Solving the last mile delivery puzzle

It’s not hard to argue that retailers with less than $10 billion a year in sales – the kinds of stores that populate malls and strip plazas – have been fighting for survival with one hand tied behind their backs.

Retail leaders like Amazon, Walmart and Target have set the bar when it comes to customer expectations, and they’ve set it pretty high. It’s not so much a matter of price, since in many categories, smaller retailers are price competitive. Rather, it’s on the logistics side of the equation. Small retailers don’t have the volume to get the discounts that the big guys get and can’t take advantage of transportation strategies because they don’t have scale. Yet, they still have to meet the delivery expectations set by the leaders. So, they pay what they have to pay and do their best to minimize the pain and protect their bottom lines.

That approach might have been manageable, or absorbable, pre-COVID, when e-commerce was still a relatively small – albeit growing - percentage of sales. Today, with e-commerce sales exploding, not so much. Slowly, the traditional retail model is becoming a wholesale model.
Think of it this way, says Brent Beabout: “Walmart moves more units in a day and a half than what American Eagle Outfitters moves in a year.

Here’s another stat: By some estimates, each year, Walmart adds shipping volume equivalent to about 20 AEO’s – that allows Walmart to gather more and more scale and data it can use to become more efficient, and to gain more leverage with its transportation partners. “The only way for retailers the size of AEO to win and stay viable is to band together in places where it doesn’t matter, and that’s the supply chain,” says Beabout. He calls this concept co-opetition.

So, who is Brent Beabout? He’s a long-time supply chain executive who previously ran the supply chain shows at Office Depot|Office Max and Nordstrom, not to mention Walmart’s e-commerce division. Today, he is the founder and president of AirTerra Inc. and the president of Quiet Logistics. Both of those companies are now owned by AEO and are the cornerstone of a vision for Supply Chain 4.0 that is built on a foundation of co-opetition. Supply Chain 4.0 is the brainchild of Shekar Natarajan, AEO’s supply chain leader.

You can read my conversation with Natarajan in SCMR by clicking here. AEO and Natarajan were also recipients of the 2021 Supply Chain Visionary Award at SCMR’s NextGen Supply Chain Conference last November for the Supply Chain 4.0 concept.

So, what is AirTerra? Beabout describes it as an asset-light transportation and logistics startup he founded after leaving Nordstrom back in 2020. It manages the first mile, last mile and all the miles in between for retailers – more on this in a moment.

Beabout says he first began thinking about the concept about a decade ago when he was at Office Depot. “When I joined the company, about 80% of our customer orders were on national carriers and 20% on regional carriers,” he says. “The regionals were undeveloped and under-utilized, so we worked on putting together a national network to service the company. By the time I left, we’d flipped those numbers.”

Beabout says that when he left Office Depot, he had the idea for a startup that could put together that same kind of network for a multitude of small retailers, aggregating their demand and gaining scale, but he didn’t think the market was ready. Coming out of Nordstrom about a decade later, “I thought the market was ripe.”

What changed? First, e-commerce had grown exponentially from a small percentage of a retailer’s sales to as much as 20%-to-30% for some. Second was that with constrained capacity and rising shipping costs: The big guys had deep pockets and scale, which minimized some of the impact; smaller retailers couldn’t afford it.

“The rich got richer, and the poor got poorer,” says Beabout. “Small retailers with one or two DCs don’t have the volume to take advantage of strategies like zone skipping or the operational and tech talent to make it work.” Boardrooms became fire fights as supply chain leaders were put on the spot, trying to explain why they had little to no control over rising logistics costs.

Beabout launched AirTerra just in time for COVID; the company went live during the summer of 2021. The idea was to provide a platform where smaller retailers could aggregate their demand and begin to gain those economies of scale that the big guys enjoy.

From the start, the idea was to be asset light and work with partners: Along with using 3PLs, the company has some dedicated trucks and leases buildings where it runs its own sort centers and then arranges the first mile, middle mile and the last mile. “We have multiple locations to inject parcels and aggregate demand for the carriers,” he says. For the retailers, “we’re a one-stop shop for shippers that don’t have people to manage their transportation, and it’s one invoice from us.” AirTerra also provides complete end-to-end track-and-trace of orders.

A “transportation platform play writ large,” AirTerra works like this. For starts, the relationship is kept simple: The contract is a few pages long versus more than 100 pages from some of the national carriers; there are few extras except for fuel. AirTerra connects to new customers via a rate shopping engine based on the product, distance and weight, or it can receive a flat file.

Customers provide their forecasts for planning. Deliveries are planned in real time via manifests, which gives AirTerra a good idea of what’s on a truck. Parcels from the customer base are injected into the network in one of three current sort centers located in LA, Columbus and Eastern Pennsylvania, with a fourth location coming online this summer in Atlanta and a fifth later in the year.

At these locations, parcels are sorted for USPS injection or those of other carriers. “Our goal with aggregation is to fill those trucks every night, wherever they’re going,” Beabout says.

While the target customer was initially 3PLs and retailers with less than $10 billion a year in revenue, the biggest surprise has been discussions with much larger brands. “Large retailers are also seeing the writing on the wall. They’re looking for carrier diversity, and we make diversification simple,” said Beabout. “Large retailers always have some straggler orders where inventory might be stuck on the wrong coast, and our rates are less expensive than most.”

How receptive are retailers to sharing space and transportation with other retailers who may be their competitors? After all, Pepsi would probably be reluctant to share space with Coke to fill out a full trailer going to Walmart, Target or Kroger. “If you’d asked me that question 5 years ago, I’d have given you the Coke-Pepsi example,” Beabout says. “Now, everyone is all ears.”

AEO was among its early customers, which acquired AirTerra in May 2021. More recently, Charles Griffith, an Amazon veteran, joined the company as chief technology officer.

AirTerra is one piece of the Supply Chain 4.0 puzzle that Natarajan is putting together at AEO. The other is the acquisition in December 2021 of Quiet Logistics. AEO was also a client of Quiet Logistics, utilizing the 3PL to expand the retailer’s geographic points of distribution. “AEO was able to move some of its fastest-moving SKUs into the Quiet network, carry less inventory overall and reduce its markdowns substantially,” says Beabout, who is running both of those businesses for AEO. “We want to offer the same concept to other customers.”

Quiet Logistics brought two complimentary elements to the table: The first was those additional distribution centers – essentially AEO bought distribution capacity rather than build it, giving the retailer a total of 10 buildings in 6 markets, including AEO’s legacy DC’s. There are plans to build that out. The second is that Quiet Logistic’s existing customer base now has access to the AirTerra network of carriers, but, even more importantly, provides more parcels, and more scale, to the AirTerra network. Remember, it’s all about aggregation.

Call it a sea change in thought and a reminder that necessity is the mother of invention, says Beabout. “E-commerce is going to continue to grow to the point that it will be 50% of sales for almost all retailers,” he says. “So, the days of big stores with lots of inventory is over. How retailers make transportation effective when 75% of their sales goes out of a DC and not a store will be the challenge for the next few years.”