The largest muscles in the human body are in the back. Yet, we work hard to put up an attractive front as an indicator of strength. Businesses are run similarly. The global market size of marketing tech is seven times that of logistics tech, despite the global market size of logistics being twice that of e-commerce. This gap is filling faster than meets the eye. Here's why.
The top five largest muscles of the human body are in the lower thigh, the back of the pelvis, the shoulder, the back upper arm and the hips. Yet, biceps, chests and six-pack abs dominates our muscle-building aspirations. Martech is now a $121.5 billion market worldwide servicing an approximately $5 trillion global e-commerce market. The logistics industry is so big that it is measured as a percentage of GDP. Global logistics is 12% of the GDP, or $9.6 trillion (estimated). Yet, logistics tech is a mere $17.4 billion market worldwide. That's a paltry 0.18% of investment in tech, and one-fourteenth of the 2.43% tech investment on the front-end.
When I was running the e-commerce business for a nationwide retail group, the top executives lived by the adage that retail is about product and price. If customers get the right merchandise at the right price, we win. They believed this differentiator applied across channels. Fulfillment needed to happen with a reasonable amount of quality and timeliness — and was not the differentiator. Technology investments in logistics were relatively lower with much of the supply chain operation managed manually. Technology investments included planning the fulfillment of products and services days ahead, the basic digitization of order completion and payments and the business analytics of cost and performance.
Jeff Bezos added convenience as the third foundational dimension, mentioning in his 1997 shareholder letter that they will make "sustained investment in systems and infrastructure to support outstanding customer convenience" in addition to selection and price. The 2008 letter to shareholders spelled out his belief that "in our retail business, we have strong conviction that customers value low prices, vast selection and fast, convenient delivery and that these needs will remain stable over time." Amazonian e-commerce had transformed retail supply chains from distribution to fulfillment. Fulfillment centers came with heavy technology investments to prepare warehouses and transportation to deliver single order shipments to end customers, instead of distributing big boxes from one warehouse to another — or from warehouses to stores.
Fast forward to the post-Covid-19 world order. On-demand commerce has come of age after a decade of technology-led innovation. On-demand fulfillment has disrupted e-commerce in much the same way as Amazonian e-commerce disrupted retail a decade earlier. On-demand commerce is defined by the convenience benefit to the extent that it commoditizes product and price. Fulfillment is now the primary proposition in commerce.
Retailers that own the customer relationship, inventory and logistics resources find themselves partnering with on-demand apps to fulfill their orders despite high margin hits and disintermediation risk. Smaller retailers who can ill-afford margin hits have moved to commission-free technology platforms that solve the front-end problems as an online point-of-sale system, yet leave you with on-demand logistics partners for last-mile fulfillment. Why do on-demand apps have such a massive competitive advantage in the market?
The answer is technology.
On-demand apps like Uber, Doordash and Instacart have invested billions in location and mapping technologies for real-time orchestration of fulfillment by flexible workers picking up geographically distributed inventory and fulfilling to an even more distributed set of customer locations. All of this happens with high predictability of order times and costs. Feedback loops into AI models ensure that every order makes the next one more predictable — and, therefore, more convenient at a lower cost. On top of the network effects of demand and supply, these businesses enjoy the data network effects of location intelligence.
Beyond on-demand commerce, we are now entering the world of instant commerce, delivering from micro-fulfillment centers (MFC) to doors in 10-15 minutes. Working backward from the customer, the supply chain for the middle mile and first mile segments are going through profound shifts as well. Instant commerce from MFCs requires replenishments the same day, even multiple times a day. Same-day fulfillment to MFCs followed by quick fulfillment to home requires real-time orchestration that old-world logistics tech is structurally inadequate to fulfill.
To compete in this new world order, businesses with core logistics must multiply their investments in logistics tech. As Jeff Lawson writes in his piece about the supply chain of software, "Every company is now a software company to some degree, and most companies can’t build everything from scratch ... software supply chain companies deliver reusable chunks of code that developers piece together to make finished applications. These are APIs." Logistics tech builders need better APIs that level the playing field to build on-demand logistics apps that feel like the future.
This technology infrastructure goes beyond what hyperscalers offer with horizontal cloud and maps platforms. On-demand logistics tech requires nuanced location, sensor, mapping, routing and optimization APIs. An increasing number of digitally transformed enterprise teams building their own solutions will find themselves leveraging such APIs to build logistics automations that are deeply integrated with their business systems. Businesses that choose to buy logistics tech solutions off-the-shelf or bespoke will depend on their technology vendors to build with such APIs. The supply chain of software for the supply chain of commerce is maturing.
My prediction is that logistics tech will become larger than marketing tech in this decade. As digital commerce comes of age, strengthening its largest muscles will be the key to good health, prosperity and the longevity of companies.