The holiday shopping season is drawing to an end. The next part is much harder: sorting the unwanted stuff, and getting it returned to the sellers.
Given the rise of online shopping, buyers have become a fickle bunch. Returned items is a $500 billion nightmare. Now, business models are sprouting up to take advantage.
It is creating new opportunities for investors in unlikely places.
When Amazon.com (AMZN) spent $13.7 billion for Whole Foods Markets in August, the immediate synergies were hard to see. Organic vegetables and hormone-free chicken didn’t seem like a good fit with the online giant’s reputation for discounted goods. The value was in the storefronts.
According to a USA Today report, while people would rather shop online, they prefer returning items to physical locations. Whole Foods provided 400 new places in desirable areas.
It is not a new strategy at Amazon.com. Since spring, the company has quietly pursued relationships with brick-and-mortar retailers like Kohl’s (KSS). The first step was selling Amazon products. Kindles, Fire tablets and Echo smart home devices was a good start. More recently, the two hooked up on Amazon.com returns at 82 Kohl’s storefronts.
The two largest delivery services, FedEx (FDX) and United Parcel Service (UPS), have their own return strategies. FedEx has been opening kiosks in groceries and drug stores. Most Americans have an Albertsons, Kroger (KR) or Walgreens (WBA) within 10 minutes of their home. And UPS is building a mesh of drop-off points in neighborhood dry cleaners and hardware stores. The Access Point Network is currently 27,000 members strong, and growing quickly.
The idea is sound. It is way cheaper to pick up packages from high-tech lockers at a network of defined points, as opposed to crisscrossing an unstructured mess of residential neighborhoods. The logistics companies have spent millions building better travel algorithms to save fuel and time.
Fun fact: UPS trucks almost never turn left, which saves millions in fuel.
The effort makes interactions more convenient for customers. Recently, Amazon.com, FedEx and UPS have begun asking recipients if they would prefer to have packages dropped off at nearby access points. This alleviates the need to wait for delivery people. It is also convenient for returns.
The strategy is paying off. Recently, FedEx reported second quarter sales of $16.30 billion, an increase of 9.2% over the same period last year. Operating income rose to $521 million, up 12%, on the strength of its FedEx Express business. According to a company slide deck presentation, the unit now has more than 10,000 Ship and Get locations.
At UPS, the story is very similar. Its Grab and Go locker strategy helped third quarter sales surge 7%, to $15.98 billion. That was $360 million ahead of the Wall Street consensus estimate. Operating income rose 8.9%, to $2.035 billion. Apparently, focusing on depots and storefronts, at the expense of door-to-door delivery, is great for margins.
The trend is undeniable. Logistics businesses are pushing margins higher by methodically reducing the number of packages they deliver to residential doorsteps. The opportunity for investors is the shares of helper companies making this new fulfillment strategy possible.
For several years I have been pointing my members toward the shares of a software company that helps shippers schedule, track, route and meet regulatory compliance requirements. It’s not the type of work that gets a lot of public accolades.
Yet the behind-the-scenes grunt work of Descartes Systems Group (DSGX) has become incredibly profitable. Its clients — the likes of FedEx, UPS and others — are firmly entrenched in its ecosystem. It has been a great stock, rising 202% during the past five years. That is better than Alphabet (GOOGL) and Apple (AAPL). And it is much better than FedEx and UPS.
Another company I follow is more involved in the locker business. As the points-of-access economy evolves, the numbers of these very high-tech, networked lockers will grow. They will become ubiquitous, an important part of the new fulfillment ecosystem. Very few firms operate in this segment. Margins are high, and the business has greater barriers to entry than one might think.
For investors, you might say the opportunity in returns is high return.
Best wishes,
Jon Markman
