SCB: For anybody who might not be entirely familiar with Flexe, what does the company do?
Glick: Flexe is a marketplace that matches shippers with 3PLs who have extra space, and we like to think of ourselves as on-demand warehousing. So, if you have a big holiday peak, we're happy to stand you up in a building, and you can ship from Black Friday to Christmas, or if you're shipping water and you need to store pallets in March and April before the big June shipping, we can help you with that, too.
SCB: The three pillars of the retail world are price, selection, and convenience, and clearly in the online world, that boils down to fast or faster shipping. Walk us through that.
Glick: When I was growing up, I would watch TV ads for K-Tel Records and they would say they ship in four to six weeks, with $6.99 shipping and handling. Fast forward to 1999, and you could ship within two days, but it may take a week or two to show up, and that costs you $6.99. In 2004, Amazon released Prime shipping, and you could get two-day shipping for free, and now it's one day or even one or two hours. So, that's the genesis of it. And we see that cart abandonment is high when you don't have fast and free shipping. So, everyone is trying to chase Amazon in two-day shipping, and they made it even harder this year by going to one-day shipping.
SCB: What would you say is the greatest competitive threat to the retail industry today?
Glick: As the world goes online — and it's still just the beginning as only10 percent of transactions are online — but as that increases, people have to compete on price, selection, and fast shipping. And so, as you think about how I do that, you know there are several ways. One is what Amazon did — they spent tens of billions of dollars putting inventory close to you in warehouses that they built themselves. And it's important that you put inventory close to customers or you're going to be paying UPS to fly your inventory all over the country. So, you can do what Amazon did and spend tens of billions. No one's ever going to do that again.
The second way is to find a 3PL or a set of 3PLs who can find you buildings that are close to your customers. And in order to do two-day shipping, you need three to five nodes. In order to do one-day shipping, you need 10 to 12 nodes. So, you have to go out and find 3PLs, and some may be strong in the Northeast, and some in the LA area. And you may have to do integrations with two, three, four 3PLs, and they'll charge you a fee. You may have a WMS license fee for each building, and it may take you six months to get started up. So, you're looking at $3 million potentially, plus six to nine months to start up your project.
The third way is to use a new family of companies called on-demand warehousing. These companies have relationships already with many of the major 3PLs. They're likely to have buildings close to any customers that you have, especially in the Northeast, Midwest, and LA, or anywhere else you need them. So, Amazon has 150 buildings. Walmart has 30 or 40 fulfillment centers. Target has half that. Flexe and others have 1,500 buildings, which allow you to put things close to the customer.
SCB: Clearly, you're talking about physical infrastructure that's already there, and you're talking about relationships that these on-demand facilities already have in place. Well, let's talk about how a retailer might go about building a two-day network.
Glick: The most important thing about having two-day shipping is to make sure you have inventory close to the customer. It turns out that in order to do that with UPS or FedEx or other parcel carriers, you're going to have to put buildings in three to five places, and those are generally something in the Newark area, somewhere in the Midwest, LA, Reno, and Texas. So, you can go out and find several different 3PLs who have buildings in that area and do an RFP. You will have to do an integration via EDI or API, and you'll have to pay a warehouse management system license fee. And so again, there's a lot of upfront expenses before your project even gets rolling.
With an on-demand warehousing provider, there is no EDI integration fee. You have one integration and then you have access to all of these 1,500 nodes. There is no warehouse management system fee, and there's no upfront capital, so you pay as you go. And we think of it as the AWS for warehousing.
SCB: Are you necessarily sharing space with other tenants?
Glick: Yeah, you might be sharing space with other tenants. Say you have a half-a-million square-foot building and they have an anchor tenant with 300,000 square feet, and another tenant that has 150,000. You may take the 50,000 that's in the corner, and you can use that just as well as any of the other tenants in that building.
SCB: The argument is that what goes in your favor is that there is an existing facility that has all of the things that you need, and you’re only paying for that space that you require, as opposed to the entire facility.
Glick: Exactly right. For the warehouse, that space is sitting fallow, and it's got zero revenue coming in, and the fixed cost is already built, the concrete is already poured, and the rack is already in. For them, any revenue that they get is better than zero, so they can offer you a competitive rate on the variable costs with no fixed costs to start.
Our model is that there are no upfront fixed costs, and so you often don't know where you want to put things, and how long you're going to have them, and you don't know what your forecast is. And so, with on-demand warehousing, we offer structural flexibility. It allows you to try out warehouses here, here and here. And if you find it works, you can add five, six, eight, 10. If it doesn't, you can shut these down and start over again. Or you can just walk away.
Traditionally, in warehousing you have to have a five-year lease or more. With this, you have no upfront cost, no long-term contract, and you pay as you go for inbound storage and outbound.
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