Editor’s note: Ajay Agarwal is a managing director in the Palo Alto office of Bain Capital Ventures and an active investor in early-stage commerce technology companies.
It may surprise many of you to learn that Dell Computer was the highest appreciating tech stock of the 90s. This success was grounded not in marketing or product, but primarily behind the scenes in a revolutionary approach to supply chain.
Dell’s success was powered by a “build to order” approach that enabled it to offer customers a personalized solution while avoiding inventory hold until the order was received. Dell’s innovation in supply chain management fueled its meteoric stock market performance — 91,863 percent (cumulative appreciation of Dell’s stock price during the 1990s).
Fast forward to 2014 and the most recent Cyber Monday. The current heavyweight incumbent in e-commerce, Amazon, featured distribution center technology powered by Kiva Systems in this year’s Cyber Monday press blitz (disclosure: Bain Capital was an investor in Kiva Systems).
Amazon has reinvented customer experience and expectations through supply chain innovation, enabling it to ship packages to customers within minutes of a received order while realizing significant savings over a traditional labor-intensive distribution center. By strategically placing distribution centers and leveraging revolutionary technology like Kiva Systems, Amazon can cost-effectively deliver goods to the vast majority of U.S. households within 48 hours for little to no shipping cost. Amazon’s innovation has enabled it to significantly increase its market share while putting enormous pressure on competitors.
The Dell and Amazon examples remind us that the key to successful commerce businesses is the unsexy, gritty, complex world of supply chain and logistics. Sam Walton figured this out in the 1960s and 50+ years later it remains true.
Other key components of customer experience still matter – things like brand, personalization, and merchandising – but the foundation of a great e-commerce company today starts with supply chain. Because the logistics realm deals with atoms and not just bits, software solutions alone can’t solve the problem and must be married with hardware like the Kiva robots, and labor like couriers and Ubers to move the physical items into place.
Order fulfillment is now the key criteria consumers evaluate when making a purchase online.
Underscoring this point is a recent Bain & Company report that states “nearly 60% of online shoppers in the United States report that shipping costs are the primary factor in determining whether to shop online with a retailer.”
As a result, many e-commerce sites have been forced to offer free shipping. According to Bain & Company, free shipping was used for 68 percent of online transactions in the third quarter, up from 44 percent in 2013 and this figure will continue to rise.
Despite revised consumer expectations, very few e-commerce companies can profitably absorb free shipping costs, which is why “flexible fulfillment” is the top strategic initiative for US e-commerce CEOs today.
Newer E-commerce Players Lead the Way
Other innovators have learned from Amazon’s example and have harnessed the power of logistics and supply chain as a source of competitive advantage. Newer innovators such as Rent the Runway have recognized that the key to success is rooted in a successful marriage between supply chain management and inventory software. Rent the Runway today operates the largest dry cleaner in the country in a 160,000 square foot facility and has built software that manages the inventory, delivery, and fulfillment of 65,000 dresses and tens of thousands of accessories across its millions of members. (Disclosure: Bain Capital is currently an investor in Rent the Runway.)
Similarly, Wayfair, which recently went public and now has a nearly $2 billion market cap, has built a powerhouse business that relies on its ability to accurately and efficiently drop ship millions of items from thousands of global suppliers. The founders of Wayfair recognized a massive opportunity to sell “long tail” goods that a normal retailer (even Amazon) couldn’t keep in stock because the demand for any given SKU was small and the cost to keep that inventory was high. For example, how much demand exists for this mailbox currently listed on Wayfair’s site?
Wayfair’s deep technical integration to thousands of vendors allows it to offer this mailbox and thousands of other merchandised items with the same delivery speeds and accuracy as Amazon. As a result, the company has built a market-leading position in a huge e-commerce category in which Amazon cannot compete.
Defensibility = Barriers to Entry = Margins = Winning
What’s powerful about these supply chain innovations is that they represent tremendous defensibility and a massive barrier to entry. This in turn prevents others from entering the same space and bringing down margins.
Innovative supply chain was the playbook for how Dell dominated the 90s, Amazon dominates today and newer companies like Wayfair and Rent the Runway will dominate in the future. Integrating today’s new technologies, including self-driving cars, machine learning and data science and drones, will allow the next generation of B2C and B2B entrepreneurs to capitalize on this opportunity.