The recent drop in demand for services has left many startups in fulfillment and logistics struggling to survive, says Aaron Alpeter, chief executive officer and founder of IZBA.

Alpeter worries that the next six months to a year will see “a fulfillment center apocalypse.” Massive growth in e-commerce and inventories in 2022 led many third-party logistics providers to buy up as much warehouse space as they could, often at elevated prices. And their multi-year leases assumed that inventory levels would remain high, in response to strong demand.

What happened instead was a dropoff in demand and consequent decline in inventory levels in the first half of 2023, along with a rise in inflation and interest rates.. As a result, those 3PLS that made big commitments to continued growth are now struggling to acquire funding. “The reality is that not all are going to survive,” Alpeter says.

Distribution and fulfillment are a low-margin business, he points out. All it takes is one or two big clients to pull back for the service provider to suddenly find itself unable to make its mortgage payments on an expensive warehouse. “People are trying to merge and shed assets,” Alpeter says, “but it’s certainly going to be a difficult time.”

Alpeter doesn’t believe that logistics technology will lose its allure among venture capitalists and other sources of funding, but startups are going to have to downscale their expectations and make more realistic pitches if they want to get the attention of investors. And distribution center operations will have to become much more selective about the clients they choose to take on.

New technology, especially artificial intelligence, offers fresh opportunities for innovations in the warehouse. But Alpeter says it’s too early to say if AI is going to take over the operation of distribution facilities entirely. More likely in the near future, he says, is the use of AI to augment existing human labor, rather than replace it outright.