25 April 2022
Selecting the right 3PL for gross margin gains
Bainbridge Growth CEO Ben Tregoe provides a cost analysis for DTC businesses.
(Photo by Jake Nebov on Unsplash)
Bainbridge Growth CEO Ben Tregoe provides a cost analysis for DTC businesses.
This post originally appeared on the blog of Bainbridge Growth. It is being republished by The Current with permission.
It is hard to miss the sea of warehouses springing up seemingly overnight in cities all over the US. These facilities are providing the support for ecommerce to grow its proportion of total retail sales to 13% over the last couple of years. The convenience of two-day shipping, wide selection, and product availability are all based on the nearness of the facilities to metropolitan areas. Selecting a fulfillment partner (3PL) with the value add services, scalability, and pricing structure is imperative to your direct-to-consumer business.
Ecommerce as a percentage of retail sales (Image by Bainbridge Growth)
Fulfillment is a broad term, so let’s define that within inbound and outbound fulfillment. Inbound is the receipt of bulk shipments to the warehouse and the subsequent storing and tracking of this inventory using a warehouse management system. Outbound services monitor your order management system for a daily batch of orders and then packs (“packout”) these orders for shipping via your shipping provider that arrives; usually daily, to dock and pick up these orders for processing. An independent non-Amazon DTC business will typically pay a 3PL fulfillment operation explicitly for the square footage in the warehouse(s), per pick variable fees, and management fees.
Let’s look into how to compare these operations based on their pricing structure. Once a DTC operation surpasses a monthly order run rate that requires a certain level of spending on fulfillment services, it will at that point make sense to seek out a third party. Monitoring this intersection of forecasted order counts, AOV and costs should help keep you within a comfortable range of fulfillment costs to revenue on an aggregate and per order basis. Let’s run a quick sketch of that:
*COGs is a flat 50% of AOV (Chart by Bainbridge Growth)
When it comes to driving margin leverage against shipping and fulfillment, the key understanding is the split of fixed versus variable costs. When shipping small parcels, there is a certain cost sensitivity to weight that should allow a business to forecast shipping costs per order within a range. The costs of the 3PL partner for fulfillment-specific services will consist of fixed costs for space charges and management fees. Both of these are related to the amount of space your solution requires, let's say 10K square feet. Variable costs come in when measuring inbound deliveries and cost per pick of SKUs & items per order.
Management fees are typically paid monthly, and serve as a general cost for the 3PL’s basic services, sales support, and warehouse management system reporting. This monthly amount will vary based on the core services selected. Space charges are the other (semi) fixed cost that is based on your forecasted monthly order rate. A fulfillment partner will scope out the amount of space they think is a good fit for your solution and charge you based on a per square foot rate. It is very important to get a good feel for what the right amount of space for your business is because if you forecast orders accurately it will minimize storage costs and help avoid signing on for too much space.
Variable costs are what most are already familiar with, as a warehouse associate moves down an aisle picking 20+ orders at a time, each item pick action is priced and charged to the customer. Assuming a cost of fifteen cents per pick, with duplicates of an SKU done for ten cents the initial rate that cost would look like the following:
(Charts by Bainbridge Growth)
Add the variable cost of 75 cents to $13.00 in fixed costs at 5K monthly orders to reach the all-in total of $13.75. If this number looks relatively high in comparison to AOV, then the business is probably not in need of the full 10K sq feet.
With this price structure, there is clearly moderate leverage gain in getting customers to order in bulk, especially if you sell mostly lightweight items. Large parcels have significantly more dispersion of pick (and shipping) costs, so expect higher per-item costs if your item is large or heavy. On fixed costs there are significant advantages to pushing more orders through the allotted 10k square feet, work with your 3PL to optimize it for the right use of flow and storage.
Value added services are the other primary variable cost, this consists of how many labor hours you purchase for things like high touch pack service, labeling adjustments, or changing the configuration of items in the package. You’d likely end up paying a flat rate of say $40 an hour for these types of services that are performed just before or during the packout process.
Once we understand how to think about a single location, you can apply the same to multiple FCs with some potential for combined management fees across your multi-facility solution. Most companies have facilities strategically located across the US, offering both B2B and B2C capabilities. Be aware that many 3PLs will outline typical ramp up times of roughly 3 - 6 months and charge service start up and integration costs.
As you work through your pricing quote and select a partner, it is best to know your customer and their needs. Make a smart strategic decision on your location, so the product is in close enough proximity to where most of your customers are. Start your process with an accurate orders outlook so that you will scope the right sized solution and carry less risk of price changes based on weaker/strong order flow. The goal should be to efficiently drive volume through your optimized space layout while carrying a rational amount in storage.
Upping marketing spend, growing loyalty members and multichannel sales are key to the beauty brand's strategy.
Digital commerce is helping e.l.f. Beauty pour fuel on the fire.
The brand continues to be one of the shining examples of the staying power of beauty products despite consumer pullback in other areas of discretionary spend. e.l.f. grew net sales 48% in the fiscal year ended March 31 as it reached $500 million in sales for the first time. For the most recent quarter, sales grew by a whopping 78%. The company is seeing profit gains as well, as adjusted EBITDA grew 56%.
With the top-line revenue flowing, the brand was opportunistic about how it invested in marketing in the most recent quarter. After upping spend to 33% of net sales in the quarter, the company ended up with marketing and digital investment at 22% of net sales for the year. That was well above the higher end of its 17% to 19% outlook. In the coming year, it expects 22% to 24%.
The fact that digital and marketing fall in the same category reflects the brand’s approach to marketing. It's a favorite among Gen Z, and has found a home on the social apps that are popular with the generation.
“Our disruptive digital-first marketing engine has built strength across multiple social platforms,” CEO Tarang Amin told analysts on the company’s earnings call. “We are a pioneer on TikTok and are now a four-time TikTok billionaire with our last hashtag challenge garnering nearly 15 billion views. We were the first major beauty company to launch a branded channel on Twitch and the first beauty brand on BeReal.”
As a sales category, digital penetration is now 17%, growing from 14% last year. The channel grew 75% in the most recent quarter.
Amin laid out three factors driving this trend:
Marketing. The marketing investment that e.l.f. made brought strong returns, and the digital-first nature of those ads are bringing people to the brand’s digital sales channels.
Loyalty. E.l.f.’s Beauty Squad loyalty program has 3.7 million members, which is a 25% year-over-year increase. Loyalty members are the biggest driver of the brand’s digital business, accounting for over 80% of sales on the brand’s DTC site.
Multichannel. e.l.f. is the only one of the top five mass cosmetics brands that has a DTC site, Amin said. It is also seeing strong growth at Amazon and other retailer ecommerce websites. The growing presence is “building upon itself,” Amin said.
With digital growth, the brand is seeking to expand capacity in the supply chain that will provide more efficiency and faster delivery, as well. It is shifting to a more distributed ecommerce fulfillment model. Previously, it had one automated warehouse in Columbus, Ohio, which meant shipping to the West Coast could take time. Now, it is moving to a multinode distribution network. With the first couple nodes up and running, there is already improvement in delivery times.
The brand is also adding distribution capacity to its main warehouse in Ontario, California.
As marketing helps more people discover and buy from the brand, the operational improvements will help create a customer experience that lives up to the hype.