Where's My Delivery?

Please refer to important disclosures on pages 27 and 28. Analyst certication is on page 27.

William Blair or an aliate does and seeks to do business with companies covered in its research reports. As a

result, investors should be aware that the rm may have a conict of interest that could aect the objectivity of this

report. This report is not intended to provide personal investment advice. The opinions and recommendations here-

in do not take into account individual client circumstances, objectives, or needs and are not intended as recommen-

dations of particular securities, nancial instruments, or strategies to particular clients. The recipient of this report

must make its own independent decisions regarding any securities or nancial instruments mentioned herein.

Where’s My Delivery?

Investment in Fulfillment Technologies

on the Rise as Consumers Demand

Quicker Deliveries

Equity Research

Technology, Media, Communications

September 25, 2019

Industry Report

Matthew Pfau, CFA +1 312 364 8694

mpfau@williamblair.com

Ryan Merkel, CFA +1 312 364 8603

rmerkel@williamblair.com

Dylan Carden +1 312 801 7857

dcarden@williamblair.com

David Robinson, CPA +1 312 364 8087

drobinson@williamblair.com

Paul Dircks, CFA +1 212 237 2749

pdircks@williamblair.com

2 Matthew Pfau, CFA +1 312 364 8694

William Blair

Contents

Summary ............................................................................................................................3

The Problem ......................................................................................................................6

The Solution .....................................................................................................................12

On-Demand Warehousing ..........................................................................................13

Tech-Enabled Fulfillment Networks ...........................................................................16

Brick-and-Mortar Stores as Fulfillment Centers ........................................................ 20

Curbside Pickup .........................................................................................................24

Last-Mile Fulfillment Technologies ............................................................................ 24

Warehouse Automation Technologies .......................................................................25

Other Interesting Fulfillment Technologies ............................................................... 25

3 Matthew Pfau, CFA +1 312 364 8694

William Blair

Summary



to continue to do so; over the past 10 years, U.S. e-commerce sales have grown at a compound an-

nual rate of 14%, while total retail sales have increased at 3%. And according to a recent report





growth has been the increasing availability and ease of use of cloud e-commerce solutions, which

-

ing of consumer companies, many of which are e-commerce and/or direct-to-consumer models.

Source: Pitchbook

Exhibit 1

Private Capital Funding of Consumer Companies ($ in millions)

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Apparel and Accessories Consumer Durables Consumer Non-Durables Retail All

Source: Pitchbook

Exhibit 2

Number of Private E-commerce Companies Receiving Funding

-

100

200

300

400

500

600

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Apparel and Accessories Consumer Durables Consumer Non-Durables Retail All

Although the number, ease of use, and availability of e-commerce solutions have greatly increased







push the envelope through its April announcement of one-day shipping as the standard for Prime

members and its Prime Now same-day delivery. The issue for other retailers, brands, and e-commerce





4 Matthew Pfau, CFA +1 312 364 8694

William Blair



-



Sources: Company websites

Exhibit 3

Timeline of E-commerce Software and Fulfillment Start-up Creation

Fulfillment CompaniesE-commerce Software Companies

1999 2004 2008 2009

2011 2013 2014 2015 2019









warehouses from GLP. Public companies have also been investing in this area. In June, Shopify an-



effective fast shipping. This was done in large part to offer an alternative to Amazon’s proprietary



-

ties to ensure quality and speed in furniture delivery, an industry beset by longer delivery times and



Sources: Company websites

Exhibit 4

Fulfillment and Last-Mile Companies

Last Mile

Providers

On-Demand

Warehousing

Tech-Enabled

Fulfillment

Last Mile

Technology

Store Fulfillment

and In-Store Experience

Fulfillment

and Last Mile

Companies

5 Matthew Pfau, CFA +1 312 364 8694

William Blair

*Purchase Price Undisclosed

Sources: Company websites, Wall Street Journal, BizJournals.com

Exhibit 5

Major Warehouse Transactions by Investment Funds ($ in millions)

$1,400

$1,800

$500

$8,000

$300

*

$179

$170

$18,700

$3,990

Announcement

Dat e:

December

2016

December

2017

November

2017

April

2018

September

2018

October

2018

Feburar y

2019

April

2019

June

2019

J ul y

2019

Square Footage

Acquired (M):

12 22 4 21 4.5 1.33 3.5 1.4 179 37.5







that these technologies will be a key area of investment for e-commerce retailers and brands over



consumer. Further, given that e-commerce sales were $528 billion in 2018 (growing at a 14% com-





technologies has the potential to be quite large.

In our coverage of public technology companies, we believe that Shopify and Manhattan Associates

  

aid the company in increasing merchants’ sales and reducing churn. We believe that Manhattan



return-to-store solutions for large retailers, and that this will be a key investment area over the



6 Matthew Pfau, CFA +1 312 364 8694

William Blair

Sources: Company filings

Fulfillment Costs as a % of GMV

Exhibit 6

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2016 2017 2018

AMZN CHWY RVLV

The Problem

In February 2005, Amazon introduced Amazon Prime and free two-day shipping for all Prime mem-



fee) was materially faster than the standard shipping options (typically between 5 and 10 business

days) offered by other retailers—further, these standard shipping options most often incurred a fee,



-

ping fees. And the envelope continues to get pushed further. This April, Amazon revealed it would

provide free one-day shipping to Prime members (down from two days). Amazon had previously





In the same month, Target started offering same-day delivery for 65,000 of its products for $9.99

per order or $99 per year. Still, for a large number of retailers and brands, the standard shipping



7 Matthew Pfau, CFA +1 312 364 8694

William Blair

Standard

Shipping Options

Expedited Shipping Options Free Shipping Requirements

Standard

Shipping Options

Expedited Shipping Options Free Shipping Requirements

Free, 5-8 business

days

N/A

Free Standard Shipping for Orders

Over $25

Free 1-2 Day Shipping with Prime

Membership

Free, 3-6 business

days

- $12, 2 business days

- $20, next business day

- $35 Saturday delivery

- $15 same day if in stock locally

All Orders with Standard Shipping

$5.99, 3-6

business days

- $17.99, 2-3 business days

- $21.99, 1-2 business days

- $9.99. same day

- Prices vary for orders over $100

Free Standard Shipping for Orders

Over $39

$4.95, 1-2

business days

shipped

- Costs calculated at checkout

based on item and size

Free Standard Shipping for Orders

Over $45

$5.49, time varies

by order

$5.99, same day Free Pickup

$5.99, 3-5

business days

- Free, 2 business days, for $35+

orders

- $15.99, next business day

Free Standard and Two-Day Shipping

for Orders Over $35 or REDcard

Holders

Expedited Shipping Available for Shipt

Members

$4.95, 1-2

business days

NA

Free Standard Shipping for Orders

Over $49

$5.99, 3-5

business days

- Free, 2 business days

Free Next Day or Two Day Shipping on

Orders over $35

Free Standard Shipping on Qualified

Items

$6, 5-7 business

days

- $12, 3-4 business days

- $19, 2-3 business days

NA

$4.99, 1-7

business days

NA

Free Standard Shipping for Orders

over $49

$7, 3-6 business

days

- $9.99, 3-5 business days

- $22.99, 3 business days

- $32.99, 2 business days

Free Standard Shipping for Orders

Over $30

Free, 5-10

business days

*Calculated at Checkout

- 3-5 business days

- 2 business days

- 1 business day

Free Standard Shipping on Select

Items and for Orders over $45

$8.95, 3-5

business days

- $4.95 - $9.95, 3 business days

- $15 - $25, 2 business days

- $25 - $35, next day

Free Standard Shipping for Orders

Over $99

$3.99, 5-7

business days

- $5.99 3-5 business days

- $14.99, 2-3 business days

- $24.99, 1-2 business days

Free Standard Shipping for Orders

over $40

$8.95, 3-6

business days

- $9.95 - $19.95, 2 business days

- $14.95 - $29.95, next business

day

- $9.95 - $14.95, same day

Free Standard Shipping for Orders

Over $50

$5, 3-7 business

days

- $7, 3-4 business days

- $17, 2-3 business days

- $22, 1-2 business days

Free Standard Shipping for Orders

over $75

$10.95, 3-6

business days

- $12 - 22.95, 2-3 business days

- $22 - $32.95, 1-2 business days

Free Standard Shipping for Orders

Over $75

$4.95, 2-4

business days

- $9.95, 1-2 business days

Free Standard Shipping for Orders

over $50

Sources: Company websites

Exhibit 7

Shipping Terms Among Retailers

8 Matthew Pfau, CFA +1 312 364 8694

William Blair

Standard

Shipping Options

Expedited Shipping Options Free Shipping Requirements

Standard

Shipping Options

Expedited Shipping Options Free Shipping Requirements

Free, 5-7 business

days

- 2 business days: $10

- 1 business day: $20

All Orders with Standard Shipping

Free, 3-7 business

days

- $15, 2-3 business days

- $25, 1-2 business days

All Orders with Standard Shipping

$3.95-$6.95, 5-10

business days

- $2-$8.95, 4-7 business days

- $15-$18.95, 3-4 business days

Free Standard Shipping for Orders

over $50

$7.50, 5-7

business days

- $11.19, same-day

- $16.53, 1 business day

*Calculated at Checkout

NA

$6.95, 3-5

business days

NA NA

$8, 2-4 business

days

- $15, 2 business days

- $25, next business day

Free Standard Shipping for NikePlus

Members and Orders Over $150

Discounted Expedited Shipping for

NikePlus Members

$3.95, 4-7

business days

- $8, 3-5 business days

- $25, 2 business days

- Prices vary for overnight

Free Standard Shipping for Orders

Over $50

Free, 3-6 business

days

- $12, 2 business days All Orders with Standard Shipping

$9.95, 3-6

business days

- $24, 2 business days

- $35, next business day

NA

$8.50-$13.95, 7

business days

- $15 + Standard Charge, 2

business days

- $20 + Standard Charge, 1

business day

- $35 + Standard Charge, Saturday

delivery

Free Standard Shipping for Orders

over $75

Free, 4-6 business

days

- $40, 2-3 business days All Orders with Standard Shipping

$6, 5-7 business

days

- $8, 2 business days (ordered by 3

PM ET)

- $20, 2 business days

- $25, next business day

- $35, Saturday delivery

Free 2 Business Day Shipping on

Orders over $150

Free, 1-2 business

days

NA All Orders with Standard Shipping

$7, 6-10 business

days

- $20, 3-6 business days

Free Standard Shipping for Orders

over $75

$7, 3 business

days

- $20, 2 business days

- $25, next business day

Free Standard Shipping for Orders

Over $35

$10, 10-15

business days

NA NA

$6, 5-7 business

days

- $12, 3-4 business days

- $19, 2-3 business days

NA

Free, 4-5 business

days

- $30, next business day All Orders with Standard Shipping

$5, 3-6 business

days

- $15, 2-3 business days

- $25, next business day

- $35, Saturday delivery

Free Shipping on Qualifying J.Crew

Rewards members orders

Free, 5-8 business

days

- $8, 2-4 business days

- $20, 2 business days

- $25, next business day

All Orders with Standard Shipping

Free, 3-7 business

days

N/A All Orders with Standard Shipping

$8.50-$12, 2-7

business days

- $18.50 - $24, 2 business days

- $26.50 - $32, 1 business day

Free Standard Shipping for Orders

over $125

Sources: Company websites

Exhibit 8

Shipping Terms Among Brands

9 Matthew Pfau, CFA +1 312 364 8694

William Blair



massive amount of infrastructure. In the 14 years since the introduction of Amazon Prime, Amazon



-

ment centers). Amazon has also invested in proprietary logistics and transportation capabilities to

reduce its reliance on third-party carriers. According to a company press release in June, Amazon



Amazon also has over 10,000 dedicated trucking trailers to manage truckload transportation, and



   



distribution centers compared with other retailers and e-commerce companies. It should also be

noted that the totals for some brick-and-mortar retailers include distribution centers geared toward







distinction becomes less relevant, in our view.

ouses

*Includes fulfillment centers, airport hubs, cross docks, sortation centers, delivery stations, and Prime Now hubs

Sources: Company filings, William Blair estimates

Exhibit 9

Total U.S. Distribution and Fulfillment Centers

0

50

100

150

200

250

300

350







-

tions, such as Amazon Web Services (AWS), and international investments; however, even after

adjusting for these items, we still believe the company is outspending its competitors.

10 Matthew Pfau, CFA +1 312 364 8694

William Blair

Source: Company Filings

*Only includes estimated U.S. capex excluding AWS

Sources: Company filings, William Blair estimates

Capital Expenditure by Online Retailers

Exhibit 10

Amazon* Walmart.com Chewy.com Wayfair StitchFix Revolve Etsy

2016

$2,948 $4,162 $24 $97 $15 $3 $36

2017

$5,299 $4,521 $40 $100 $17 $2 $4

2018

$5,757 $5,218 $44 $159 $17 $3 $1

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

CAPEX Spend In Millions







completed over a long distance. It is much more cost effective to ship a product as far as possible as

part of a truckload shipment, and then use parcel shipping to move the product within a relatively

close radius. This is primarily because guaranteed delivery date rates increase when going outside











is largely dependent on average order value. Consider that a $3 three pack of Chapstick will cost the

same to ship as an $88 three pack of Tom Ford lipstick. This is why many retailers have had dollar

thresholds for free shipping, or have adjusted the online offering to account for shipping costs (a









11 Matthew Pfau, CFA +1 312 364 8694

William Blair

Sources: UPS, FedEx

Shipping Costs by Zone Example

Exhibit 11

Zone 7: $39

Zone 5: $32

Zone 4: $32

Zone 1: $25

MSRP $150 $150 $150

Gross Profit $30 $45 $60

Gross Profit Margin 20% 30% 40%

Zone 1

Standard Shipping $9 $9 $9

% of Gross Profit 30% 20% 15%

2-Day Shipping $25 $25 $25

% of Gross Profit 84% 56% 42%

Zone 4

Standard Shipping $11 $11 $11

% of Gross Profit 35% 23% 18%

2-Day Shipping $32 $32 $32

% of Gross Profit 106% 71% 53%

Zone 7

Standard Shipping $12 $12 $12

% of Gross Profit 38% 26% 19%

2-Day Shipping $39 $39 $39

% of Gross Profit 129% 86% 64%

Sources: UPS, FedEx, Biz Journals Portland, Nike

Exhibit 12

Impact on Profits From Shipping Costs

12 Matthew Pfau, CFA +1 312 364 8694

William Blair





-







typically be delivered in two business days.

Shipping Time 50% of U.S. Pop. 70% of U.S. Pop. 90% of U.S. Pop. 98% of U.S. Pop.

3-day 1 1 1 1

2-day 1 2 4 8

1-day 5 8 11 16

Sources: Flexe, Shippo, William Blair estimates

Potential Fulfillment Centers Needed by Shipping Time

Exhibit 13

The Solution







from 200,000 to 1,500,000 square feet and that the average annual lease cost is $7 per square foot,

it would cost a business roughly $22 million to $170 million per year just in leasing costs for 16

-

tiples of this. According to a survey by Logistics Management, warehouse square footage averaged

220,800 in 2018 and number of employees was 182 (or 0.82 per 1,000 square feet). And according

to Energy Star, a warehouse typically has 0.59 workers per 1,000 square feet. These estimates are



employees (or 5 per 1,000 square feet), which are supplemented by 5,200 robots. Considering that

the median hourly wage for warehouse workers was $18.58 in 2018, labor costs would likely be in



Square Footage: 200,000 1,500,000

Lease Cost Per Square Foot $7.00 $7.00

Annual Lease Cost Per Fulfillment Center $1,400,000 $10,500,000

Annual Lease Cost for 16 Fulfillment Centers $22,400,000 $168,000,000

Employees Per 1,000 Square Feet 1.0 1.0

Average Hourly Wage $19 $19

Average Hours Per Week 25 25

Annual Labor Costs Per Fulfillment Center* $4,830,800 $36,231,000

Annual Labor Cost for 16 Fulfillment Centers* $77,292,800 $579,696,000

*Does not include benefit costs, which could add another 20% plus

Annual Fulfillment Center Operating Costs

Exhibit 14

Sources: CBRE, Bureau of Labor Statistics, Logistics Management, Energy Star, The Boyd Company, William Blair

13 Matthew Pfau, CFA +1 312 364 8694

William Blair

-





centers can be cumbersome considering that many 3PLs do not have technology platforms to seam-

lessly integrate and manage inventory across multiple warehouse operators. Further compounding



where to store inventory or how much inventory to store.

We believe three key technologies that merchants can leverage to compete better are on-demand



physical store base). In the following sections, we highlight each of these areas and list some ad-



On-Demand Warehousing

On-demand warehousing, a relatively new concept, essentially gives merchants the ability to scale

up and scale down their distribution operations, much like AWS does for compute power. This model

is particularly good for businesses with some uncertainty, whether that be seasonal, high growth, or







How it works? On-demand warehousing leverages a marketplace model, where warehouse operators



The contracts can be short- or long-term, and many of the on-demand warehouse marketplaces

provide assistance in matching the right warehouse provider with the right businesses based on

various requirements. Further, many on-demand warehouse platforms provide software that in-

tegrates with other supply chain systems (e.g., warehouse management, order management, and

inventory management) to help manage inventory, orders, shipments, and billing. This software is

used by both the warehouse operator and the consumer of warehouse capacity.











of how companies are using on-demand warehousing.

14 Matthew Pfau, CFA +1 312 364 8694

William Blair

Company Founded Funding ($ in millions) Logistics Partners

2013 $64.00 1,000-plus

2017 $15.50 Hundreds

2015 $15 248

2017 ND ND

Sources: Crunchbase, company websites

Exhibit 15

On-Demand Warehouse Providers

Use-Case Customer Examples and Possible Use-Cases

Seasonal Demand

Walmart used Flexe to supplement peak seasonal demand for 90 to 120 days, primarily for e-commerce.

Because the warehousing was needed for only a short period and across three different U.S. regions,

Flexe was chosen because it could quickly identify facilities to do the work for the company in accordance

with Walmart's performance expectations.

Contract Flexibility

According to Datex, a supply chain software provider, average warehouse leases last five years. As a

result, warehouse space is fixed for the duration of the lease. On-demand warehousing allows retailers to

increase or decrease their necessary space based on near-term forecasts and treat storage costs as

variable.

Network Expansion

Casper mattress became a Flexe customer four years ago, and since then has used Flexe to open more

warehouses and change locations of warehouses over time as the business grew. Since Casper's

business is constantly changing (expanding to brick-and-mortar, reducing delivery costs, etc.), Flexe

provides an opportunity for Casper's distribution network to grow with the demand faced by the business.

Ease-of-Use

For small and midsize enterprises, coordinating warehouse space, leases, and fulfillment processes at

multiple warehouses can be a time-consuming process. Some on-demand warehousing companies act as

a single point of contact for the retailer and handle the legwork of researching locations, pricing, etc. As a

result, dealing with an on-demand warehouse provider could be more efficient for a small or midsize

enterprise.

Excess Warehouse

Capacity

A Flowspace warehouse provider planned to expand the business in the future so it moved into a larger

warehouse. The provider did not need the excess capacity for the current year, so it used Flowspace to

generate income from its empty space until the company expanded to fill that capacity.

Sources: Company websites

On-Demand Warehouse Provider Examples and Use-Cases

Exhibit 16







-



of the population. It is also possible that pricing could be favorable for on-demand warehousing

(versus traditional outsourcing) because warehouse operations are monetizing unused space that

previously was not generating any revenue.

15 Matthew Pfau, CFA +1 312 364 8694

William Blair

  



empty. Leveraging this empty space through on-demand warehousing has some incremental vari-



What are the challenges? The two biggest challenges that we see for on-demand warehousing

are matching the right merchant with the right warehouses and providing tools to help manage





while another is set up to handle small CPG products. This is where the on-demand warehouse

marketplaces need to be able to account for different requirements and capabilities and help make

the proper match.



heavily customized for that warehouse operator’s needs, and in a number of cases are not equipped



marketplaces need to provide software that integrates with a warehouse provider’s WMS to help



across the on-demand warehouses it is using, which the on-demand marketplace must facilitate

through software integration.



that going from one warehouse to two could increase the amount of inventory by 30% to 40% as

a result of safety stocks. Therefore, a merchant needs to balance the lower shipping costs from ad-

ditional warehouses with the additional inventory carrying costs and working capital requirements.

Lastly, with leveraging on-demand warehouses, the quality and service levels are out of the hands of

the merchant. Marketplaces can add value here by providing tools to monitor warehouse operator

performance, create a rating system, and eliminate poor-performing providers from the marketplace.

Who are the on-demand warehouse providers?

FLEXE. -







integrates with other supply chain systems (e.g., warehouse management, order management, and

inventory management) to help manage inventory, orders, shipments, and billing. The platform also







total funding from Activate Capital, Tiger Global Management, Madrona Venture Group, Redpoint

Ventures, and Prologis Ventures. See our Private Company Spotlight.

Flowspace. 

-





over 500 warehouse locations, and customers do not need to sign long-term contracts. Flowspace,

founded in 2017 and based in Los Angeles, has raised $15.5 million in funding and its investors

include Canvas Ventures, Moment Ventures, 1984 Ventures, and Y Combinator.

16 Matthew Pfau, CFA +1 312 364 8694

William Blair

STORD. 

3PLs that is then resold to businesses looking for warehouse space. The company also provides tools

for inventory and order management, which integrate with ERP systems. The company’s solution



Stord has raised $15 million and its investors include Kleiner Perkins, Susa Ventures, and Dynamo.

Warehouse Exchange. 

warehouse operators to post available space and businesses to book space. The platform uses a



Tech-Enabled Fulfillment Networks











    



(because of maintaining inventory in multiple warehouses) and potential quality issues given the





meaningful volume (e.g., more than 50 orders per day).

Although some of these services may seem similar to on-demand warehouse marketplaces, there

are a few key differences, in our view. First, in an on-demand warehouse marketplace, the mer-





merchants which warehouses to send their goods to. Second, on-demand warehousing is great for



-





-















-





1. Fulfilled by Amazon (FBA): 

seller’s behalf.

2. Fulfilled by Merchant (FBM): Seller ships its own products directly to the customer after receiv-

ing orders from Amazon.

17 Matthew Pfau, CFA +1 312 364 8694

William Blair

3. Seller-Fulfilled Prime (SFP): Seller ships its own products directly to the consumer according

to Amazon Prime’s strict shipping standard, allowing it to display the Prime badge on listings



4. Multichannel Fulfillment (MCF): 

the seller’s behalf for non-Amazon sales channels.







shipping costs, Amazon uses dimensional weight, taking a shipment’s density into account. The







based on the space occupied in Amazon’s warehouses, measured in cubic feet. During the holiday



will increase from $0.69 to $2.40 per cubic foot from October through December. This seasonal fee

hike dissuades sellers from clogging up Amazon’s warehouses with slow-moving inventory ahead

of the holiday rush.

Fee type Price

Monthly inventory storage (per cubic foot) $0.69 to $2.40 depending on season and size of item (oversize discounted)

Long-term storage - Over 365 days $6.90 per cubic foot

FBA fulfillment fees (per unit) - Standard size $2.41 to $5.26+ (cost depends on weight)

FBA fulfillment fees (per unit) - Oversize $8.26 to $137.32+ (cost depends on size and weight)

Inventory removal (per unit) - Return $0.50 to $0.60 depending on item size

Inventory removal (per unit) - Disposal $0.15 to $0.30 depending on item size

Return processing fee (per unit) $3.19 (after Amazon provides free shipping to customer return)

Unplanned service fee (per unit) $0.20 to $2.40 depending on problem

Sources: Amazon Seller Central, William Blair

Exhibit 17

Fulfilled by Amazon

Fees Table







to Amazon customer service (i.e., returns management), ease of managing seasonal spikes without





customer shipping addresses. This is intellectual property that sellers may prefer to keep private,

fearing Amazon may decide to disintermediate them. Second, the overall cost to sell on Amazon,



advertising costs (e.g., sponsored products get placed ahead of relevant search results). Third, using



18 Matthew Pfau, CFA +1 312 364 8694

William Blair

sellers can lose control of their inventory if they choose to commingle products with other sellers.

Amazon could ship a damaged item that is not part of the seller’s inventory, prompting a return













-

ment fees are higher by roughly 25% (depends on weight and size). One downside to MCF is lack



which can potentially lead to slower shipping times.

Product Example

FBA / MCF Fulfillment Fee $4.71 $5.95

Inventory Storage Fee (1 month) $0.64 $0.64

Inbound Shipping to FBA $1.60 $1.60

Amazon Seller Fee (15%) $3.75 -

Total Fees $10.70 $8.19

Sources: Amazon Seller Central, Fitsmallbusiness.com, William Blair

Exhibit 18

Fulfilled by Amazon (FBA) vs. Multichannel Fulfillment (MCF) Fees

$25.00, standard-size item, weight 2 lbs.

Fulfillment & Other Fees

Sold on Amazon

& Fulfilled via FBA

Sold on Own Website

& Fulfilled via MCF



including freight and air, with 50 owned and leased aircraft and 20,000 owned and leased vehicles



-



share of its own delivery network.

Darkstore. Darkstore was launched in 2016 and has raised $30.2 million. Darkstore provides a

technology platform that enables brands to offer same-day shipping. The company does this by

-





Deliverr. 

any size. The company leases warehouse space from over 10 facilities, which are located across the

continental United States. Deliverr provides customers with a software platform that helps manage





integrations with ChannelAdvisor, Sellbrite, Zentail, GeekSeller, SellerCloud, SellerActive, Shopify,

Skubana, Listing Mirror, eComdash, and SellerCloud. Deliverr has raised $7 million in funding.

19 Matthew Pfau, CFA +1 312 364 8694

William Blair





and will partner with warehouse operators across the United States. The solution will provide sell-

ers with cost-competitive one-day, two-day, and three-day shipping options. Managed Delivery is

targeted toward high-volume sellers and will be available in the United States in 2020.

ShipBob. 





 -

 

software integrates with leading e-commerce platforms like Shopify. When a purchase is made on











that are strategically located close to urban centers.











and providing Amazon with data could also be dangerous from a competitive perspective, whereas







our Private Company Spotlight.









will be integrated with Shopify’s e-commerce platform and provide customers with inventory

management tools. The solution is initially targeted to U.S. businesses with 10 to 10,000 orders per



30,000 orders per day and ship to 99% of the continental U.S. within two days or less. In September,

Shopify announced its intention to acquire 6 River Systems for $450 million, which will enable the









-

fectively monetizes its customers’ growth (through payments, customers moving to higher tiers, and

Plus pricing), the company is heavily incentivized to help its merchants be successful. Further, more-

successful merchants are less likely to churn, as a big source of churn for Shopify is business failure.

-

lenges that need to be worked through for the service to be successful. First, many 3PLs are not





20 Matthew Pfau, CFA +1 312 364 8694

William Blair

base. To solve this issue, Shopify will likely have to provide software that integrates with 3PLs’ WM



Shopify will need to consolidate inventory and order information across its 3PL partner base to

provide a holistic view to merchants and have accurate inventory and shipping information on its

customers’ e-commerce sites. There is also likely to be a great deal of customer turnover within



balancing supply with demand is likely to be a challenge, but Shopify has already stated that it is

open to building its own warehouses to help alleviate this.

Ware2Go. Ware2Go, based in Atlanta, provides a platform that matches available warehouse space





by UPS, which also provides the shipping for guaranteed two-day delivery.





-



facilities, Wayfair can ship small-parcel items (average 30 pounds) in two days and larger-parcel

items (average 80 pounds) within seven days. The big get here for both suppliers and Wayfair is

to be able to speed delivery, with furniture delivery time more typically measured in months, not

days. As of 2018, some 26% of small-parcel deliveries were running through CastleGate, while more



-



approaches 50% (more in line with Amazon). It is important to appreciate that Wayfair is building



forwarding paths in the United States were not set up to account for large items. This is in part why

delivery times for furniture suppliers are elongated, often they have to negotiate a tangled and dis-



down lag time, alleviating a key pain point in the industry. With a fully developed network, Wayfair



network, opening distribution for more traditional furniture retailers that Wayfair will increasingly

make compete on delivery time (much like Amazon has across the broader retail landscape), but

that will have limited, if any, opportunity to do so without using what Wayfair is creating.

Bricks-and-Mortar Stores as Fulfillment Centers

 



side of the business; however, more retailers are starting to leverage their physical stores as mini



customers through buy-online-pick-up-in-store and buy-online-return-to-store options. Although

these concepts have been discussed for years, we believe market adoption of technology solutions

to handle these processes is still relatively early, having gained momentum more recently with the



Report from NewStore, of the 150 brands evaluated, only 26% offered buy-online-pick-up-in-store



and roughly 67% offered buy-online-pick-up-in-store and 87% offered buy-online-return-to-store.



2019 Target stores handled 80% of the retailer’s digital volume.

21 Matthew Pfau, CFA +1 312 364 8694

William Blair

Penetration rates 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Consumer electronics

13% 13% 15% 17% 18% 22% 23% 27% 29% 30% 33% 34% 37% 39% 44%

Apparel and footwear

2% 3% 3% 4% 5% 6% 6% 7% 8% 10% 12% 14% 16% 19% 22%

Pet care

1% 1% 1% 2% 2% 2% 2% 2% 3% 3% 4% 6% 8% 12% 16%

Health

2% 2% 2% 3% 4% 5% 6% 7% 8% 9% 9% 9% 10% 11% 12%

Beauty and personal care

2% 2% 3% 3% 4% 4% 4% 5% 5% 6% 7% 8% 9% 10% 11%

Home furnishings, improvement, gardening

1% 1% 2% 2% 3% 3% 4% 4% 5% 6% 6% 7% 9% 10% 11%

Consumer appliances

2% 2% 2% 3% 3% 4% 5% 6% 8% 9% 9% 10% 10% 11% 11%

Toys and games

2% 2% 3% 3% 3% 3% 3% 3% 4% 4% 5% 6% 6% 7% 8%

Video games

1% 1% 2% 2% 2% 2% 3% 3% 3% 3% 4% 4% 4% 5% 6%

Sources: Euromonitor, William Blair estimates

Exhibit 19

Online Penetration by Category

22 Matthew Pfau, CFA +1 312 364 8694

William Blair

Sources: Company websites

Exhibit 20

Retailer In-Store Pickup and Return Availability



presence and offers pickup from over 2,800 Amazon lockers in more than 900 cities and returns

through 1,159 Kohl’s stores. Further, the company has 520 North American physical locations, which

includes about 475 Whole Foods stores in the United States.

For retailers or brands that already have physical stores, using them as







centers, so this provides a means for faster shipping to the surrounding areas. This can be more ef-





that they need immediately. And providing in-store returns can be more cost-effective for retailers and

23 Matthew Pfau, CFA +1 312 364 8694

William Blair

brands and convenient for consumers. According to the National Retail Federation in 2018, about 10%

of a retailer’s annual sales will be returned, a number that skews much higher for online sales (up to

30% for some categories). There is also the opportunity to sell customers additional products when

they buy online and pick up or return to store. In 2016, UPS and comScore, Inc. surveyed 5,330 online

shoppers in their Pulse of the Online Shopper report. The report stated that of the 50% of shoppers

surveyed that have shipped to store for pickup, 46% made additional purchases in store. In addition,

when shoppers returned product in store, 70% made an additional purchase. Comparatively, when

shoppers processed their return on a website, 45% made an additional purchase.

What are the challenges?



smaller. According to a 2018 issue of Supply Chain Quarterly, a brick-and-mortar store typically



 

-

ment centers can range from 200,000 to 1.5 million square feet. Compounding the size differential,







can be located close to urban centers, square footage and labor costs can be higher.

Another major issue is that store-level inventory is typically not very accurate. According to a pre-

sentation by Manhattan Associates, store inventory accuracy can range from 60% to 70%, whereas



a store is ensuring that inventory accuracy is high enough. Further, additional software is needed to



Who are the software providers?

IBM. -



analyst reports. In addition to handling order management for e-commerce, the solution has add-



the company does not provide a WMS and needs to integrate with another vendor. This is where





Manhattan Associates. 

a leader in the enterprise supply chain management market for retail, consumer packaged goods



warehouse management—where the company is the market leader and has been consistently ranked





its warehouse management, order management, and point of sale, Manhattan is able to manage a





Manhattan’s OMS knows where all of the inventory for the purchased product is and can determine





handles the pick and pack process. Manhattan also has functionality that integrates with RFID de-





large retailers and brands with a brick-and-mortar presence.

24 Matthew Pfau, CFA +1 312 364 8694

William Blair

NewStore. NewStore, started in 2015 by Stephan Schambach, who previously founded Demand-



platform that has an integrated cloud order management system and mobile POS. The solution was

built entirely from a mobile perspective, enabling retailers and brands to provide an end-to-end



management, one transaction (process combination of store and endless aisle purchases in a single







platforms, warehouse management systems, and order management systems. NewStore’s custom-

ers include UNTUCKit, Adidas, and Steven Alan. According to Crunchbase, the company has raised

$110 million in funding and its investors include General Catalyst, Activant Capital, and Mr. Scham-

bach. The company’s board of directors includes Sharen Jester Turney (former Victoria’s Secret



See our Private Company Spotlight.

Shopgate. Shopgate, founded in 2009, provides a SaaS platform for mobile applications for retailers.

-



solutions are used by over 12,000 merchants.

Curbside Pickup



retailer having a product available to be brought to a customer’s vehicle at a designated location,



retailers and grocers, most notably Walmart, which rolled out the program to 2,100 of its 5,000-plus



-

ing concept still in the development stages is OLAM (which stands for online, at-mall), which is





take smaller, 2,000-square-foot outward-facing parcels in malls to allow for curbside pickup and



the Willowbrook mall in suburban Chicago, Illinois. A study conducted on OLAM’s behalf in late

2014 by the NPD Group suggests high potential adoption rates, particularly among women (45%

of respondents citing interest in the concept).

Last-Mile Fulfillment Technologies

Matternet. Matternet, based in Menlo Park, California, performs on-demand drone deliveries in

urban environments. Matternet produces its own drones; its current drone, the Matternet M2, can

carry payloads up to 4.4 pounds for distances up to 12.5 miles. The drones are unmanned and pro-

vide the option for same-day delivery at lower costs for short trips. The company has performed



States during 2019. The drones perform healthcare, e-commerce, and humanitarian delivery. In

March 2019, UPS announced a partnership with Matternet to deliver medical samples in the Raleigh,

North Carolina, metropolitan area with oversight from the FAA. Matternet has raised $25.5 million



and Levitate Capital.

Nuro. Nuro, founded in 2016, produces self-driving electric vehicles to handle short neighborhood

deliveries for products such as groceries, prescription drugs, or dry cleaning. The vehicle is smaller



audio sensors for its self-driving capabilities. The company previously completed a pilot in Scottsdale,

25 Matthew Pfau, CFA +1 312 364 8694

William Blair

Arizona, delivering groceries in partnership with Fry’s Foods. The company is partnering with





Starship Technologies. Starship Technologies, launched in 2014, creates electric self-driving deliv-

ery robots to perform food and package deliveries. Starship has tested its delivery robots in more







$85 million in funding to date. Starship Technologies’ investors include Morpheus Ventures, Shasta



Warehouse Automation Technologies

Fetch Robotics. Fetch Robotics, based in San Jose, California, was founded in 2014 by Melonee Wise

(CEO). The company’s Fetch Cloud Robotics Platform provides autonomous robots for material han-





or automated data collection (perform inventory counting by automatically scanning RFID tags).

The company also produces a robotics platform for researchers to collaborate and develop more

mobile robotic technologies. In July, the company raised $46 million as part of its series C round,

led by Fort Ross Ventures. The company has raised $94 million in funding to date.

Locus Robotics. Locus Robotics, based in Wilmington, Massachusetts, was founded in 2014. The





a customer’s WMS system through APIs and custom integrations. The company also developed a

management platform to gain insight into performance and activity and manage operations and



Partners and Zebra Ventures. The company has raised $59 million in funding to date.

Other Interesting Fulfillment Technologies

Bringg. 

stores, among others. The platform can help companies manage deliveries made by any combina-

  

 









Ventures, Cambridge Capital, Coca-Cola, Ituran, and Pereg Ventures.

SHIPSI. -

livery. During the checkout process, Shipsi’s software will determine if an item is in stock locally

and if there is an available driver. If the inventory and driver are available, Shipsi will provide the

consumer with the option for same-day delivery. The deliveries are performed by partners such as

Uber and Postmates. We believe the software is targeted to midsize to large retailers with a physical



Ventures, Precursor Ventures, and Stage Venture Partners.

26 Matthew Pfau, CFA +1 312 364 8694

William Blair



Amazon.com, Inc. (Outperform) $1,785.30

  

      

ChannelAdvisor Corporation (Market Perform) $9.31

     

Manhattan Associates, Inc. (Market Perform) $84.05

Shopify Inc. (Market Perform) $313.26

Target Corporation $108.78

UPS, Inc. $119.05

Wayfair Inc. (Market Perform) $118.29

Walmart Inc. $117.62

IMPORTANT DISCLOSURES

This report is available in electronic form to registered users via R*Docs™ at https://williamblairlibrary.bluematrix.com or

www.williamblair.com.

Please contact us at +1 800 621 0687 or consult williamblair.com/Research-and-Insights/Equity-Research/Coverage.aspx for all disclosures.

Matthew Pfau attests that 1) all of the views expressed in this research report accurately reflect his/her personal views about any and all of

the securities and companies covered by this report, and 2) no part of his/her compensation was, is, or will be related, directly or indirectly,

to the specific recommendations or views expressed by him/her in this report. We seek to update our research as appropriate. Other than

certain periodical industry reports, the majority of reports are published at irregular intervals as deemed appropriate by the research

analyst.

DOW JONES: 26807.80

S&P 500: 2966.60

NASDAQ: 7993.62

Additional information is available upon request.

Current Rating Distribution (as of September 25, 2019):

Coverage Universe Percent Inv. Banking Relationships * Percent

Outperform (Buy) 67 Outperform (Buy) 19

Market Perform (Hold) 31 Market Perform (Hold) 7

Underperform (Sell) 1 Underperform (Sell) 0

*Percentage of companies in each rating category that are investment banking clients, defined as companies for which William Blair has

received compensation for investment banking services within the past 12 months.

The compensation of the research analyst is based on a variety of factors, including performance of his or her stock recommendations;

contributions to all of the firm’s departments, including asset management, corporate finance, institutional sales, and retail brokerage; firm

profitability; and competitive factors.

William Blair

27 | Matthew Pfau +1 312 364 8694

OTHER IMPORTANT DISCLOSURES

Stock ratings and valuation methodologies: William Blair & Company, L.L.C. uses a three-point system to rate stocks. Individual ratings reflect

the expected performance of the stock relative to the broader market (generally the S&P 500, unless otherwise indicated) over the next

12 months. The assessment of expected performance is a function of near-, intermediate-, and long-term company fundamentals, industry

outlook, confidence in earnings estimates, valuation (and our valuation methodology), and other factors. Outperform (O) - stock expected

to outperform the broader market over the next 12 months; Market Perform (M) - stock expected to perform approximately in line with

the broader market over the next 12 months; Underperform (U) - stock expected to underperform the broader market over the next 12

months; not rated (NR) - the stock is not currently rated. The valuation methodologies include (but are not limited to) price-to-earnings

multiple (P/E), relative P/E (compared with the relevant market), P/E-to-growth-rate (PEG) ratio, market capitalization/revenue multiple,

enterprise value/EBITDA ratio, discounted cash flow, and others. Stock ratings and valuation methodologies should not be used or relied

upon as investment advice. Past performance is not necessarily a guide to future performance.

The ratings and valuation methodologies reflect the opinion of the individual analyst and are subject to change at any time.

Our salespeople, traders, and other professionals may provide oral or written market commentary, short-term trade ideas, or trading

strategies-to our clients, prospective clients, and our trading desks-that are contrary to opinions expressed in this research report. Certain

outstanding research reports may contain discussions or investment opinions relating to securities, financial instruments and/or issuers

that are no longer current. Always refer to the most recent report on a company or issuer. Our asset management and trading desks may

make investment decisions that are inconsistent with recommendations or views expressed in this report. We will from time to time have

long or short positions in, act as principal in, and buy or sell the securities referred to in this report. Our research is disseminated primarily

electronically, and in some instances in printed form. Research is simultaneously available to all clients. This research report is for our clients

only. No part of this material may be copied or duplicated in any form by any means or redistributed without the prior written consent of

William Blair & Company, L.L.C.

This is not in any sense an offer or solicitation for the purchase or sale of a security or financial instrument. The factual statements

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our own unless otherwise stated and are subject to change without notice. Prices shown are approximate.

This material is distributed in the United Kingdom and the European Economic Area (EEA) by William Blair International, Ltd., authorised

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William Blair

28 | Matthew Pfau +1 312 364 8694

CONSUMER

Sharon Zackia, CFA, Partner +1 312 364 5386

Group Head–Consumer

Lifestyle and Leisure Brands, Restaurants

Jon Andersen, CFA, Partner +1 312 364 8697

Consumer Products

Dylan Carden +1 312 801 7857

Consumer Technology, Specialty Retail

Daniel Hokin +1 312 364 8965

Hardlines, Specialty Retail

Ryan Sundby, CFA +1 312 364 5443

Outdoor and Recreation

FINANCIAL SERVICES AND TECHNOLOGY

Adam Klauber, CFA, Partner +1 312 364 8232

Co-Group Head–Financial Services and Technology

Financial Analytic Service Providers, Insurance Brokers,

Property & Casualty Insurance

Robert Napoli, Partner +1 312 364 8496

Co-Group Head–Financial Services and Technology

Financial Technology, Specialty Finance

Chris Shutler, CFA +1 312 364 8197

Asset Management, Financial Technology

HEALTHCARE

Biotechnology

Tim Lugo, Partner +1 415 248 2870

Group Head–Biotechnology

Biotechnology

Andy T. Hsieh, Ph.D. +1 312 364 5051

Biotechnology

Myles R. Minter, Ph.D. +1 312 364 5283

Biotechnology

Matt Phipps, Ph.D. +1 312 364 8602

Biotechnology

Raju Prasad, Ph.D. +1 312 364 8469

Biotechnology

Healthcare Technology and Services

Ryan Daniels, CFA, Partner +1 312 364 8418

Co-Group Head–Healthcare Technology and Services

Healthcare Technology, Healthcare Services

John Kreger, Partner +1 312 364 8597

Co-Group Head–Healthcare Technology and Services

Distribution, Outsourcing, Pharmacy Beneϔit Management

Jeffrey Garro, CFA +1 312 364 8022

Healthcare Technology

Margaret Kaczor, CFA, Partner +1 312 364 8608

Medical Technology

Matt Larew +1 312 364 8242

Healthcare Delivery, Healthcare Services

Brian Weinstein, CFA, Partner +1 312 364 8170

Diagnostic Products, Medical Technology

GLOBAL INDUSTRIAL INFRASTRUCTURE

Nick Heymann +1 212 237 2740

Co-Group Head–Global Industrial Infrastructure

Multi-industry

Larry De Maria, CFA +1 212 237 2753

Co-Group Head–Global Industrial Infrastructure

Capital Goods

Louie DiPalma, CFA +1 312 364 5437

Aerospace and Defense

Brian Drab, CFA, Partner +1 312 364 8280

Industrial Technology

Ryan Merkel, CFA +1 312 364 8603

Building Products, Commercial Services, Specialty Distribution

GLOBAL SERVICES

Tim Mulrooney +1 312 364 8123

Commercial Services, Stafϔing

Andrew Nicholas, CPA +1 312 364 8689

Consulting, HR Technology, Information Services

TECHNOLOGY, MEDIA, AND COMMUNICATIONS

Jason Ader, CFA, Partner +1 617 235 7519

Co-Group Head–Technology, Media, and Communications

Enterprise and Cloud Infrastructure

Bhavan Suri, Partner +1 312 364 5341

Co-Group Head–Technology, Media, and Communications

IT Services, Software, Software as a Service

Jim Breen, CFA +1 617 235 7513

Internet Infrastructure and Communication Services

David Grifin +1 312 364 8505

Software

Jonathan Ho, Partner +1 312 364 8276

Cybersecurity, Security Technology

Maggie Nolan, CPA +1 312 364 5090

IT Services

Matthew Pfau, CFA +1 312 364 8694

Software as a Service

Ralph Schackart III, CFA, Partner +1 312 364 8753

Digital Media, Internet

Stephen Sheldon, CFA, CPA +1 312 364 5167

Real Estate, Education

Alessandra Vecchi +1 212 237 2764

Semiconductors/Wireless

ECONOMICS

Richard de Chazal, CFA +44 20 7868 4400

EDITORIAL AND SUPERVISORY ANALYSTS

Steve Goldsmith, Head Editor and SA +1 312 364 8540

Beth Pekol Porto, Editor and SA +1 312 364 8924

Lisa Zurcher, Editor and SA +44 20 7868 4549

Audrey Majors, Editor +1 312 364 8992

Equity Research Directory

John F. O’Toole, Partner Manager and Director of Research +1 312 364 8612

Kyle Harris, CFA, Partner Operations Manager +1 312 364 8230