Online Retail

Hermes Builds a Delivery Giant

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Hermes' great new hall of goods.
  • Why it matters

    Why it matters

    Amazon is getting more and more demanding of its delivery companies and Germany’s Hermes hopes to win some of its business through updating its facilities.

  • Facts

    Facts

    • Hermes’ new warehouse is one of the biggest pieces of real estate on one level in the whole country.
    • The unit cost €90 million to build.
    • Online sales of furniture and home furnishings generated total revenues of €2.7 billion.
  • Audio

    Audio

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For five years Hermes has been working on a construction site in the Westphalian town of Löhne. The Otto subsidiary has persuaded countless landowners to sell, fought citizens’ initiatives and excavated half a million cubic meters of earth.

The result is one of the biggest pieces of real estate on one level in the whole country, measuring the equivalent of 51 soccer pitches.

The longest side wall of the hall at 100,000 m² (120,000 yd.²) measures more than half a kilometer (a third of a mile). It is from here that the Hamburg-based company will begin the central dispatch of bulky online orders like washing machines, furniture and electric cookers – both for itself and other companies.

The gigantic construction is replacing ten now-obsolete buildings, but it will not make business less expensive for Hermes. Higher expenditure on rent virtually cancels out savings on truck journeys between stores which are no longer needed.

So why the enormous expenditure of €90 million on construction costs?

“It’s true that the investment will not reduce our costs in the short term,” said Dieter Urbanke, chief executive of the Otto company Hermes Fulfilment, “but we are speeding up our logistic processes considerably.”

Delivery of most large devices to consumers will now come one day earlier. That will make it easier, Mr. Urbanke added, “to achieve the service objectives agreed with online retailers.”

Mr. Urbanke would not reveal the name of the client applying this pressure, citing client confidentiality. But there is little doubt that he is alluding to the online retailing giant Amazon.

For a long time now, the U.S. company has been decidedly inflexible when it comes to speed of delivery. In Great Britain, Amazon booted out the unreliable package service Royal Mail last year and took over deliveries itself.  The same thing happened in the United States, where the online retailing giant took over deliveries in several big cities to be more punctual, after Fedex and UPS botched Christmas two years ago.

Amazon and Otto are major competitors in online retailing but Amazon also offers a great deal for Hermes.

DHL, a subsidiary of Deutsche Post, has traditionally worked closely with Amazon. But in the last few days in Berlin, for example, anyone ordering Amazon products with a 2-hour delivery service didn’t receive it from DHL, but from a courier service commissioned by the U.S. online retailer.

That is why Otto Chairman and Hermes Supervisory Board Chairman Hanjo Schneider reached out to the world’s biggest Internet department store a few weeks ago. Amazon and Otto are major competitors in online retailing but Amazon also offers a great deal for Hermes. In an interview with the “Die Welt“ newspaper, Mr. Schneider made the offer to Amazon to use both the Hermes package shops and the soon-to-be launched household-friendly package boxes.

Amazon has taken note of these offers to cooperate. For its express deliveries the U.S. giant is already making use of the courier service Liefery, in which Hermes has held a minority stake for a year now.

To speed up its delivery operation, Otto’s logistics subsidiary is using close family connections. Hermes had planning and development work for its mega Westphalian hub carried out by the Hamburg-based ECE – which also implemented two smaller delivery center projects in Hanover and Friedewald near Frankfurt. The real estate company, managed by Alexander Otto and best known in Germany for its shopping centers, is owned, like the Otto group, by descendants of the company founder Werner Otto.

 

But, just like Hermes, ECE is loath to make too much capital commitment.  “The real estate property has already been sold, along with our long-term rental contract,” said Mr. Urbanke. It is now owned by the financial investor Tilad, based in Dubai.

The delivery of bulky goods will now be faster, above all, because for the first time Hermes is concentrating several different services under one roof. Furniture, ice boxes and washing machines are not just being stored in the huge new center; orders for them are also processed there. The consignments are passed on via a building connection to a sister company, Hermes equipment service, which then makes the delivery.

But the most important point is that returns – unlike with the normal Hermes package service – go straight back to the dispatch stores in Löhne.  There, bigger devices and furniture are inspected and repaired if necessary. A suitable workshop had already been earmarked for Hermes Fulfilment.

But Mr. Urbanke is already worried about one issue. “The new building was originally planned for products occupying 44,000 cubic meters,” he said “but we are already at full capacity there.”

Hardly any online product had the same kind of rapid growth as furniture and home furnishings in 2015.  According to the mail order association BEVH they generated total revenues of €2.7 billion – 15 percent more than in the previous year. And in the current year, Internet sales of furniture have increased by even more. In the first quarter of 2016, according to the association, it exceeded the figure for the same period last year by 35 percent.

If the boom continues, then Hermes’ “everything under one roof” concept could be just a temporary solution.  In that case, there would be smiles at ECE – it is possible they would receive an order for a second mega hub.  And that would be in southern Germany, according to Hermes’ long-term plans.

 

Christoph Schlautmann covers the logistics and waste management sectors for Handelsblatt. To contact the author: schlautmann@handelsblatt.com

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