Spring 2007

The third-party fulfilment market is flourishing, and is predicting rapid growth as more retailers go online. Peter Rowlands talks to some of the key players, and hears why they think you need their services

Behind the story of massive growth in online retailing lies a somewhat less celebrated story - the parallel rise in outsourced fulfilment. Statistics about just how much e-fulfilment work is outsourced are hard to come by, but major players are emerging, and some are reporting brisk growth.

A prime example is iForce, which works for the likes of Boots and John Lewis, and reports a remarkable growth rate of 180 per cent. Prolog, another major player, is about to open a sixth warehouse at its showcase site in Sherwood Park, Nottinghamshire, adding a further 125,000 sq ft to its capacity there. It also has longer-term plans to increase its Sudbury base by several times that amount.

In a nutshell, as home shopping fulfilment evolves into a flourishing high-volume logistics activity, a true third-party infrastructure is emerging to support it, served by some major businesses.

What is perhaps surprising is that these are mostly independent companies or groups, not offshoots of the world's established logistics giants. Three or four years ago some pundits were predicting that once the growth in home shopping was perceived as permanent, not merely a flash in the pan, the big guns of the logistics industry would swoop in to dominate the market. It hasn't happened yet.

Mark Hewitt, chief executive of iForce, has little doubt that the big players will eventually turn their attention to this sector. 'It's not a case of if, but when,' he says. However, he doesn't see this as a threat to well-established players such as his company. 'We've got several years' experience in the market, and have pushed out service level agreements up to 99.9 per cent. Business-to-business contractors will be playing catch-up for quite a while to get to this point.'

He points out: 'Home shopping fulfilment is a different market. It's not about warehouses, it's about single picking.' Ian Dignum, sales director of Prolog, agrees. 'When the market gets big enough, the big boys will see opportunities. But e-fulfilment is much more fiddly than conventional logistics. You're dealing with much larger numbers of smaller products. I'm not certain that many logistics companies are set up to deal with that..'

In fairness, the logistics giants are already quietly active in many areas of the fulfilment market. Companies such as DHL Exel, Wincanton and Salvesen all have specialist fulfilment operations - some quite substantial. The issue is really about how important they consider the sector, which is likely to be viewed as a niche market in the context of their overall portfolio.

Ultimately, if the catch-up game seems too slow for them, they can always resort to acquisition - as Wincanton did last year, buying out Lane Group's well-respected home delivery business. But so far there are few other such examples.

By contrast, there have already been various consolidation moves within the existing third-party fulfilment market. Early last year Ark-H took over Diss, uniting two well-established names in the B2B and B2C markets respectively, and creating a business with a staff level at the time of 300. More recently Braywood, a mid-sized player, was acquired by Dutch media group DOCData.

The Braywood acquisition is interesting in another way, since it seems to reflect a general move in the media business to expand into fulfilment and related areas. A few years ago DOCData's focus was more on media replication and distribution, but now it is committing increasing resources to fulfilment.

Time Warner is another media organisation that has been turning its attention to the fulfilment market, building up its TW4 business. Now Technicolor, a media replication specialist, is expanding into the third-party fulfilment market; and Brandedmedia, a CD and DVD replication business, has set up an offshoot called Brandedmailing - again with fulfilment firmly in its sights.

You might question whether there will be room for all these newcomers, but the answer appears to be yes - for the simple reason that the growth in their target market is so vigorous. Home shopping volumes continue to soar; Christmas spending reached £7 billion last year, and is predicted to hit £10 million this year. Yet only half of Britain's high street retailers are thought to have fully transactional web sites so far. Assuming the laggards feel compelled to join the fray (and rumours of impending initiatives abound), they will add further impetus to the existing growth rate. And many will require outsourced fulfilment.

They won't all want this, of course. Plenty of retailers are content to handle their own fulfilment work. But compared with conventional bulk distribution to shops, it's a demanding business.

simply not the same task

Nick Allen, chief executive of established fulfilment specialist Zendor, offers an off-the-cuff check list for retailers. 'Do you have existing space within a warehouse? If you can allocate completely separate picking areas for one-to-one fulfilment, it might make sense to do it yourself. But do you have the expertise? Can you organise order-picking and collation? It's simply not the same task as replenishing single bulk consignments.'

Another factor is staffing, he points out. 'Do you have a good location for recruiting people?' You need to bear in mind, he says, that seasonal fluctuations in demand are more extreme in B2C fulfilment than in logistics as a whole. Mark Hewitt of iForce echoes many of these points. 'There's a huge growth in perception of the need to outsource fulfilment,' he says. 'Being realistic about it, if contractor delivers the wrong pallet somewhere, it's not the end of the world. If a carrier delivers the wrong package to a consumer, it's much more damaging.'

He adds: 'Home shopping involves even greater demands than ordinary retail. If you can't find a product you're looking for in a retail store, you'll usually just accept it with a shrug. You don't expect every shop to have every conceivable size and colour of every item in stock. But on the internet, you do expect everything to be available. Fulfilment has to match up to that level of expectation.'

Ian Dignum of Prolog agrees that consumers are becoming more demanding. 'Customers are craving more choice, and are less willing to wait for their goods.' He says the vast majority of Prolog's fulfilment operations now involve 24-hour delivery. 'We used to offer delivery in two to three days, but that's not acceptable any longer.'

One way in which outsourced specialists are getting more sophisticated is in their ability to manage carriers in order to provide the optimum mix of expertise and value. Some use third-party software such as MetaPack's to select carriers via a matrix of prices and features; others such as iForce are building this capability into their own systems.

'We've been putting a lot of effort into this aspect of our Intelligent Retail System over the last eighteen months,' Mark Hewitt says. 'It enables us to play to each carrier's forte.'

Prolog's Ian Dignum says that since Parcelforce suspended its three- to five-day delivery service a few years ago his company has been testing the market more actively. 'We've formed relationships with several carriers in order to provide the best solution for each customer requirement.'

Zendor's Nick Allen sees the ability to bargain with carriers as one of the benefits of using outsourced fulfilment. 'Smaller retailers working on their own can find themselves in a weak position if they're trying to negotiate coverage for peaks. We can use our size to ensure we get favourable terms.'

Clearly retailers need to attain a certain size before they can justify employing an outsourced fulfilment specialist. Matt Cannon of Braywood is refreshingly frank on the point. 'If you're a retailer turning out under a thousand to fifteen hundred units a month, by far the cheapest option is for you to do your fulfilment yourself,' he says. 'There are bound to be fixed setup costs, and you have to have the volume to offset them.'

There's an added benefit here for smaller retailers, he adds. 'If you have a real hands-on involvement in fulfilment at the beginning, you'll gain a much deeper understanding of the issues behind mail order.'

Nevertheless, many fulfilment houses (Braywood being one of them) seem happy enough to take on relatively low-volume business that would probably seem alien to conventional logistics contractors. 'You can't just stick with the big boys of retail,' says iForce's Mark Hewitt. 'We think it's important to offer 'incubator' services to bring on new players. The biggest challenge they face is to scale their operations up as they grow, and we can help them with that.'

Indeed, alongside its large-scale modern warehousing for customers such as John Lewis, iForce has traditional multi-user facilities where more modest operations can thrive.

Something else the distinguishes fulfilment specialists from conventional logistics companies is their willingness to get involved in consumer interaction. Zendor is able to tap into the massive contact centre resource of parent company N Brown, the catalogue retailer, and other major players such as 2Touch and Prolog run major contact centres as business units in their own right. Prolog's Ian Dignum says his company's activities in this field are flourishing. 'We don't see the doom and gloom that seems to be a feature elsewhere in the market.' Some fulfilment companies, by contrast, limit their contact centre activity to the specific needs of customers. 'We regard our contact centre as an add-on to our fulfilment business,' says Braywood's Matt Cannon. 'It works so much better that way. Our staff buy into the products they're dealing with. We're happy if the department breaks even.'

Both medium-sized players such as Braywood and bigger companies such as iForce continue to attach great importance to developing their own systems resources. Prolog by the same token has access to the source code of the proprietary system it uses. iForce's SMART system also includes a module called RESCUE for driving its significant involvement in reverse logistics.

Quite where the next big developments will come in the outsourced fulfilment market is not clear, but several contractors told us they were involved in negotiations with major retailers over new contracts that could be announced later this year.

There seems to be general agreement that clothing, and in particular the fashion market, currently represents the most promising area for growth. 'Clothing is undoubtedly the biggest untapped sector,' Mark Hewitt told us. Nick Allen of Zendor says this sector 'accounts for by far the highest volume of potential customers we're talking to.'

The reasons have little to do with fulfilment. Until now garment retailers have been wary of issues of sizing and colour, which can be difficult to address adequately on web sites, but advances in web technology means these problems are now being addressed much more effectively. Logic dictates that consumers will be prepared to buy clothes online more confidently in future.

What is significant that the fulfilment houses could lead the way in helping to get fashion retail web sites performing effectively - perpetuating a role that they have been building in the past five to seven years.

Perhaps a comment from iForce's Mark Hewitt says it all. 'Will we still be around in five years' time? Very much so - and we'll be far bigger than we are now.'