Reverse Logistics

HW&Co. Whitepaper

Summer 2016

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Investment banking services are provided by Harris Williams LLC, a registered broker-dealer and member of FINRA and SIPC,
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Harris Williams & Co. Reverse Logistics| Summer 2016

Reverse Logistics
Harris Williams & Co. Whitepaper
Summer 2016 Transportation & Logistics
Contacts
Frank Mountcastle| Managing Director
Our mission with this paper is to provide background on the fmountcastle@harriswilliams.com
eCommerce sector and various eCommerce logistics business models +1(804) 915-0124
and dive a bit deeper into the reverse logistics sector where the Jason Bass| Managing Director
landscape is evolving rapidly. jbass@harriswilliams.com
+1(804) 915-0132

CONTENTS Joe Conner | Managing Director

jconner@harriswilliams.com
+1(804) 915-0151
Abstract
Jeff Burkett | Director
jburkett@harriswilliams.com
Reverse Logistics Overview +1(804) 932-1334
Jershon Jones | Director
eCommerce Market Trends jjones@harriswilliams.com
+1(804) 932-1356
Logistics Industry Developing Service Providers
Jeff Kidd | Vice President
jkidd@harriswilliams.com
Fulfillment Service Providers +1(804) 915-0178
James OMalley | Vice President
Cross-Boarder Enablers jomalley@harriswilliams.com
+1(804) 915-0165
Last Mile Delivery
Technology, Media & Telecom
Reverse Logistics Contacts
Mike Wilkins | Managing Director
Competitive Landscape mwilkins@harriswilliams.com
+1(415) 217-3411
Camille Ashley | Vice President
cashley@harriswilliams.com
+1(415) 217-3436
Harris Williams & Co. Reverse Logistics| Summer 2016

Overview
Retail shopping has undergone a dramatic transformation in recent years. No longer must
customers travel to stores to rummage through racks of clothing, shelves and shelves of
items, or other physical product displays. They also need not ask a sales associate to check
in the back for the right size/color/quantity of good or wait in long register lines to buy
that new item. The age of eCommerce has continued to replace storefronts with
customized webpages, virtual racks with seemingly indefinitely deep search results, and
register lines with digital shopping carts, where the wheels never wobble. The growing
trend towards eCommerce has not only altered the shopping experience for customers, but
has also drastically changed the supply chain and logistics models. While most large
companies have figured out the forward logistics model, either internally or through the
use of third party logistic providers (3PLs), there remains a large frontier left to pioneer
that of reverse logistics. As consumers continue to flock to the web to make purchases
through their smartphones and tablets, the establishment of efficient reverse logistics
programs will be key to recapturing value that directly impacts the bottom line.

eCommerce Market Trends

The eCommerce industry has continued to evolve since 2000 as an increasing number of
consumers have shifted from shopping in retail locations to shopping from any number of
locations: the couch, the morning train, the grocery store check-out, anywhere they have
service. Industry participants recognize that a key driving factor behind eCommerces
continued growth has been the adoption of smartphones; as of January 2016, 79.1% of the
U.S. population owned smartphones.
Exhibit 1
U.S. Smartphone Penetration Rates
For the Years Ended December 31, 2008-2015

65% Increase
100%

75%

50%

25%

0%
2008 2009 2010 2011 2012 2013 2014 2015

As smartphone penetration rates have risen, mobile eCommerce has followed suit as
consumers are no longer limited to online shopping from a desktop. From 2000 through
2015, U.S. eCommerce sales increased from $27.4 billion to $340.8 billion, a CAGR of 18.3%.
In line with this, eCommerce as a percentage of total retail sales has steadily increased
from less than 1% in 2000 to over 7% in 2015, a shift that is clearly still in the early innings.

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Exhibit 2
Historic U.S. eCommerce Sales
For the Years Ended December 31, 2000-2015
($ in billions)

CAGR: 18%

7.3%
6.4%
5.8%
5.3%
4.8%
4.4%
4.0%
3.4% 3.6%
2.9%
2.5% $341
2.1% $297
1.7% $260
1.4% $229
0.9% 1.1% $199
$142 $145 $169
$113 $136
$57 $72 $91
$27 $34 $44

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

eCommerce Sales % eCommerce of Total Retail Sales

Looking forward, eCommerce is expected to continue growing at an annual growth rate of

7%-13% through 2018, outpacing brick-and-mortar sales growth by more than 2-to-1 and
global GDP by more than 4-to-1. One of the key growth drivers is the increasing ability of
consumers to purchase goods cross-border no longer do I need to wait for my aunt to
visit from Australia to get those authentic sheep slippers. Now, I can go to a companys
website or online marketplace and order cross-border products practically as easily as I
can domestic products. Cross-border transactions have seen the greatest increase in recent
years, with 82% of global shoppers making at least one purchase from a merchant abroad
in 2015. And while U.S. shoppers are excited about their authentic sheep slippers, the rest
of the world is enthralled by the opportunity to review the 63 different washes of Levis,
myriad of styles of Ray-Bans, and various sizes and colors of retro Nike sneakers.

Exhibit 3 Exhibit 4
Projected U.S. eCommerce Sales Retail Channel Growth Projections
For the Years Ending December 31, 2016-2018 For the Years Ending December 31, 2013-2018
($ in billions) $492 ($ in billions)
6.8x
$440 23.8%
$414
$393 $385
$355 5.4x 4.1x
3.7x 14.6% 14.3%
10.1% 1.7x
1.4x
3.9% 3.5% 5.8%
2.7%

2016 2017 2018 U.S. Global

eMarketer Projections Forester Research Projections GDP Retail Online Retail Cross-Border Online Retail (Export)

As eCommerce volumes and complexity continue to increase, the roles of forward and
reverse logistics providers will remain vital and industry players will continue to evolve
alongside the broader marketplace.

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Harris Williams & Co. Reverse Logistics| Summer 2016

Logistics Industry Developing Service Providers

There you are. Reviewing your shopping cart, ready to purchase your new running shoes.
Once you enter your promotional code for free shipping, you select complete transaction
and off your order goes. In 3-5 business days, your new shoes will arrive, just in time to
start training for that fall half-marathon. But what happens during those 3-5 business
days? How does that new pair of shoes make it from the factory to your front door? And
what if the shoes dont fit right? How do you return the shoes? Where do they go? What
happens to them? The answers to these questions are the thrust behind the evolution and
advancement of the 3PL eCommerce service offering. In the following sections, we
endeavor to provide a brief synopsis of four of the main eCommerce logistics offerings
fulfillment, cross-border enablers, last mile delivery, and reverse logistics.

Fulfillment Service Providers

As more customers (like you) continue to shift to online shopping, eCommerce companies
are required to receive, process, and ship products quicker than Usain Bolt in the 100
meters. No longer is a company restricted by physical storefront locations access to
customers is literally just a click away. But order fulfillment can be a challenging process
that a company who specializes in designing running shoes does not have the resources or
expertise to handle. In an eCommerce environment where 1-2 day shipping is becoming
the norm and mistakes often translate into lost customers, there is no time to putz about.
The retailer, or more likely its professional outsourced 3PL provider, must fulfill that order
that same day. It cant sit around in cyberspace. Enter the fulfillment service provider.
From receiving, order processing, and shipping to inventory storage and returns
processing, these 3PL providers make sure your size 10s are shipped quickly, and in a cost
effective manner.

Cross-Border Enablers
The global reach that eCommerce has provided to companies continues to alter the
competitive landscape and possibilities for growth, even for mid-sized and small
companies. However, shipping on a global basis is a whole different kettle of fish one
that even some of the largest eCommerce players are afraid to address. Cross-border
shipping providers offer the necessary solutions to ensure that that same pair of running
shoes can make it to someones front door in Brazil, Dubai, Hungary almost just as easily
as it can in the U.S. The biggest value proposition offered concerns clearing customs and
meeting regulatory requirements. These service providers ensure goods are properly
documented and meet the necessary cross-border requirements in an efficient and cost
effective manner. Further, some of the providers offer lower shipping costs to customers,
through package consolidation. For example, lets say you live in Australia, but you want
to order U.S. goods from multiple online retailers. Certain cross-border enablers will
consolidate your packages into one package, saving the end customer money from
utilizing bulk-shipping (it costs less to ship one large package than to ship three small
packages). Thanks to this burgeoning class of service providers, retailers and consumers
alike literally have an entire new world of opportunity.

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Harris Williams & Co. Reverse Logistics| Summer 2016

Last Mile Delivery

Its Wednesday morning. You pull up your shipping confirmation email, click on the
tracking number and see the magical words youve been waiting 36 hours to see: Out On
Truck For Delivery. Finally! You rush home, excited to play with your new iPad and
catch up on Game of Thrones during your flight this weekend. As you get to your front
door, you see the 3x2 notice that sends disappointment through your entire body: Sorry
we missed you! As you examine the note, you see that the delivery man will be back
between 1pm and 4pm tomorrow. How on earth are you supposed to be home at that
time [unlike your cooler, millennial friends] you have an employer that expects you to be
at a desk in an office during business hours. Sound familiar? This issue has faced online
shoppers and logistics companies for years and can represent up to 28% of the total cost to
move goods. For the logistics companies, even the big boys, inefficiencies still exist. Add
to this the Amazon Dilemma. Amazon Prime and Amazon Prime Now, services that offer
expedited delivery times as part of a subscription-based model, have compounded the
issue. As a result, customers are ordering more products online, more frequently. A
coworker of mine told me that he constantly comes home to multiple Amazon boxes
greeting him at his front door. While he doesnt have the inconvenience of the missed
delivery, the major carriers are often making multiple trips per day to a single house its
not their fault, there are so many packages shipping that they cant keep up. As a result,
new last mile delivery contracting companies are popping up as the industry tries to solve
this challenge. Up until now, building lasting efficiencies amid exploding volumes has
proven to be a real challenge.

Reverse Logistics
These dont fit you think to yourself as you try on the new pair of shoes. See I knew
there was a reason I was a late adopter to shopping online I really needed to try these on
before I bought them. Ah, but you remember what got you over that initial mountain of a
hurdle the free shipping and returns policy, which actually allowed you to order the
same pair of shoes, in two different sizes, and keep the ones that fit. You quickly print the
return shipping label, tape it to the same cardboard box that was just delivered (less one
pair of shoes), and head to the nearest shipping center. Maybe you even just leave it right
where the delivery agent left it hours earlier your front porch, with your doorman, at the
office. This scenario has become commonplace as free shipping and return policies have
often become a norm of good eCommerce customer service. While such policies can be
expensive, a survey by BizRate found that 89% of online shoppers cited the return policy as
a reason they would or would not buy from a company. With retail sales in the U.S. alone
totaling almost $4.7 trillion in 2015, and a median retail return rate of 8%, over $375 billion
of merchandise is returned on an annual basis.

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Harris Williams & Co. Reverse Logistics| Summer 2016

Exhibit 5
Retail Sales Return Rates
For the Year Ended December 31, 2015

Auto Parts Department Stores Housewares Home Improvement

21.0% 14.1% 12.3% 11.4%

Adult Apparel Childrens Apparel Footwear Sports

10.5% 9.9% 9.6% 9.3%

National Retail Federation Median: 8%

While 8% represents the median of returns on all retail sales, it is estimated that upwards
of 30% of goods purchased online are returned. The explosive growth in eCommerce has
forced companies to develop solutions to allow customers to return merchandise
efficiently. These solutions are helping define reverse logistics, which comprises the
supply chain from the customer back to the retailer or beyond.

Exhibit 6
Reverse Logistics Flow

As an item moves upstream (think salmon of the Capistrano), there are multiple points
where immense value can be won or lost. The first point is the situation described earlier,
when the customer decides to return the product. As referenced, a companys return
policy can have a substantial impact on attracting and retaining customers. If the customer
has to jump through hoops to send an item back, there is a high risk that a customer will
abandon that shopping cart as she reads the fine print regarding returns.

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Harris Williams & Co. Reverse Logistics| Summer 2016

Research shows that 85% of customers will not do business with a company if they cannot
receive credit back for a returned item. To combat this, companies are making the return
process as easy as possible, often including clearly labeled instructions and pre-paid
packaging slips in the shipment. While the company has to cover the potential return
shipping costs, there are direct benefits to this approach. Besides increasing customer
lifetime value, this approach allows the company to have better control over the first stage
of the returns process. For one, providing the return shipping labels ensures the package
is sent to the correct location having to track down a package that was sent to the wrong
location can be costly. Additionally, having uniform return labels allows for increased
efficiency in processing a return once the items reaches receiving.

In receiving, one of the most critical stages in the reverse logistics process, the package is
examined to identify the sender, what goods are included and in what condition, and if the
item matches the original purchase. While this may seem like a simple assembly line, it is
crucial to the process. Delays and mistakes can result in operational hassles, reduced
customer service, missing or lost products, etc. As the next step is issuing the customer a
return credit or exchange, missing items can make the process much more difficult and
expensive than is necessary the last thing a company wants is to upset a customer or
have to take a loss on an item because it walked away.

As soon as the item has been received and the return/exchange processed, the receiving
company has the opportunity to extract value from the item. Before the items ultimate
destination (e.g., back on the shelf, to a consignment shop, to the dumpster) and value can
be determined, the item must be inspected, triaged if you will. This task has one goal to
drive the greatest value possible. To do so, it is imperative that the inspection team is
highly trained with expansive product knowledge so that the right decisions can be made
regarding how to process the item. This step can be very manual, and outsourcing the
function to a skilled third party service provider is now a viable option. The last stop on
the reverse logistics train is asset recovery. Depending on the results of the inspection, an
item can be restocked, returned to the supplier, repackaged for sale, sold to a liquidator or
scrapped. The amount of value extracted obviously varies significantly depending on the
result, but leading providers ensure that a product can be resold at its highest and best use
and price whenever possible, gaining value for their retail clients.

Value doesnt stop with the product itself. In todays age of big data analysis, companies
have begun unlocking additional value by using customer returns to identify trends and
predict future customer behavior. A key example is a mens fashion company that
analyzes customer returns to predict which items will be ordered in the future. The key is
that not only does this analysis apply to the specific customer, but to other customers that
have a similar buyer profile. The result is more targeted marketing and reducing the
likelihood of future returns. So not only is the physical good processing important, but the
supporting consumer behavior is wildly valuable to retailers.

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Harris Williams & Co. Reverse Logistics| Summer 2016

Competitive Landscape
The complexity of the supply chain has continued to mushroom over the last 15 years. No
longer does the supply chain stop at the customers front door. With the rise of
eCommerce, the supply chain now more than ever before involves a U-turn. The
competitive landscape is just as dynamic as a customers fast fashion sense these days.
And while plenty of 3PL players (see Exhibit 7) are involved, some have had difficulty
effectively handling the additional burdens that accompany reverse logistics. As a result,
no 800-lb gorillas exist (yet) and there continues to be ample room for small, nimble, savvy
players to enter the market and deliver immense value.

Exhibit 7
Various Reverse Logistics Providers

Representative
Market Service Offering End Markets Size Commentary
Participants

Product lifecycle & Acquired in 2015 to expand FedExs

reverse logistics Retail, Tech Large supply chain offerings in
solutions retail/eCommerce

Aerospace & Defense,

Recently announced increased focus on
Forward & reverse Auto, Government,
Large providing services to support clinical
logistics solutions Healthcare, Retail,
trials
Tech

Launched Reverse Logistics Maturity

Forward & reverse Auto, Healthcare,
Large Model (RLMM) to help companies
logistics solutions Retail, Tech
manage circular economy

Product lifecycle & Currently working through acquisition

reverse logistics Retail, Tech Large by HNA Ingram will remain a U.S.
solutions based company

Product lifecycle & Ranked #1 by shippers for on-time

reverse logistics Retail, Tech Medium pickup/delivery among national less-
solutions than-load delivery providers

eCommerce Tacit Knowledge (subsidiary) released

software and Retail Medium ncommerce, an end-to-end eCommerce
technology services platform for mid-sized retailers

Logistics & Added 3,200+ jobs to its Louisville

eCommerce Retail Medium fulfillment center to meet increased
technology services demand

Product lifecycle &

Named Roy Simrell as President and
reverse logistics Healthcare, Retail Small
Chief Client Officer in March 2016
solutions

Forward & reverse Aerospace & Defense, Named Chris Davis (XPO Logistics) as
Small
logistics solutions Retail New Business Director in June 2016

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Harris Williams & Co. Reverse Logistics| Summer 2016

New market entrants are utilizing technology and specialization to attack supply chain
pain points that the traditional 3PL providers have yet to tackle. As these specialized,
niche providers continue to rely on the larger 3PL providers for certain aspects of the
process (the forward logistics and transportation), its only natural that the larger players
will continue to evaluate in-housing certain, if not many, of these niche services.

Exhibit 8
M&A Activity in the Broader eCommerce Logistics Sector

Date Target Acquirer

Fulfillment Service Providers November 2015

November 2015

November 2014

January 2014

Cross-Border Enablers June 2015

December 2014

October 2014

Last Mile Delivery July 2015

January 2015

May 2013

Reverse Logistics January 2015

January 2014

December 2013

Rest assured, however, as quickly as eCommerce continues to evolve, it creates a myriad of

new opportunities for logistics platforms. Its very early in the race and only one thing is
for sure the landscape (the finish line) will undoubtedly look a lot different 10, 5, even 3
years from now. If you want to keep up in this industry, you might as well put on those
new running shoes.

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Harris Williams & Co. Reverse Logistics| Summer 2016

SOURCES

BizRate.com InternetRetailer.com

comScore January 2016 Report National Retail Federation 2015 Return Fraud Survey

Deloitte Hidden Value in Reverse Logistics Nielson

eMarketer U.S. Census Bureau

Forrester UPS Company Reports

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Harris Williams & Co. (www.harriswilliams.com) is a preeminent middle market investment bank focused on the advisory
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Investment banking services are provided by Harris Williams LLC, a registered broker-dealer and member of FINRA and
SIPC, and Harris Williams & Co. Ltd, which is authorised and regulated by the Financial Conduct Authority. Harris
Williams & Co. is a trade name under which Harris Williams LLC and Harris Williams & Co. Ltd conduct business.

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