Q&A: Karl Siebrecht, CEO of Flexe

Logistics Management Group News Editor Jeff Berman recently caught up with Karl Siebrecht, CEO of Seattle-based Flexe, the programmatic logistics leader, delivering technology-powered, omnichannel logistics programs to the world’s largest retailers and brands. Siebrecht addressed various topics, including: the state of that warehousing economy; the impact of BOPIS (buy online pickup in store) on e-commerce and the shifts between online and in-store shopping as it relates to warehousing; and Peak Season challenges, among others. Their conversation follows below. 

LM: How do you view the current state of the warehousing economy?

Siebrecht: I would describe the state of the warehousing economy as very dynamic. In the last two years, we've had historically low vacancy rates, like this is the tightest market we've ever seen since people started keeping track of it. With what's happening in the macroeconomy and consumer demand softening, I think it is highly likely—and we're already starting to see signs of this—that tight capacity will loosen up. We're already starting to see that. You first likely heard about it from Amazon and other big companies saying “Oh, actually, we're not going to open that facility,” or “we've got empty buildings now, and we were going to fill them, and now we're not going to fill them.” And that, of course, works its way back to the REITs, the owners, and the developers of the property. We are seeing a softening, and it will continue to get softer. But the question is by how much and for how long? And I have no idea. It depends. Are we going to have a soft landing or not in, in terms of the recession and also where interest rates going to go because, of course that affects development, and new capacity coming online. So, who knows? The macroeconomic conditions and the uncertainty around that is one of the drivers of the uncertainty around where is the warehousing economy going? There's a second driver as well, which I would call more fundamental, and this is sort of consumers' needs and wants around how they want to buy stuff. Do I want to go back to the store and buy more stuff in stores? Do I want to keep ordering online? So, is e-commerce going continue to grow and, if so, at what rate? Or do I want to buy online and pick up in store? That started to take off with Covid. Is that a blip or an ongoing thing? And then, if I want stuff delivered, how fast do I want it delivered? Do I want it same-day or next-day or two days. Is five-to-seven days still fine for some people? But all of those things that I just described that are fundamentally driven by consumers’ needs and wants and preferences…all impact warehouse capacity as well.

LM: In what ways?

Siebrecht: As one example, if you need product delivered quickly, then a company has to have lots of warehouses in a more distributed model, keeping inventory close to where the people live so they can ship it fast.

LM: At the onset of the pandemic, there was somewhat of a consensus that shopping online would be the preferred approach for consumers, with in-store shopping abating. That obviously has changed. How do you reconcile the shift between what people thought and what happened? Also, what does that mean for companies like Flexe and other developers as they build out their future roadmaps?

Siebrecht: We have now had enough quarters of retail sales data to know that the Covid spike in e-commerce was a temporary spike, with things now having normalized. And what that looked like is very, very high growth rates of e-commerce, starting in March 2020 for a couple of quarters. It continued growth from that peak, and then we saw an actual decline in year-over-year growth rates quite a bit as things went back to normal. But, I think, if you drew a line in e-commerce growth starting in 2018, there would be this blip, and we picked it up on the same trajectory a few quarters ago. We are kind of back to pre-Covid growth rates for e-commerce overall. But in the middle of that, of course, was this huge spike, and then a retrenchment, so what happened? Well, initially, many retailers did not have product. Store shelves were empty, because manufacturing facilities were shut down. Once those manufacturing facilities started to open up, most retailers, not just Amazon, bought a ton of inventory to get it on a ship and through a port to get it here domestically, so that if there were disruptions again in manufacturing, you wouldn't suffer the loss in sales. And that worked really well, actually, because a lot of companies hit historically high revenue, because they stocked up. And that ‘s great. But guess what? Now, we've got a position where many retailers have a glut of inventory. Think about this. What was my problem in March 2020? It was one problem. Two quarters later it was another problem. Now, it is a third problem. I have a lot of inventory, so do I discount or do I hold some of the premium inventory? A lot of companies are holding it and will sell it next year when market conditions are better. So, now I need to store it someplace and I have to carry that cost of inventory, so those are big problems to navigate through. If we take a step back and look at this and say “Covid was kind of an extreme supply chain disruption.” It just was a global event, kind of unprecedented in modern times. But there has always been, and there will continue to be, all kinds of uncertainty for businesses, whether it is strikes at the port or a ship getting stuck in the Suez Canal. Or it could be thinking BOPIS was a niche thing and then seeing how it has real traction now. Who would have predicted that? So, I think that fundamentally what we believe—and this is a bit self-serving—because our business is called Flexe, our value proposition is about helping the world’s biggest enterprises become more agile by moving quickly at scale and being able to pivot and change when their forecasts are wrong. Helping you be more agile in your distribution networks is what we do with our omnichannel logistics programs. Our premise when we started nine years ago, long before the pandemic, and these disruptions people can point to, is that there were always disruptions, for large enterprise companies, and that they can use Flexe for certain parts of their business that are more dynamic.

LM: Can you please provide some examples of that?

Siebrecht: Flexe can be this flexible complement to my existing fixed infrastructure of leased facilities or facilities that are either in-house managed, or third-party managed through a 3PL and a multiyear contract. Those are still good solutions, but they're a bad fit for the parts of businesses that are uncertain or dynamic, like seasonal peaks, or just supply chain disruptions or errors in forecasting. Going back to consumer wants and needs, several years ago, it was fine if I ordered something online and I got it in five days. How often does that work today? If you see that in the shopping cart, most people will see if they can find that item on Amazon, and it will come in two days max, if not one.

LM: The National Retail Federation is calling for a record year for holiday season retail sales, with e-commerce sales expected to account for a quarter of that, at almost $270 billion, which would be a new record. In what ways does this help to bolster the need for efficient warehousing and distribution?

Siebrecht: The growth rate for e-commerce is lower than the growth rate for retail sales overall. So, that goes to kind of the overhang of the e-commerce the spike we saw, because in a non-sustainable way, it was higher in the fourth quarter of 2021 because of the Covid impact. It is still growing this year but at a lower rate, as last year was pretty high.

LM: In terms of this year’s Peak Season, based on Flexe’s interactions with the retailers and brands it works with, what are some of the challenges they are up against this year, given the conflicts related to things like inventory projections, consumer demand and other things like that?

Siebrecht: I would say that the first challenge has been forecasting. It's kind of what we've been talking about. Are things going to taper off from an e-commerce perspective because it was so high last year and will there be a relatively lower growth this year? That's one. Two is discounting. Many of these retailers have a lot of inventory. What are they going to do, discount to try and move volume or hold back some of their particularly more premium inventory to next year to make a higher margin per unit? A third and very challenging and exciting uncertainty is around BOPIS. This is an example where a different type of e-commerce took root during Covid. It was around, but it really started to gain traction in Covid, and what we hear from our customers, and what we see in available market research is that is sticking. The consumer demand for BOPIS has remained robust even now that Covid is kind of over. And that's great, because, for the retailer, the economics are so much better, because you avoid all of that last-mile cost and there are significantly better unit economics for profitability for items sold for retailers. That is really exciting. But for a retailer trying to forecast how much BOPIS I should plan for…is it going to keep growing and is it going to grow by double-digits? Here is why you want to know, as best as you can, what the forecast is.

LM: Why is that?

Siebrecht: It is because it requires a more frequent replenishment of your retail stores. If you're moving more product through your retail footprint, because people are buying online, and you have all this new demand—but your store footprint is still the same size—you have to replenish your SKUs more frequently. Before BOPIS, retailers would fill up their stores once a week with a truck. Now, if you are moving 2x, 3x, or 10x more volume on certain SKUs, you are going to have empty shelves, which is not only lost revenue, but it is also dissatisfaction for the customer who walks in to buy your goods and it is not there. So, what do you need? You need more capacity regionally situated so you can do faster store replenishment. That is a change is evolution to your warehouse and distribution network footprint.

LM: Where do things go from here? How do you approach sort of the “regionalization” of the Flexe model, given the rise of BOPIS and what is going on with e-commerce?

Siebrecht: Regionalization is one of the biggest sorts of macro-dynamics in warehousing operations right in in logistics networks for two reasons. One is faster store replenishment, driven both by BOPIS and ship-from-store. If I'm fulfilling from my store, in many cases, I can get better economics and I am moving more product through my store footprint. I need to replenish it faster. Regionalization is also driven by faster e-commerce fulfillment. It's no longer OK to ship stuff in three-to-five days; people need to ship it faster. That means you've got to put at least your fastest moving SKUs closer to where the people live. So, there's been an evolution from centralized fulfillment centers of years ago to now more of a distributed fulfillment network. And that delivers better economics, because it's a shorter last leg to ship the product. It delivers faster delivery times, which is generally going to decrease your cart drop off. People won't leave your site to go buy it on Amazon, because they can get it faster.

LM: Have you seen any type of a collective shift in strategies being taken by the retail shippers you work with or is it more of a roll with the changes approach, in terms of establishing warehouse footprints? Also, how have the events in recent years altered, or influenced, their playbooks?

Siebrecht: What I would say is that the vast majority of the big enterprises we work with feel they built too much capacity of the wrong types in the wrong places [based] on what they knew or predicted to be true would become true years ago. The vast majority of companies we see and work with and talk to feel this way. As for examples, one of the early strategies was to build big centralized fulfillment centers. Why? Because when they get to the high utilization rate, there is going to be a really low cost-per-unit. But if a forecast was wrong, then you don’t get to that utilization rate, especially if it was a 10-year forecast for a $50 million investment. Of course, it was wrong. Nobody can have even an accurate five- or three-year forecast. The second reason is the strategy shifted. Consumer demand migrated to people needing their stuff fast, so a centralized strategy did not work anymore. That's one example. There are many others [examples] of building capacity that ends up being the wrong amount of the wrong function in the wrong place. So, I would say, you know, look, we take a step back, and this applies to distribution networks and a lot of other parts of business, particularly those where there's any kind of fixed capital investment. It comes down to forecasts, and forecasts are typically wrong, particularly forecasts that are greater than a year out, and it's not because the people doing them are dumb. It's because it's really hard, impossible, to predict the future. One of my favorite idols on this topic is Warren Buffett, arguably the world's greatest investor. You know how Warren Buffett does his forecasts? He doesn't. He says he has this quote that says, “forecasting will tell you a lot about the forecaster and not very much about the future.” And the point is not that we shouldn't forecast.

The best companies will forecast. They'll use all the tools available to them to do the best forecast possible, and they'll try to get better at it every year, and then the very best companies will also take a step back and admit what the error rate is around the forecast, and they'll have the humility to not present the forecast as precise thing but to say, “Hey, this is the best we got. But there's a plus or minus X error rate.” Only when you do that can you create a plan that takes into account that uncertainty. Because if you think you're certain, you will commit to the fixed investment that is the exact right investment for that precise forecast. So, now let's build a plan around the fact that I’m not right. I'm either going to be too high or I'm going to be too low. Let's build in structural flexibility and not just, “Hey, if I'm not right, I'll scramble to try and make up for the part that I missed. Let's anticipate that we're going to be wrong. We don't know how much wrong and in what direction. So, let's build in structural flexibility so we can be agile, and we can move fast and we can basically out-compete our rivals.

LM: What do you think are some of the types of things you think the companies you work with should be focusing on over the next 12-to-18 months?

Siebrecht: Under the same banner of uncertainty, when we look at the macroeconomic market, in determining if this is going to be a soft landing or not, one of the things our customers are doing is when existing facilities are coming up for renewal on a lease, they are not renewing. They're not recommitting to multiple years of fixed investment again, because they don't know what's going to happen this year or next year. So, instead, they're bridging. If they don't have to re-sign that three-year lease, they may do something that's more flexible. We help them find capacity. We do it quickly all with all of those things that will help bridge a company through this uncertainty. This is the exact wrong time to sign a long-term lease. You look around like companies are hiring, and others are putting in hiring freezes. Many are doing layoffs. Do they really want to recommit to a three-to-five-year lease? Let's see if it's a soft landing or not, and then make a decision on the other side.

LM: Are there exceptions, do you think, when it comes to certain geographies, like near the ports of Los Angeles and Long Beach, for example?

Siebrecht: It depends on space availability. One of the things that uh companies have done to help alleviate that problem is moving product into secondary inland markets. It's if you can find space in those primary port markets, it's really expensive. But if you can find capacity in a secondary market—maybe 50, 100, or 150 miles inland—rates are 50% lower, and you can basically bypass those premium markets and still solve your problem, moving your product on further down the supply chain but not stopping in the most expensive real estate in the country.