Warehouse-as-a-Service Providers Address Ecommerce Fulfillment Niche

The growth in online sales, the scarcity of ecommerce fulfillment center space and the need to meet increasing customer demands have all merged to drive interest in a particular kind of offering: Warehouse-as-a-Service (WaaS).

These solutions are tailor made for companies lacking the capital to create or expand their ecommerce fulfillment center footprint, or that have flexible space requirements. Tapping networks of unused facilities, they work well for merchants facing seasonal spikes in order volume.

A New Twist on an Old Idea

Benjamin Hartford, a senior equity research analyst with Baird, said the concept of space on demand is not new, but technology has brought greater transparency and the ability to rapidly respond to customer needs.

“Technology allows it to be even more rapid, direct and shorter term,” said Hartford, pegging WaaS to grow “at or above” the 15% run rate of ecommerce overall. “3PLs have employed the practice for some time, but now there’s the ability for transactions to happen more quickly and be of shorter duration. It’s more evolutionary as opposed to revolutionary, brought about and facilitated by technology.”

The trend is driven not only by the rapid growth in ecommerce but in the need to have inventory positioned in smaller, forward locations to address demand for rapid delivery and save on transportation and logistics costs.

Hartford said it would be “short sighted” to assume traditional 3PLs won’t react to this kind of emerging market need. “Some may not but some will,” he said. “They’ll invest in IT interfaces if they see demand for this kind of warehouse-as-a-service offering. It’s certainly incumbent on them to work to offer it.”

3PLs Getting In on the Action

3PL XPO Logistics launched a shared-space distribution network of warehouses and last-mile hubs earlier this year. Called XPO Direct, it gives shippers an alternative to the fixed costs of regional fulfillment centers. The company said it can stockpile inventory within one- or two-day delivery to 95% of the U.S. population, and close to store networks, moving it around as necessary.

David Hauptman, senior vice president of strategic management for 3PL Geodis, said he sees a need and room in the market for both on demand and traditional warehouse and distribution models, but understands the growing interest in the former.

“With ecommerce growing at the rate that it is and warehousing real estate tighter than ever, finding temporary space and fulfilment capabilities with a trusted partner is critical for brands,” Hauptman said.

While watching the trend with interest, Hauptman said Geodis has been offering pop-up space to its clients for the past 15 years. “We see this as a value-add to our customers more than our core business model or something we actively seek,” he added. “But interestingly enough we do have customers who started as a temporary pop-up operation that have moved to a successful, long-term partner.”

Here are some thoughts on the WaaS trend from three startup companies providing this type of service.

Flexe: Tapping Excess 3PL Capacity

Karl Siebrecht, founder and CEO of Flexe, said his company isn’t the right solution in every case, especially for retailers with higher degrees of certainty in their volume forecasts. He said two growth drivers have been peak season spikes and increased costs and requirements from Fulfillment By Amazon (FBA).

“We’re a more flexible solution compared to leasing or owning, or a multi-year 3PL contract,” Siebrecht said. “It goes to the use case we’re trying to solve for. If a shipper has been doing the same thing for years, with trucking routes that are very well-known and the volume forecast is tight, they typically don’t get a lot of surprises. Fixed nodes are a great solution for that.”

About 80% of Flexe’s 1,000 warehouse partners are 3PLs ranging from regional providers with a couple facilities to large global players with dozens or even hundreds of locations. Flexe connecting clients to its partners’ excess capacity, providing the latter with a new revenue stream. Siebrecht said Flexe analyzes demand by market to determine where it should add partner capacity.

Even though Flexe is more naturally suited for startups and companies without distribution assets, Siebrecht said some large retail clients use it to augment their own ecommerce fulfillment networks, including three Fortune 20 companies. While not sharing specifics, Siebrecht said Flexe grew its revenue 1,200% from 2015 to 2017 and tripled its headcount.

Typically, a new company bases its fulfillment buy/build/lease decisions based on projected volume growth. Siebrecht said WaaS solutions like Flexe give them a new set of options.

“If you start an ecommerce company tomorrow, hopefully you have a product everyone wants and you create your forecast,” he said. “Under the old model distribution, it helps you decide how much warehouse space you need, and there could be a lot of risk with an early-stage company without a lot of historical data. You don’t have to do that anymore with flexible offerings.”

Darkstore: Big-Brand Hookups Draw Attention

Lee Hnetinka, founder of Darkstore, said it is a technology company first and a logistics provider second, comparing it to disrupters like Uber and Airbnb. The company made waves earlier this year by partnering with Snapchat and Nike to fulfill pre-release orders of Air Jordan III “Tinker” shoes during a live event in Los Angeles in February. The inventory sold out in 23 minutes. This week it’s doing something similar with Snapchat, Levi Strauss and Walt Disney World.

The company has 43 Darkstores in 40 top U.S. markets totaling 58,000 million square feet of space, through its ecommerce fulfillment center partners. Delivery partners include on-demand services like Deliv and Dynamex. Darkstore’s platform allows customers to choose the quickest, most economical delivery option.

“When we started there was no one who could offer an ecommerce brand the ability to store inventory in a city and have it delivered the same day,” Hnetinka said. “We enable a Nike or a Tuft & Needle to put their inventory in a place that’s local to the consumer and have it delivered in a few hours.”

Hnetinka said an ecommerce fulfillment partnership is “like a marriage – hopefully you only choose your partner once. If you do it correctly, you keep them a long time. Fulfillment is the backbone of a retail or ecommerce company. If the order isn’t fulfilled in time, the customer has a bad experience. Getting product to them is one of the most important, if not the most important things in the value chain.”

Darkstore is growing by going deeper into existing customers as well as adding new brands, with several major ones to be announced in Q4, Hnetinka said. He said some customers might begin with Darkstore handling a single SKU in one city, with a single fulfillment speed, like same-day delivery in New York.

While everyone talks about how Amazon is killing retailers, Hnetinka said what Bezos and company is actually doing is teaching them how to be better at retail. “Amazon, Target and companies like them are changing the way to enable convenience for customers,” he said. “They’re doing it because customers expect instant gratification, fast delivery and concierge-like service.”

Flowspace: Necessity is the Mother of Invention

Ben Eachus, co-founder and CEO of Flowspace, said the startup was born out of his frustration with meeting the fulfillment space requirements of Honest Co., where he was director of strategic projects.

“The problem I ran into time and again was projecting how much warehouse space we needed to accommodate our growth and channel changes,” Eachus said. “I found locating and launching space to be a long and cumbersome process. Once we found it there were often negotiations and tech integrations. The idea behind Flowspace was to make that process easier.”

Flowspace utilizes a virtual network of ecommerce fulfillment space, from both 3PLs and first-party partners that list their available space on its site in specific markets. Customers are primarily in the small-to-medium merchant category, companies typically constrained by their inability to hit monthly or annual order processing requirements. They may have an ecommerce site set up on Shopify or Bigcommerce, use FBA or sell through a marketplace.

“We’re not specific to any vertical or platform,” Eachus said. “They could be companies selling into wholesale channels but the majority are selling direct to customer.” Since its founding in May 2017, Flowspace has grown to “hundreds of customers,” he said.

As with Flexe, facility partners are primarily 3PLs but mostly smaller regional players with a specific geographic focus.

“The value we provide to them is, not every one of them has a dedicated sales force, so we supplement that,” Eachus said. “Because we can stitch together multiple regional providers we essentially have a national network. Our customers might be storing inventory across the country through multiple providers. It helps our partners not only generate incremental revenue from their empty space but it gives them a national presence they wouldn’t have otherwise.”

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