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1
Economic and Environmental Implications of Online
Retailing in the United States
H. Scott Matthews1 and Chris T. Hendrickson2
Abstract
The advent of the Internet and e-commerce has brought a new way of marketing and
selling many products, including books. The system-wide impacts of this shift in retail
methods on cost and the environment are still unclear. While reductions in inventories
and returns provide significant environmental savings, some of the major concerns of the
new e-commerce business models are the energy and packaging materials used by the
logistics networks for product fulfillment and delivery. In this paper, we analyze the dif-
ferent logistics networks and assess the environmental and cost impacts of different de-
livery systems. With a return (remainder) rate of 35% for best-selling books, e-
commerce logistics are less costly and create lower environmental impacts, especially if
private auto travel for shopping is included. Without book returns, costs and environ-
mental effects are comparable for the two delivery methods.
1. Introduction
It is tempting to assume that the sale of products on the Internet is beneficial to the
environment. For example, emissions from vehicles driven to shopping malls can be
avoided, retail space can be reduced, and inventories and waste can be reduced.
However, a product ordered online may be shipped partially by airfreight across the
country and require local truck delivery. Also, the product is likely to be packaged
individually, and the packaging may not be reused. The adverse impacts on the
environment of such transportation can be significant, and the net effect of different
logistics systems is not obvious (Matthews 2000).
Books are regularly purchased online as well as in retail stores. The high number
of remainders (unsold books) also leads to an interesting case study. After sales have
peaked, these remainders are either discarded, recycled or sold to a discount
bookstore. E-commerce allows for lower inventories (since there is only one
inventory point) and less remainders, thus reaping environmental benefits due to
avoided warehousing and paper production.
1
Graduate School of Industrial Administration, Carnegie Mellon University, Pittsburgh, PA
15213, USA, email: hsm@cmu.edu, Internet: http://www.gsia.cmu.edu/andrew/hsm/
2
Dept. of Civil and Environmental Engineering, Carnegie Mellon University, Pittsburgh, PA
15213, USA, email: cth@cmu.edu, Internet: http://www.ce.cmu.edu/~cth/
08-11-01, matthewsh.doc
2
Two models of logistics networks will be considered in this case study. First,
traditional retailing involves a retail outlet. In this model, books are shipped from
the publisher through distributors and warehouses to the retail outlet. The customer
then purchases the book at a retail store and brings it home. Second, the e-commerce
model ships the book from the publisher to one warehouse by truck and then by air
freight to a regional hub where it is sent by delivery truck to the customer.
Cost calculations are based on the comparative costs involved in selling a million
dollars worth (at production) of 'best seller' books, or roughly 286,000 books at an
assumed production cost of $3.50 each. We assume each book is 23 x 6 x 16 cm in
size (9 x 2.25 x 6.25 inches) and weighs 1.1 kg (2.4 pounds).
2. Traditional Retailing Method
The traditional method of retail, where books are sold at retail stores, can be
modeled as a series of transport links among facilities. The books are transported
from the printer to a national warehouse and then shipped again to a regional
warehouse. From the regional warehouse, the books are transported to a retail store,
where a customer buys a book and takes it home. In addition there is a return link for
unsold copies as roughly 35% of best sellers are unsold (Publishers Weekly 1997).
We assume all transportation is carried out by truck in traditional distribution, and
the distance between all destinations (e.g. warehouses and stores) is separated into
segments of 805 km (500 miles). This allows the model to be easily adjusted for
differing distances. The average consumer lives 16 km (10 miles) away from a
bookstore (Brynjolfsson 2000) but consumers tend to buy more than one item at a
bookstore (or as part of a shopping trip); thus, only a round-trip distance of 5 mi.
was used for the round-trip to the bookstore.
We assume that the 35% remainder rate for books in traditional retail inherently
causes the production of 35% more books than sold (or a total of 386,000 books).
All of these books are transported in boxes of 10 to bookstores. Assuming that each
box is 51 x 41 x 41 cm (20 x 16 x 16 inches) and weighs 910 grams (2 pounds), the
cost of each box is $1.33 (ULINE 2001).
The environmental effects of automotive trips made by consumers to bookstores
to purchase books must also be taken into account. Taking the fuel economy of a
passenger car to be 9.6 km/l (22.5 mpg), and the fuel economy of a light truck to be
6.5 km/liter (15.3 mpg) (US EPA 1997), we can calculate that the energy required
per mile for a passenger car is 3.6 MJ/km (5.8MJ/mi) and for a light truck is 5.3
MJ/km (8.6 MJ/mi). The environmental impacts of an average trip made to the
bookstore are shown in Table 1.
Returns of unsold books from retailers in the traditional model are an important
issue. Shipping of returns involves an additional truck leg, which we again assume
to be 805 km (500 miles). We ignore returns from customers after purchases; we
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3
Impact/km Impact for 5 mile Total
round trip
Effect Car Light truck Car Light truck
Energy Use 3.6 MJ/km 5.3 MJ/km 29 MJ 43 MJ 9.7 TJ
Hydrocarbons 1.8 g/km 2.3 g/km 14.5 g 18.5 g 4,550 kg
CO 13.7 g/km 18 g/km 110 g 145 g 35,000 kg
NOx 0.9 g/km 1.2 g/km 7.5 g 9.5 g 2,350 kg
CO2 225 g/km 338 g/km 1818 g 2728 g 611,000 kg
Source: (US EPA 1997, NHTSA 1998), Total based on 286,000 trips, 65% cars, 35% trucks
Table 1
Environmental Impacts of Round trips to Bookstores in Passenger Vehicles
assume they would involve similar personal trips for both traditional and e-
commerce retailing.
3. E-Commerce Retailing Logistics
We assume that the e-commerce method of selling a book (where a book is
marketed and sold online) has fewer links but involves airfreight from the e-
commerce warehouse to a Regional Logistics Center. We also assume that this
warehouse is located near or at an air hub of a major logistics carrier (e.g. UPS or
FedEx) so transfer from warehouse to the carrier is not included. Not all orders are
shipped by air this assumption is intended to represent a 'worst case' scenario for
analysis.
The books are shipped 805 km (500 miles) from the printer to the company's
major distribution warehouse via truck. The books are then air freighted to a
regional center (again assuming a distance of 805 km) from which the books are
delivered by local courier truck to the customer's residence.
The packaging used in e-commerce tends to be corrugated cardboard boxes.
Assuming a box size of 30 x 23 x 11 cm (12 x 9 x 4.5 inches), a weight of 317 g (0.7
pounds), the cost of each box to be $0.41 (ULINE 2001) and that the books are
packaged individually, we can calculate the cost in individually packaging the total
shipment of $1 million worth of books as $117,000. We assume no remainders or
returns in this model. However, the cost of the bulk packaging of 286,000 books
also needs to be included, $38,000, for a total of $155,000.
4. Comparative Costs of Traditional and E-commerce Logistics
Selling $1 million of books in the traditional model with remainders requires
386,000 to be produced and shipped given the 35% remainder rate. The total weight
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of shipments in the traditional model is 455 Mg (501 short tons) including 420 Mg
(463 short tons) of books and 34.5 Mg (38 short tons) of bulk packaging. A base
production of $1 million of bestseller books in the e-commerce (no remainders)
model requires only 286,000 books to be shipped. The e-commerce model ships a
total of 338 Mg (371 short tons) in bulk (including 343 short tons of books and 29
short tons of packaging) and a total of 403 Mg (443 tons) individually. A
comparison of these costs is shown in Table 2. We present estimates for two
traditional models - with and without remainders. We use the 35% remainder rate to
scale up costs where appropriate.
With a zero return rate, the traditional system has a slightly higher overall cost
than e-commerce but can provide immediate service to customers. But generally, a
certain proportion of the books published will remain unsold, and will be either
returned to the publisher to be recycled or sold to discount stores. Assuming the
average return rate for bestsellers of 35%, our estimate of e-commerce retailing costs
is far lower than the traditional system. Our estimates do not include any costs
associated with stock-outs in the traditional system; the e-commerce model places
books not immediately available on back-order for eventual delivery. Also, there are
benefits associated with immediately purchasing and perusing books. Finally, on-
line booksellers may have a wider selection than conventional bookstores.
5. Comparative Environmental Costs
E-commerce logistics systems involve more reliance upon airfreight service than
truck or rail modes. Airfreight requires much higher energy and fuel usage, with
corresponding large air pollution emissions. Table 3 shows some supply chain
environmental effects from $1 Million of trucking, airfreight and book publishing
(CMU GDI 2001). Table 4 shows the use of energy, emission of conventional air
pollutants, hazardous waste generated and greenhouse gas emissions for the
trucking, air freight, packaging, fuel production and book production for the
traditional and e-commerce retail models.
In order to quantify the environmental impacts associated with the production of
the fuel used in passenger vehicles, a producer price of $0.90/gallon was assumed
for our calculations. This figure was then combined with the values for the fuel
efficiencies of passenger cars and light trucks above to arrive at the dollar amount of
fuel used for passenger trips to the bookstores. Using a fleet composition of 35%
light trucks and 65% passenger cars (NHTSA 1998), the dollar cost of fuel for one
round trip to the bookstore is $0.225. For 286,000 trips to the bookstore, the
monetary cost of the fuel used is $64,400.
Our results indicate significant differences between the retail fulfillment modes,
with e-commerce having less of an environmental impact in all categories when
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Item Traditional Retailing E-Commerce Retailing
Without W/ 35%
Returns Return
Calculation Notes Cost Cost Calculation Notes Cost
($1000) ($1000) ($1000)
Packaging $1.33 x 286,000 38 51* ($1.33 x 286,000 books/ 155
books/10 books per 10 books/box) + ($0.41
box x 286,000 books)
Bulk Truck 3 trips*805 km/ 144 195* Only one 805 km (500 48
Shipments to trip (500 mi) of mile) shipment of 338
Warehouse 338 metric tons metric tons (371 short
(371 short tons) at tons)
$0.18/mt-km
($0.26/ ton-mile)
(US DOT 1999)
Air Freight None 0 0 One 805 km (500 miles) 177
trip - 403 tons (443
short tons) at $0.55/mt-
km ($0.80/ ton-mile)
(US DOT 1999)
Local 8 km (5 miles) at 472 472 Local delivery charge of 440
Delivery/ $0.21/ km $1.50 for 286,000 books
Pickup ($0.33/mile) for
286,000 pickups.
Retailing 12% revenue with 515 695* 4% of revenue with av- 172
Overhead average $15/book erage $15/book (Meeker
Cost (Meeker 1997) for 1997) for 286,000 books
286,000 books
Return 805 km (500 mi) of 0 17
Shipping returns (100,000
from Re- books *10
tailer books/box *
$0.26/mi)
Return Pro- $3.5 of 100,000 0 350
duction Cost books
Total without private auto 697 1,308 992
Total with private auto 1,169 1,780 992
Table 2
Comparative Estimated Costs of Logistics and Returns for Traditional versus E-
Commerce Book Retailing
compared to the traditional model with returns. The comparison between e-
commerce and the traditional model without returns is less clear. Overall, emissions
from passenger vehicle trips (including fuel production) contribute significantly to
the environmental impacts. By eliminating these trips, emissions of greenhouse
gases and conventional air pollutants are significantly reduced in the e-commerce
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model. However, the increased air freight and packaging of the e-commerce system
reduce much of the benefits from reduced passenger trips.
Effect Trucking Air Book Paperboard Fuel
Freight Production Containers Production
and Boxes
Energy (TJ) 25 39 7 23 109
Conventional Air 42 16 6 22 27
Pollutants (mT)
RCRA Hazardous 43 53 17 69 465
Waste (mT)
Greenhouse Gas 1672 2483 453 1640 5234
Emissions (CO2
Equivalents, mT)
Table 3
Some Effects of $ 1M of Trucking, Air Freight and Book Publishing Production
As seen in Table 4, the e-commerce impacts lie roughly between the zero and
35% return traditional models. Thus, the e-commerce model is at worst comparable
to the traditional model, and under normal conditions, superior. The only effect of
concern is greenhouse gas emissions, which are a result of the substitution of air
freight and increased packaging.
A sensitivity analysis of the results was performed between the traditional model
with 35% returns and the e-commerce model. No sensitivity analysis was done
against the zero returns traditional model given the already clear tradeoffs. Thus, if
the air freight distance is 870 km (540 miles) rather than 805 km, the emissions of
greenhouse gases in the e-commerce model would equal those in traditional (with
remainders). Likewise, if the round-trip allocated distance to local retailers drops
66% to 2.7 km (1.7 miles), conventional pollutant emissions are higher in e-
commerce. This analysis reinforces the importance of which environmental effects
cause concern. As greenhouse gas emissions are currently unregulated, and thus
unlikely to be the focus of any decision, the sensitivity analysis suggests that
significant changes in the assumptions would be needed for the traditional retail
model (with returns) to be superior than the e-commerce model.
As noted above, this paper assumed that all shipping of e-commerce book orders
were done by airfreight (a worst case scenario). However, many orders are shipped
exclusively by truck. This means that the actual effects from e-commerce delivery
would be generally lower because of the trucking. This would make e-commerce
even more competitive when comparing energy and environmental effects.
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Energy Conventional RCRA Greenhouse
(TJ) Air Hazardous Gas Emissions
Pollutants Waste (CO2
(mT) Generated Equivalents,
(mT) mT)
Trucking 5.3 8.9 9.1 354
Trad. Retail (35% returns)
(inc. returns)
Production 9.45 8.1 23 612
Packaging 1.2 1.1 3.5 84
Passenger 9.7 42 0 611
Tripsa3
Passenger Fuel 7 1.7 30 337
Production
Total 33 62 66 2000
Trucking 3.6 6 6.2 241
Trad. (no returns)
Production 7 6 17 453
Packaging 0.9 0.8 2.6 62
Passenger 9.7 42 0 611
Trips
Passenger Fuel 7 1.7 30 337
Production
Total 28 57 56 1704
Trucking 1.2 2 2 80
E-commerce
Air 7 2.8 9.4 440
Production 7 6 17 453
Packaging 3.6 3.4 10.7 254
Delivery Trips 11 18.5 19 736
Total 30 33 58 1963
Table 4
Comparative Effects of Trucking, Air Freight and Returns Book Production for Tra-
ditional Retailing (with and without returns)
Examples of potential spillover effects from electronic commerce that were not
analyzed include structural changes to the economy, substitution of manual or
physical processes to digital systems, et cetera (Romm 1999).
3
For Passenger Trips, this includes only Carbon Monoxide, Nitrogen Oxides and
Hydrocarbons. For other categories, the figure includes Carbon Monoxide, Nitrogen Dioxide,
Sulphur Dioxide, VOC, Lead and PM10 (particulates less than 10 microns in diameter).
08-11-01, matthewsh.doc
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6. Conclusions
We have analyzed a generic scenario for traditional versus E-Commerce retailing of
a single commodity, best-selling books. For further results, see Matthews (2001).
Our analytical approach can be adjusted for different assumptions about shipping
distances, return rates or shopping allocations. By altering these critical parameters,
E-Commerce can be found to be more or less costly than the traditional system. It is
noted that different assumptions about population density (and thus, distances to
retail stores) and order sizes would significantly change the results. Nevertheless,
our base analysis case suggests that E-Commerce sales have a cost advantage and
environmental benefits.
7. Acknowledgments
The authors would like to thank the AT&T Corporation and the AT&T Industrial
Ecology Faculty Fellowship Program, for funding support of this project.
Bibliography
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