Capnamic

Global consumption and especially the rise of eCommerce (800% growth since 2010) have brought international supply chains to the verge of collapsing. Especially Europe and the US have gone through a phase of constant and substantial increase in consumption over the past 15 years.

Retailers have seen both their supply chains and all areas of their operations being challenged by extreme demand growth (>200% since 2010). As a subsequence, retailers have increased order volumes rapidly and product portfolios were diversified quicker. Both motions also put pressure on warehouse partners and their operations as they need predictability to maximize utilization of their space and might be unable to cope with diversifying product portfolios (extreme example would be the addition of goods that need cooling).

Recent developments represent a setback, and growth has been sluggish over the past 18 months. However, overall numbers are not (yet) indicating a structural crisis but rather show that retail (and primarily eCommerce) has fallen back to pre-covid levels maybe rather indicating a “back to normal” after the spike during the pandemic.

Nevertheless, both the spike up and the setback down increase the challenge that retailers and warehouse operators face in their cooperation. Classical means to solve the problem of unpredictability will include more complex SLAs that give the retailers access to more capacity if they pay an ongoing higher fee – comparable to a commitment fee of a bank. It is less profitable for the warehouse than operating at full capacity and more expensive for the retailer then just paying for what they need.

In a world where capital efficiency and gross margin have played a more important role than ever in the past decade, this system no longer works – which is neither the fault of the warehouse operator nor the retailer. Compared to the tech world, an AWS-like system would be required but is difficult to obtain in a 1:1 relationship between retailer and warehouse.

What do I mean by an AWS-like system, and why is it impossible to achieve a 1:1 relationship?

In hosting, website/shop owners and software providers benefit from “load balancing.” I can subscribe to a framework contract with a hosting company that defines costs and the server capacity that will be provided with a broader corridor that I can access. Yet, companies are not required to pay for loads that they don’t need but at the same time can increase capacity when needed – all automatically adjusted by the hosting company, without any operational disturbance to website/shop owner or the software provider.

In the warehousing reality, one needs to adjust this concept because load balancing between one retailer and one warehouse will not work. The general principle is only effective because now that one player needs less, another player needs more, which naturally can only happen if, on the retailer side, there is more than one partner for the warehouse.

However on the warehouse side, the logic breaks with having only a single player. The problem is twofold. First, the requirements of retailers are too complex. Second, the warehousing market is fragmented with many small to medium players that can only “scale” with a partner to a certain degree. Thus, maximum efficiency can only be achieved if, on both sides of the equation, there is a critical number of high[1]quality operators. Quality is the crucial word here to create trust in the system.

The potential role of tech start-ups

Every player in this market has a specific set of capabilities that makes it unique and brings value. For the retailer, it is customer interaction and portfolio composition; for the warehouse operator, it is end-to-end warehouse operations. Neither party has the capacity or resources to structure more creative SLAs or alleviate the inefficiency coming from the other party’s needs.

In my view, a successful start-up does not try to be better in core processes of an industry that people have been in for a very long time. I don’t believe that the learnings of decades that yielded certain process optimizations and understandings of edge cases can be overcompensated by a better technological setup, leaner infrastructure, and high energy. For me, the task of a successful start-up is to find the missing piece in a value chain and add that piece to create win-win dynamics.

" Every player in this market has a specific set of capabilities that makes it unique and brings value. For the retailer it is customer interaction and portfolio composition, for the warehouse operator it is end-to-end warehouse operations "

Bearing that in mind, in my role as tech investor, I think the warehousing market offers great start-up potential if someone can overcome the inefficiency in the market caused by its highly volatile dynamics. For those reasons, we at Capnamic have been on board with Munich-based Logistics[1]as-a-Service provider overstock since the very early days.

To be successful and bring mutual benefit to the market, a successful company must honor the following:

1. Existing warehousing companies are best equipped to do warehousing

2. A relationship net has to have n:n ties to achieve efficient load balancing

3. Both retail and warehouse partners must be diligently vetted in order to create an environment of trust for everyone involved

4. A unified technology layer is required to enable all parties to seamlessly collaborate together whenever a new retailer or warehouse operator comes into play

If both are honored, I am expecting three things to happen:

1. Higher predictability of operating at high warehouse utilization will yield a willingness to pay on the warehouse operator side

2. The ability to quickly and comparably easy up- and downscale warehousing capacity will yield a willingness to pay on the retailer side.

3. Seamless technology replacing manual collaboration will lead to operational efficiency and yield a willingness to pay on both sides.

Not only is this the win-win dynamic that I am looking for, but at the same time, a company of that character has everything to become an outlier in a VC portfolio.