Warehousing 2.0: How a Startup is Reshaping the Logistics Industry

Welcome Shareholders,

Every Sunday, We'll highlight one company to do an in-depth breakdown of their business, financial situation, and whether or not it's a worthy investment opportunity - large or small. In today's edition, we'll look at a Flexible Warehousing-as-a-service startup looking to solve the logistical challenges faced by retailers after the pandemic.

The pandemic was a black swan event for businesses in more ways than one. With customers mostly stuck at home, retailers were caught off guard, having to build digital infrastructure to provide convenient contact-free deliveries. A second, more pressing challenge for businesses was the supply chain logistical challenges associated with facilitating online retail. Retailers struggled as freight and warehouse rates climbed, and many invested billions of dollars in expanding their logistics and fulfillment network. However, that demand has now normalized, and shopping patterns have more or less gone back to pre-pandemic levels, leaving many retailers with additional Warehousing and logistical capabilities than what's currently needed.

All of this is compounded by escalating trade tensions between the US and China, forcing many to scramble to bring their manufacturing onshore. Warehousing-as-a-service has quickly emerged as a solution that can help companies fix their supply chain, save costs and achieve greater flexibility as and when needed. Flexible Warehousing-as-a-service startup Flexe has become one of the fastest-growing players in the space, quickly capitalizing on the industry's uncertainty. So can Flexe disrupt the $500 billion retail logistics market and become a leader in the space?

Pandemic Era Logistical Challenges

Ever since the pandemic hit the US in March 2020, Retailers have faced a barrage of challenges in managing their supply chains and delivery logistics. As stores shuttered and Americans remained stuck at home, consumer shopping preferences drastically shifted from in-person retail to online sales. Undoubtedly, the pandemic brought forward some innovations in deliveries that would have taken a few years to be implemented otherwise. All of the investments into infrastructure, including Warehousing and transportation, have led to significant improvements in the delivery experience. Consumers are now used to the efficiency of online orders and the convenience associated with them. In fact, most retailers now offer some form of one-day or same-day delivery or the choice to pick up goods in-store. However, the pandemic has also bought a host of challenges and volatility in retailers' operations.

When the pandemic hit in 2020, retailers scrambled to improve their online shopping networks to deliver the same reliable experience as in-store sales, but this is only part of the story. While retailers looked to improve their front-end shopping experiences for users, they also had to build out their back-end solutions for delivery, which involved completely revamping the existing Warehousing and transportation infrastructure. Before the pandemic hit, these companies had primarily relied on China and other countries to manufacture products and keep costs low. But the pandemic showed that supply chains could become fragile when demand explodes, just as it did over the past year. Factory shutdowns in China and Cargo delays at sea resulted in weeks, if not months, of product delays that cost companies hundreds of billions in potential revenues.

Production delays and congested ports have also led to an average delay of 6 days for cargo ships to dock compared to their original timeline, the highest in over two decades. Apart from the delays, retailers had to bear a surge in freight costs, which has put pressure on margins and led to higher prices. For instance, the Shanghai Containerised Freight Index (SCFI) spot rate for the Shanghai-European route was as little as $1,000 per Twenty-Foot Container (TEU) in June 2020 but jumped to $4,000 per TEU by the end of 2020 and surged to $7,395 by July 2021. The impact of higher freight charges meant that import prices increased on average by 24% and consumer prices by 7.5%, which meant lower sales over time.

Manufacturing Diversification

These challenges have led many CEOs to reevaluate the China Model and diversify their manufacturing and supply chains. A UBS survey conducted last year of C-suite executives found that 90% were in the process of moving production out of China or had plans to do so, while 80% had plans to strengthen their supply chain networks in the US. But Strengthening supply chains also come with drawbacks and significant risk. The initial capital outlay and time required in opening a warehouse and sorting facility have put a few retailers on pause to evaluate alternate options. Couple this with the cyclicality of demand and consumer spending, and this can leave companies exposed for long periods of time. When consumers pull back on spending and demand drops significantly, retailers can be caught off guard, which can lead to significantly higher associated operating costs and lower margins. This is very evident over the past few months, as consumers have prioritized spending on essentials due to the impact of inflation. This has left many retailers overestimating the potential demand from customers and holding inventory that is costing millions to store in their warehouses.

Even Amazon, which has been a longstanding beneficiary of pandemic spending trends, is now pulling back its supply chain expansion efforts as it stated that it 'Overestimated Demand .'The company said that it was canceling, closing, delaying, or pausing negotiations on 24.6 million square feet of ground-level space for fulfillment networks, delivery space, and other buildings across 28 states, which is nearly 25% of the total area that it had in its pipeline to expand to in the future. All of this data presents a conundrum for retailers and a lose-lose scenario in either case. Investing too much too early to meet future demand can lead to higher operating costs through leases, while not investing enough can leave companies unable to meet consumer demand. Retailers may need to take a more flexible approach in combating supply chain issues in the future, and Flexible Warehouse Service Provider Flexe could play a pivotal role in the transformation.

Warehousing-as-a-Service

If the past two years have taught companies anything, it is that they need to keep their supply chains agile and adapt to the prevailing conditions to prevent being caught off guard. This essentially means using a mix of stores, onshore warehouses, and off-shore storage facilities to optimize delivery times and minimize costs. However, the primary hurdle for most companies is the sizeable investments and time required to modify existing legacy supply chains and transform them to meet the consumer's ever-changing needs. E-commerce giants like Amazon and Shopify have taken over a decade to build out their delivery and fulfillment networks, and retailers have only recently woken up to the fact that consumers prefer convenience over any other factor when purchasing. As Amazon continues to make a push in its 1-day and same-day delivery push, retailers may be left behind if they don't act quickly.

Enter Flexible Warehousing solutions that help companies temporarily bridge the gap in their supply chains and meet the consumer's needs in the short term. Founded in 2013, Flexe is one such company that is looking to shake up the supply chain landscape. The company describes itself as a 'Warehousing-as-a-service' provider, essentially helping retailers turn what would traditionally be a fixed experience into a variable cost. Flexe's customers can pay for storage that they use rather than committing millions upfront into long-term warehouse leases. The cost structure mirrors that of the pay-as-you-go cloud computing services offered by Amazon Web Services or Microsoft Azure, which removes the need for a company to buy and run its data centers. This enables companies to ramp up or scale down their logistics requirements depending on the supply and demand dynamics, solving one of the longstanding issues prevalent in the industry.

But how does Flexe achieve this? The solution is quite simple, really. Companies that have logistics needs come to the company. Flexe then syndicates the opportunities across its network of warehouse operators, which currently comprises more than 1,500 facilities that bid on providing services. To boil it down in simple terms, Flexe is a two-sided marketplace that connects buyers and sellers for temporary warehousing needs. Another way to look at it is to compare it to travel booking providers like Agoda or Expedia that connect buyers and sellers but for logistics solutions. Flexe started out as just a marketplace but has evolved over the last decade, now potentially acting as a one-stop shop for supply chain-related solutions. In recent years, the company has addressed various pain points in the supply chain to offer distribution, fulfillment, and delivery services on its platform.

There are several use cases for customers for these additional services that can reduce storage costs and delivery time and improve supply chain efficiency. For instance, Flexe can supplement a retailer's warehousing capabilities when a retailer's warehouse can't temporarily process packages due to facilities upgrades or routine maintenance. The company's platform is also smart enough to match retailers with warehouses that are closer to its stores, enabling it to reduce shipping times. In addition to warehousing and storage services, Flexe also offers package processing and transportation services. All of this can be monitored by the customers through a centralized interface, where they can keep track of merchandise shipments, process product returns, and use key data to increase operational efficiency.

Is it Scalable?

Flexe has the potential to disrupt the $500 Billion Retail Logistics market, but there are a few challenges that the company will need to address before it can capture a chunk of the market.

The first is Flexe's choice of target customers, where it prefers catering to larger enterprise customers rather than SMBs and other smaller sellers. The company claims that its customer base includes six of the ten largest retailers in the United States and the five largest consumer packaged goods companies. This starkly contrasts Amazon and Shopify, which have targeted the faster-growing and larger addressable SMB market. Shopify acquired logistics startup Deliverr for $2.1 billion in 2021 and also invested strategically in freight services provider Flexport. The combined efforts have enabled it to improve its fulfillment network for SMBs on the platform, delivering 70% of the orders within two days or less. Amazon has also recently introduced a new 'Buy With Prime' program, letting merchants use its fulfillment network to deliver orders while also managing returns and providing customer data insights.

Many have argued that Flexe's strategy of wooing large corporate customers could be flawed over the long term. The primary argument is that Retailers will invest in their own fulfillment networks, looking at the current disruptions and state of things, if they haven't already started. Considering the volatility in logistics and warehousing costs, it makes sense for retailers to invest rapidly to have headroom in the future while also bringing down variable costs over time. This will also enable them to bolster their own e-commerce offerings to compete with Amazon and Shopify for 1-2 day deliveries. So over time, Flexe could see a drop in demand from the pandemic-era boom fuelled by strong consumer demand. This would suggest that the Amazon/Shopify model of targeting SMBs and other smaller retailers could be the way to go, considering that they don't have the resources or expertise to compete with their larger counterparts.

Flexe also faces the same challenges as any other Platform business like Uber and DoorDash, where third-party logistics providers (3PL) will go directly with a customer once an existing relationship has been established. Just like Uber and DoorDash, the prices paid by customers can eventually spiral out over time due to the fees charged by Flexe, making it cheaper to cut out the middleman. Also, unlike those consumer-facing businesses, Enterprise customers are much more likely to cut spending very quickly if business conditions deteriorate further. The logistics industry has been built on longstanding multi-year/decade relationships, so it will be hard for Flexe to suddenly disrupt these dynamics. On the one hand, Flexe takes out the guesswork and uncertainty in logistics, but on the other hand, companies looking to grow their businesses more aggressively may opt to go with 3PL.

While both of these challenges are compelling arguments as to why Flexe might not really disrupt the logistics market, there is a counterargument that potentially strengthens the company's case and makes it a strong value proposition.

Flexible Warehousing is Here to Stay

There is no doubt that retailers will build out their own networks over time, but Flexe will still be a part of the supply chain equation for a few key reasons. First, building out a logistics network is complex and can take a decade and tens to hundreds of billions of dollars to complete. So it will not be practical for all retailers outside of the largest to make huge investments outright. Another factor to consider is that, despite all of the talks of diversifying supply chains and divesting from China due to the trade tensions, manufacturing activity remains robust in the country. China accounted for 30% of the global manufacturing output in 2021, a significant increase from 22.5% in 2012. It means that most companies are still in the dark about the eventual outcome of the trade war. Some may look to pull ahead and take advantage of the incentives provided by the government to bring production onshore (think Intel, Tesla, etc.), but most will likely let the situation play out before committing a significant capital outlay.

Even if most companies eventually transition away from China, they will look to diversify their manufacturing to other low-cost hubs like the Philippines, Bangladesh, and India. This is because the US simply doesn't have competitive manufacturing prices or capabilities in most areas, and moving production onshore could lead to massive price hikes & decline in product quality. As mentioned earlier, another crucial factor that could prevent onshoring completely is the cyclical trends and purchase behavior from buyers. Companies that have committed billions in Warehousing, like Shopify, FedEx, and Amazon, to meet the influx of buyers due to a spike from the pandemic are now suffering with additional capacity. Another factor to consider is that the US Economy is headed into a potential recession (or at least a slowdown) as a result of the interest rate hikes instituted by the federal reserve. A recent survey conducted across CFOs in Duke University's Fuqua School of Business found that 44% of the respondents would cut back on heavy capital projects this year.

All of this suggests that retailers (especially small and medium enterprises) won't rush out to make significant fulfillment and delivery network investments. Coupled with the lack of medium-term visibility due to the fog clouding the entire supply chain industry, it is likely that the flexible warehousing industry and companies like Flexe are here to stay.

Bottom Line

The pandemic accelerated the shift towards online retail, exposing supply chain and logistical challenges for businesses. Retailers invested heavily in expanding their Warehousing and transportation infrastructure to meet the new demand but now find themselves with excess capacity. The pandemic also forced many companies to reevaluate their reliance on China for manufacturing and diversify their supply chains. However, diversifying manufacturing comes with significant risk and initial capital outlay. The situation presents a conundrum for retailers, who must balance investing in supply chain infrastructure for future growth while being flexible enough to adapt to changing consumer behavior.

Warehousing-as-a-service could be a pivotal solution for businesses to optimize their supply chains, and companies need to keep their supply chains agile and adaptable to prevent being caught off guard. Flexe has positioned itself perfectly to take advantage of the lack of visibility in the future of the supply chain. Its services are perfectly suited to target retailers who don't want to commit billions to build their logistical infrastructure. It even makes sense for large companies as many will be hesitating on making large capital investments considering the rising interest rates and potential recession on the horizon. Flexe's long term prospects will largely depend on if warehousing-as-a-service has a long-term future or if it's a solution that was only meant to meet the extraordinary circumstances created as a result of the pandemic.