlineplatforms struggle with calculating tax and dutiespayable on cross‑border shipments, especially whenusing national postal systems. Sending a retrospectivebill to the end‑recipient will put many consumers offbuying goods from foreign traders. This will consequentlyimpact negatively on MSMEs whose invaluable onlinetrust ratings may be affected.–– Returns: MSMEs lack the resources to establish robustand cost‑effective returns procedures on an internationalbasis. This is especially the case for low‑valueshipments. Consumers tend to be discouraged frommaking an initial purchase if they know that they will haveto pay the shipping costs if they return a product.–– Last‑mile delivery services: whereas large shippers ofhigher value items have access to a full range of last‑mileservice offers from express and courier companies,MSMEs shipping low‑value goods do not benefit tothe same extent. This puts them at a competitivedisadvantage, especially against market leaders suchas Amazon who own and manage their own logistics.Although some companies are developing specificlogistics services (both upstream and down) for MSMEs,many existing solutions were never established withsmaller e‑retailers in mind.Many MSMEs view technology as the answer toovercoming these issues, with 86% of Shipa Freight surveyrespondents believing that it will “level the playing field”for them to operate globally. One example would be atechnology‑driven solution that lowers transaction costs andincreases transparency throughout the shipping process.Shipa Freight allows users to get rate quotes and book,pay and track ocean and air shipments around the world.The eBay Global Shipping Programme combines softwaredisplaying full landing costs to customers with a series ofnational logistics hubs to simplify sales in over 50 countriesfor users of its marketplace. Some experts considerthat latest technological developments, such as arounddistributed ledger technology (DLT) and blockchain, will helplead to more improvements still for small business trade (seeBox 1).To illustrate this: according to a MSME study by Agility’sonline freight service, Shipa Freight, 89% of respondentssaid their export revenue will grow over the next three years,but 94% also indicated they have faced difficulties whenshipping internationally.16 Top challenges ranked by smallbusinesses in the research were: costs being too high ornot having an accurate picture of a final landed cost (42% ofrespondents); the struggle to find the right logistics partnerDelivering the Goods: E-commerce logistics transformation11

Box 1: The latest buzzFigure 2: The proportion of SME leaders who say thefollowing issues are challengingIf it becomes more mainstream, DLT and the use ofblockchain could offer another useful tool for smallbusinesses grappling with export‑related logisticschallenges. DLT systems can provide a secure way ofexchanging value or information between multiple actorswithout relying on a third party to mediate the transaction.In theory, the application of DLT systems to tradeprocesses could increase efficiency and transparency,and some initial ventures are being rolled out. TheIBM and Maersk‑led “TradeLens” uses a blockchaincomponent as part of a broader service that allowsusers to share relevant trade processing documents.The service is fee paying, however, and mainly forfull‑container freight – meaning e‑commerce usersmay need to maintain other IT systems for airfreight orless‑than‑container loads more common to the industry’slogistics demands.18Other stakeholders are exploring the application of DLTsolutions to government‑led foreign‑trade single windowsfor the submission of required trade documentation or tobetter manage port logistics. For example, Wave offersa blockchain application aimed at digitizing the Bill ofLading, a legal document between a shipper and carrieroutlining the nature and destination of goods in shipment.Skuchain, supported by several international banks,uses a blockchain solution to eliminate Letters of Credit,creating a more readily accessible global commercial trustenvironment. The development of these tools, however,is not without operational, interoperability and regulatorychallenges that need to be further unpacked for thistechnology to become a truly go‑to tool for MSMEs.19Source: World Economic Forum E‑commerce Expert Group12Delivering the Goods: E-commerce logistics transformationSource: Shipa Freight, Ship for Success: SMEs and International Trade,2018

Emerging economiesChina is expected to drive a significant volume ofcross‑border e‑commerce due to a large and growingmiddle‑class hunger for foreign products. The scale ofChinese e‑commerce is already significant, with the countrybeing home to approximately 20,000 delivery companies,more than 400 of which operate across borders accordingto the Chinese State Postal Bureau.20 It is estimated thataround 130 million e‑commerce parcels are delivered perday in the country. This has placed extrem

May 24, 2018 · for overall e‑commerce (cross‑border and domestic, B2B and B2C).1 A report by DHL suggests that cross‑border e‑commerce already accounts for 15% of total e‑commerce sales and will expand to 22% by 2020.2 One signal, however imprecise, of cross‑border B2C e‑commerce expansion can