News | Gütersloh, 05/30/2023

Strong Growth Worldwide

Boost@Bertelsmann: Arvato

Clothing, electronics, cosmetics, medicines and much more: people who order online have their purchases delivered via Arvato distribution centers in numerous countries. This is a business in which Bertelsmann has invested a lot of money – and will continue to do so.

The “shuttle” is one of the technical highlights at Arvato’s modern logistics center in Hamm, Germany. “Controlled by computers, the automated shuttles fetch boxes containing various products from our business partner Douglas from the warehouse,” explains site manager Christian Schmidt. “The boxes then travel via an intelligently controlled conveyor system to the employees who pick and pack the orders received online.” A good 220 employees work in two shifts to handle the many different work processes in Hamm. By the end of the year, Arvato plans to have 300 employees. At the moment, as many as 100,000 items can be shipped to customers here per day. The near-flawless operation in the approx. 38,000 square meters of warehousing space immediately adjacent to the A2 highway – the facility, launched in September 2022, is nowhere near at its planned maximum capacity – is the result of extensive investments that Arvato has made in various countries around the world under Bertelsmann’s Boost strategy. The high pace of logistics capacity expansion is to be maintained, confirms Arvato CEO Frank Schirrmeister in an interview.

“Our total revenue has increased by 15 percent in each of the past two years alone,” he says, making clear the dimension of Arvato’s growth. “And this has been mostly organic growth, i.e., the expansion of our own businesses without acquiring other companies,” he emphasizes. “We have expanded distribution centers at existing locations, but we have also established new hubs in various countries,” adds Schirrmeister. The list of countries in which Arvato now operates is accordingly getting longer and longer: there are now 97 locations in 17 countries worldwide, with some 17,500 employees, including the United States as a fast-growing market. Arvato offers its more than 500 customers logistics services such as warehousing, order picking and transport management on total warehousing area of more than 2.5 million square meters (27 million sq. ft.).

Arvato also develops and operates supply chain, e-commerce and omnichannel solutions that are as complex as they are global, as well as digital distribution models using the latest IT solutions and technologies. The advantage for its business partners is that all services are modular, so they can be combined as desired. And the industries Arvato’s customers hail from are just as varied: from Consumer Products and Healthcare to High Tech, Automotive and Publishing.

Omnichannel distribution as end-to-end solution

“Our core competence lies in doing business in end-customer-oriented sectors, i.e., with companies that sell their goods and services to consumers,” explains Frank Schirrmeister. “Depending on the location and the customer, we supply our partners’ stores or deliver orders received via an online store or online marketplace to their customers’ homes on their behalf. We call this end-to-end solution omnichannel distribution.” The B2B business, such as logistics within a company or between customer sites, is not part of the portfolio, nor are services for the food, chemical, or oil industries, for example, “because none of this would be worthwhile for us due to the lower value-add,” explains the Arvato CEO.

In the past few years, Arvato has seen significant growth, especially in the Consumer Products segment, with services for renowned brands from the fashion, beauty, sports, and lifestyle sectors; in the Technology segment, where it provides services to the high-tech and consumer electronics industry; and in the Healthcare segment, with solutions that integrate all players in healthcare – from pharmaceutical manufacturers to laboratories and suppliers, to patients. “We have significantly increased our capacity here in the past two years. On the one hand, because our existing customers have tendered for new and in some cases larger orders, which we were able to secure. And on the other hand, because we were able to acquire completely new customers in these market sectors,” says Schirrmeister. This created a need to expand existing sites and set up new ones. Arvato’s customers include such well-known companies as Rituals, Douglas, Esprit, Zalando and Sephora in the consumer products sector; Microsoft, Apple, Sennheiser and Harman in the tech sector; and Otsuka and Olympus in the healthcare sector.

A new logistics hub for Meta

In the past year alone, Arvato has grown at various locations around the globe. “In Las Vegas, for example, we opened a completely new logistics center to better supply our major partner Meta with electronic components for the server parks in its data centers on the US West Coast,” says Schirrmeister, and goes on to present a long list. The company’s fifth US distribution hub is being built in Louisville, Kentucky, which will deliver tech products to end customers. “Last year, we also ventured into the healthcare market in the United States,” Schirrmeister continues. “After winning Smith & Nephew, one of the world’s largest orthopedic manufacturers, as a customer in Europe three years ago, we took over a Smith & Nephew warehouse in Memphis, Tennessee, at the beginning of this year and invested heavily in it, including in its automation.” The huge logistics complex in Gennep, the Netherlands, has also been expanded again, he said, to continue growing with customers such as the audio technology company Harman. With around 230,000 square meters (2.5 million sq. ft.) of warehouse space, Gennep is now one of the largest distribution centers in Europe, says Schirrmeister. “In France, we have expanded our logistics center in Chanteloup-en-Brie near Paris to be able to offer the Roche pharmaceutical group, among others, even more services within Europe,” says the CEO, continuing his list. In Italy, he says, Arvato made an acquisition, taking over the logistics service provider Quickly together with its 14,000 square meter site (approx. 150,000 sq. ft.) site in Anagni near Rome in October 2022 – a rare exception to the strategic principle of organic growth, as Arvato has several of the Quickly group’s key customers integrated in its own portfolio.

And that is by no means all: at its headquarters in Gütersloh, the company erected a new warehouse with 30,000 pallet spaces in 2022 – right next to its existing 70-meter-high high-bay warehouse, which is currently being modernized. After more than 40 years of continuous operation and a total of around 50 million trips, all 14 stacker cranes in the high-bay warehouse will be replaced at a cost of several million euros. “In the United Kingdom, we responded to multiple requests from our customers in the tech and healthcare industries who want to avoid Brexit-related customs issues, and have built a new logistics center in the East Midlands with 20,000 square meters (215,000 sq. ft.) of warehouse space,” continues Frank Schirrmeister. Arvato is also growing steadily in Turkey with strong global brands including Ikea and H&M, as well as with domestic companies; its seventh distribution center opened near Istanbul in 2022. And in Australia, Schirrmeister adds, the company has set up a plant before any contracts were finalized, in anticipation that clients such as Microsoft, Apple and Meta would soon be interested in Arvato services “made in Australia,” which were previously handled by Arvato from Singapore. “As we predicted, this did not take long,” reports the CEO with satisfaction.

Considerable revenue growth in the United States

The internationalization of the business is progressing rapidly, as can be seen from this long and far from comprehensive list of investments: while Germany alone accounted for three quarters of Arvato’s revenues less than five years ago, this share has now fallen to around 50 percent. Arvato already generates a good 15 percent of its revenues in the United States, where it currently employs around 1,200 people – and the trend is clearly upward. The Netherlands and Poland each account for 10 percent, France for 6 percent, and Asia, i.e., China and Singapore, for 3 percent. The remaining shares are accounted for by subsidiaries in Turkey as well as the United Kingdom, Spain, Italy, Austria, France, Ireland, Brazil and Australia.

Arvato has particularly high hopes for the United States. “The United States is strategically important to us in several respects,” says Mitat Aydindag, Arvato’s President North America since 2018. “The country is in itself a very large market with many large and accordingly attractive customers, and on top of that, it is one of the key markets for new technologies and the healthcare sector. In 2016, for example, we were able to win Microsoft as a major new business partner in the United States. Right from the start, our colleagues in Louisville, Kentucky, and Ontario, a city in California, were responsible for the account,” says Aydindag lists. “Besides, in the United States – as in the case of Microsoft – we often do business with globally active companies for which an international presence is important and with whom we can later conclude contracts for services in other regions or even worldwide. This is exactly what we succeeded in doing with our initially US customer Microsoft, for whom we quickly established services in Gennep, the Netherlands, for Europe, and later in Hong Kong for Asia in 2017. In doing so, we benefited from the expertise we had gained with Microsoft in the United States.” So the United States served as a growth driver, so to speak, for business in other countries, says Aydindag. As in many other locations, however, it is a great challenge to find qualified specialists so as to maintain the growth rate. Of course, he said, there was support from Germany and Europe. In 2022, Arvato launched “Apollo,” a mobility program to attract experts from across Europe to fill vacancies in the United States, including in key account management, IT or customs management. However, in view of a depleted labor market, recruiting employees for the warehouses is also proving to be a recurring problem, reports Aydindag.

Uniform branding and integrated operations

“The logistics market is extremely fragmented. And we are neither one of the small nor one of the very large logistics service providers, but certainly one of the most attractive for the customers we serve,” says CEO Frank Schirrmeister, elaborating on Arvato’s strong international presence. “One of our greatest strengths is that we don’t merely have a uniform branding, but are operationally integrated and work in global teams,” he explains. “To achieve this, we pushed ahead with the relevant strategic projects even during the COVID-19 crisis, and now have a globally uniform IT infrastructure accessible via the cloud, through which central applications such as reporting tools, as well as other IT applications, can be used. This enables each business unit to exchange relevant data and knowledge, to form working groups with colleagues from other units, to communicate with each other systematically and, based on these competencies, to serve our customers in all countries and markets with the same quality – including the data,” Schirrmeister points out. He adds that a central key account management team is available to customers as the main contact for all inquiries, which are then forwarded to the respective experts at Arvato. “This is particularly interesting for many customers when they are looking to expand internationally. They know that they will get the same service with the same quality from us, regardless of which important market they are aiming for,” says Frank Schirrmeister. “And we don’t have to start all the processes from scratch; we do it through our central platforms. In this respect, we are significantly ahead of most of our competitors.”

The same is true for the automation of logistics processes in the distribution centers, which Arvato has been pushing for years. Whereas just a few years ago it was the respective site managers who decided locally which investments, for example in an IT solution or even a new conveyor system, were worthwhile and which were not, Arvato now uses its central expertise for this purpose. “We have gained a lot of experience over the past few years on how and for which processes such elaborate conveyor systems should be operated,” explains the CEO. “Dimensioning them and installing them is a major challenge. And it’s not the right way forward for every distribution center and for every customer. But if it is, and if it’s worth the effort in a reasonable amount of time, our experts know exactly how best to go about it. They are then deployed on site as consultants.”

Highly automated process

In Hamm, this effort has paid off – according to Schirrmeister, the construction of the state-of-the-art distribution hub for more than 70 million euros was the largest investment in Arvato’s history to date. Site manager Christian Schmidt, who has been with Bertelsmann since 1988 and worked for Arvato for 18 years in successive management roles in several countries, is duly pleased as he tours the halls. “This technology lets us process significantly more orders per day than would be possible manually,” he emphasizes. This is because the shuttles mentioned at the beginning of this article are supplemented in Hamm by an equally intelligent conveyor system with a total length of around seven kilometers (4.34 miles). In a highly automated process, it first selects empty cartons in the right size for the order, folds them to save as much space as possible and provides them with a computer-readable label – and then sends them on their journey through the halls. Via roller conveyors and multiple levels, the cartons – together with the dark gray plastic crates full of Douglas articles provided by the robotic systems from the warehouse – reach their respective destinations: a workstation where an employee stands at a picking table and repacks cosmetics from a compartment of the gray crate into the waiting carton, for example. During the visit, we noticed that a screen at eye-level shows a picture of which compartment of the crate the employee has to reach into and how many items they have to remove from it – “pick by light” is the name of this process. “The aim is to use the conveyor system to bring the goods to the employees, minimizing the distance to the merchandise,“ explains Schmidt. The employee packs the removed items into the carton in front of them as indicated, confirms the completed order by pressing a button, and places the carton back on a roller conveyor, on which it continues its journey through the hall toward the outgoing goods area. About 200 fully loaded trucks leave the warehouse every day – and considerably more during peak seasons. Meanwhile, other roller conveyors transport the gray crate back to the warehouse , where the shuttle system sorts it back into a free rack space. “The system remembers which items are still in the crate, so that it can retrieve them for a new order at the next opportunity,” explains site manager Schmidt.

Hamm is just one of many locations where Arvato is driving automation forward. In Memphis and Louisville in the United States, in Gennep in the Netherlands and in Hanover in Germany, among other places, more and more work steps are now being automated. “The advantages are obvious,” explains Frank Schirrmeister: “More throughput with fewer employees – who are often hard to come by these days anyway – increases efficiency and thus revenues and the profitability of the entire operation. However, the high investments also need be amortized, which means we need planning security for the next few years, ideally until we have finished depreciating the costs. So we need planning security, and that in turn means we will invest in such equipment if we know we will keep a customer for a long time and will be processing large order volumes for them.” Moreover, automated conveyor systems are not possible for every type of product: smaller items or “hanging garments” in the case of fashion items, for example, are difficult to sort by machine, says the CEO.

Millions of euros for eco-friendly energy production

Frank Schirrmeister also places a priority on the climate-compatibility of Arvato’s business. It is no coincidence that many millions of euros have been invested in energy-saving and eco-friendly energy generation measures in recent years. For example, the company has begun a global switch to green power and, as recently as mid-March, announced the conversion of the energy supply of five more distribution centers in the United States to green power sourced from wind and solar energy. Following the warehouse in Pleasant Prairie, Wisconsin, four distribution centers in Louisville and one in Valencia, California have since also started sourcing electricity from renewable sources. This helps reduce annual greenhouse gas emissions by an average of about 3,100 metric tons of CO2. “This was another step in our sustainability strategy to be climate-neutral together with Bertelsmann by 2030,” says Frank Schirrmeister, and stresses that customers from the tech industry in particular value such a strategy, even making it a prerequisite for doing business. In order to achieve the self-imposed target, all of Arvato’s sites worldwide are to be converted to green power over the next few years, the CEO assures us. While the company in Louisville is working with the two local power suppliers LG&E and Eastern Kentucky Power Cooperative to purchase “green” energy to offset the electricity consumed locally, the Valencia site is relying on the Clean Power Alliance. These are local nonprofit electric utilities serving 30 cities in Los Angeles County and Ventura County, as well as other areas in both counties. In 2020, 70 percent of the electricity provided came from solar power, and 30 percent from wind power. So in both cases, Arvato is making a contribution to the energy transition in the United States, where the issue has not yet played a particularly important role in rural areas and alternative energies are not being promoted by the government.

The situation is different in Germany, where in Gütersloh, for example, Arvato installed photovoltaic modules on a total of 46,000 square meters (roughly half a million square feet) of roof space at its warehouses in 2022. The system, which cost 3 million euros, generates around 3.5 million kilowatt hours of electricity per year, 100 percent of which is consumed on site. This is equivalent to the annual consumption of approx. 1,000 three-person households. In Hamm, as at other sites, the company operates its own combined heat and power (CHP) plant and also has a photovoltaic system installed on the roof; here, it covers 31,000 square meters (333,000 sq. ft.). “The conditions for eco-friendly energy generation are different in every country,” sums up Frank Schirrmeister, explaining the economic impact of high energy prices. “In general, last year we spent almost 20 million euros more on supplying our operations with energy in Germany alone, so we are countering this with many measures such as thermal insulation, less lighting and the aforementioned expansion of solar power.”

“Boost is expediting our plans“

The fact that Arvato is able to invest in new technologies at so many sites and expand distribution centers or open them in new locations is clearly thanks in part to Bertelsmann’s Boost strategy. “Of course, we have always invested and driven a lot of things forward,” says Frank Schirrmeister. “But Boost is expediting our plans and empowers us to make significantly bigger investments. Supporting Arvato’s growth in this way really is a huge vote of confidence from Bertelsmann.” According to Schirrmeister, the company continues to aim for primarily organic growth. “Many competitors are conglomerates that mainly want to strengthen their own distribution position with acquisitions in the logistics sector. But we define ourselves as a service provider for companies in promising industries that prefers to grow with its orders.” And in Schirrmeister’s view, this is going well: “We have excellent, financially robust customers whom we are able to sign as business partners in more countries or whose contracts we can expand. At the moment, we are still benefiting from strong momentum, though it looks like business could cloud over a bit for some customers soon – in the fashion sector, for example. Overall, however, we are very diversely positioned, so we will continue to feel a tailwind from our customers, receive exciting new orders, and open and expand further sites,” he says confidently, announcing further major investments for large customers this year. The powerful growth of the past two years will probably not be matched by Arvato this year and next, “but we will definitely continue to be very satisfied with our business performance,” says the CEO. “If this continues, we could achieve record revenues by no later than 2026.”