Season 5, Post 3: Sun Tzu was right
Ask most people about logistics and their eyes may glaze over. However, as the Chinese General, Sun Tzu, highlighted many years ago, “the line between disorder and order lies in logistics.” Think back to the start of 2020 when the COVID-19 pandemic began for a perfect case study in disorder – empty shelves in supermarkets and a run on toilet paper. Fast-forward to today and two conversations we had this week with significant players within the logistics space suggest that there is still much that needs to be done.
Begin with the toilet paper problem. Talk to the management team of Prologis (who reported quarterly earnings yesterday and hosted a subsequent conference call) and they will tell you that the market is “less than halfway to equilibrium in inventories.” Put another way, the shift from just-in-time supply chains to a just-in-case model where capacity is built in at every stage to deal with unforeseen events still has a long way to run. This is why, “customers need to commit to supply [of warehouse space],” especially since “little is available,” according to Prologis.
So, we need more warehouse space, particularly against a backdrop of “strong demand… and a continued lack of availability” (Prologis), but it is also becoming increasingly apparent to us that we need to use the space more intelligently. This was one of the main conclusions that became apparent to us from spending a morning with the management team of GXO, the largest pure-play contract logistics provider in the world. The business works with around 30 of the Fortune-100 businesses including Nike, Pepsi and Zara in order to help solve their complex supply chain problems.
We all know (as much as anything from personal experience – as your author can attest) that e-commerce is growing, at the expense of conventional physical retail. While convenient for the consumer, it introduces disorder for the retailer. Businesses need up to three times more warehouse when retailing e-commerce. Packets require more logistics than pallets and returns are higher. GXO highlights three market challenges: c40% of inventory ends up being discounted by retailers, c30% of e-commerce items are returned and c25% of returned items are sent to landfill. The solution: use a combination of advanced technological solutions to drive automation and reduce variable warehousing costs (as well as boosting net-promoter scores). The model works in other industries too. Have no doubt, logistics is becoming cooler.
19 January 2023
The above does not constitute investment advice and is the sole opinion of the author at the time of publication. Heptagon Capital is an investor in Prologis. The author of this piece has no personal direct investment in the business. Past performance is no guide to future performance and the value of investments and income from them can fall as well as rise.
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Alex Gunz, Fund Manager
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