Amazon is a $200 billion juggernaut. They offer the best online shopping experience, competitive pricing, and a supply chain designed for the fastest delivery possible. At times you have to wonder if anyone in their path can survive the onslaught. As they’ve grown, rolled out Prime, and expanded categories, they’ve handed a death sentence to Borders, Radio Shack, Circuit City, and many other retailers. Of those that are left, which retailers have a chance, and what do they need to do to survive? Let’s take a look.
While they were slow at first to match Amazon’s online shopping experience, retailers have made huge strides over the past few years. Customer reviews, one-click checkout, “smart” searching, and a broad product mix are more prevalent than they were even three years ago. Similarly, many retailers have closed the gap on pricing. Recognizing ecommerce as a critical part of their future channel mix, they brought to bear knowledgeable resources, experienced in pricing and promotion, to level that playing field.
Which leaves supply chain as the weak link for retailers who cannot or are unwilling to match Amazon’s last-mile logistics. Staples offers a great shopping experience and matches Amazon’s prices, but how loyal will their customers be when they know they can get same-day delivery from Amazon, versus waiting three days for Staples to deliver, or driving twenty minutes to the nearest store?
Most retailers’ supply chains are all about getting pallets of goods to their stores. Distribution centers, inventory management, transportation providers, and delivery models are all geared toward making sure the stores are never out of stock. As ecommerce emerged, retailers struggled with how to start shipping individual items direct to the customer. Many initially adapted by opening a centralized national warehouse dedicated to shipping ecommerce orders. That model left their pallet-based store replenishment supply chain in place, while enabling them to send individually packaged items to online buyers.
This model made sure they were not totally eclipsed by Amazon—until recently. Amazon is relentlessly speeding up their supply chain. They’ve opened dozens of new warehouses and rolled out same-day delivery in more than 35 markets, with an eye toward providing free same-day delivery to Prime users in every major market. Brick-and-mortar retailers now need to totally reinvent their supply chains to leverage local inventory to match Amazon’s supply chain. Centralized ecommerce warehouses are almost obsolete.
For retailers, using local inventory requires a lot of rethinking, but there is reason for hope. Target, for instance, recently announced that 55% of its ecommerce orders are now fulfilled from local stores. And most retailers now have some experience experimenting with storefront delivery options.
But this is modest progress. Until retailers commit to a scalable, locally oriented supply chain that offers low-cost same-day delivery, they run the risk of losing buyers to Amazon’s supply chain advantage, bit by bit—even if their stores are bursting with merchandise.
So at the end of the day, matching Amazon’s online experience and price will not be enough for retailers to survive. Without supply chain re-invention as well, retailers face a slide into inevitable bankruptcy as store volumes dwindle and online buyers move towards Amazon. I’d expect Wall Street and others to increasingly predict the winners and losers in retail largely based on supply chain strategy and their investments in the last mile.
For 2016 I made some predictions for the year in logistics. I was spot on with several (e.g., valuation pressure for on-demand delivery companies) and not so good on others (e.g., consolidation). Overall, though, I was good enough to make some more for 2017. So here goes:
1. Amazon will Buy Sears – Imagine the shake up as Amazon enters into brick and mortar retail in big way, acquiring some great brands (Craftsman, Die Hard, Kmart, Kenmore) and also instantly adding 1,300 forward-deployed inventory locations for same day delivery.
2. Uber-like visibility for package delivery – Shippers will have increased expectations for their delivery partners as they strive to provide consumers with visibility similar to what they get with Uber (driver photo, license plate and phone number, driver rating, route mapping etc.). Delivery providers will need to scramble to collect and present all of this visibility data to the end recipients.
3. Uptick in Storefront Delivery – Major retailers will introduce more comprehensive and innovative storefront delivery programs. A few years of experimenting will give way to firm commitments to match Amazon, even if they are money-losing operations for several years.
4. Drone mania comes crashing down – Actual commercial realization of drones for delivery will not materialize in 2017 as the hard realities of technology hurdles, regulatory issues, and common sense drag down the hysteria.
5. Google Express will shift their focus to small businesses – It’s no mystery why Google is in last mile: They need to stem the loss of ad revenue from e-commerce buyers skipping Google search and going directly to Amazon. Google Express is a way to attract retailers with a unique local delivery option. As larger retailers develop their own local delivery strategies, expect Google to shift to smaller retailers who can’t do it on their own.
6. FedEx will get off the sidelines – Expect FedEx to begin to innovate on local delivery through acquisitions, investments, or an innovation center. UPS has made some investments in local delivery (Convoy, Deliv, Shutl), but FedEx has held firm. Expect that to change as the threats of local delivery become more entrenched.
2017 certainly is shaping up to be an interesting year with the pace of innovation and disruption in logistics accelerating.
Over the years, logistics companies and carriers have waged war on various fronts. Pricing is an obvious one, and service level is another (next-day air, next-day AM, same-day), but today these have largely normalized across competitors. Now a new front has opened: customer visibility and experience.
Shippers—whether retailers, distributors, or manufacturers—are increasingly looking for real-time visibility into where their shipments are in the supply chain in order to identify issues that cause production or availability problems—problems that may ultimately affect their sales. At the same time, customer visibility and experiences provided by ride-sharing companies (Uber, Lyft) and food delivery companies (Instacart, Grubhub) are increasing customers’ expectations. These experiences are rarely seen (yet!) in logistics but, as with fast shipping, are likely to become standard.
Here’s a partial list of capabilities that drive a great customer experience and are not widely available in logistics. Over the next few years, they will become important for shippers and the carriers they work with if they are to meet evolving customer expectations. (Remember when Amazon Prime seemed like a luxury, and how within six years customers would no longer accept 5-to-7-day delivery?)
1. Photo and name of the driver, and vehicle information – Uber has set the standard on this one;
2. Real-time driver location – GPS location of driver when inbound for delivery or pickup;
3. Estimated delivery time;
4. Scheduling – customers should be able to schedule a reasonable time window for their delivery or return pickup (i.e., not the typical cable company four-hour window);
5. Driver quality score – know others’ ratings of the driver or carrier;
6. Real-time survey – capture feedback immediately after the delivery or pickup is complete;
7. Easy customer support access – access that doesn’t require a phone call or a cumbersome contact form, and that reaches the shipper, not the carrier, directly;
8. Centralized delivery visibility – one shipper-controlled place for the customer to track deliveries, as opposed to providing a tracking number and making the customer go to the carrier, as is typically the case today;
9. Simple online claims submittal and processing – for example for damages, lost items, etc.; and,
10. Notifications subscription – customers pick and choose when and how (text or email) they are notified/alerted to events (out for delivery, delivered, etc.).
As in every competitive environment, there will be early adopters who provide these capabilities before the rest. The early adopters will build market share, potentially gain pricing leverage, and also become stickier relative to the laggards—the capabilities mentioned above have been key ingredients in Uber’s rapid rise. Some of these enhancements are easy (e.g., online claims submittal), but most are difficult due to most companies having old legacy technology and not investing in new technology for logistics.
Even UPS, who proudly claims to spend more than $1 billion on technology every year, is moving slowly toward this next-frontier customer experience. In 2011 UPS started Fast Forward, which allows recipients to choose a delivery window in certain situations. And in 2016 they rolled out a map for recipients to see the real-time location of their delivery. But these services are only available for non-business customers of Next Day Air and International shipments—both of which are less than 1 percent of their business. This slow progress is an indication of how hard it will be for even large carriers, and therefore their shipper customers as well, to meet emerging customer expectations.
The irony is that the very technology investments that allow carriers to provide visibility to their shipper customers, and in turn to their end customers, also improve efficiency and reduce costs for the carriers themselves. To provide a high-quality customer experience, carriers need to get their own houses in order first. Real-time operational visibility, systems integrations, and paperwork elimination are all drivers of cost reduction as well as prerequisites for shippers to give customers a great delivery experience.
The very largest carriers and shippers with in-house technology teams may be able to improve their systems on their own, but the bet here is that most will need to adopt external technology to keep up. Who knows how long it will take for an Uber-like experience to become a requirement for shippers, but good times are likely in store for supply chain software companies that can meet these visibility needs.
I was recently at an invitation-only conference with the CEOs of most of the important logistics providers in the United States. Several wider themes emerged: the good (not great) economy, the emergence of last mile delivery, et cetera. But the most surprising theme for me was the near-universal assertion that Uber will be entering into delivery but is not a competitive threat. Truckload, LTL, small package, and supply chain technology providers all were dismissive. Each had reasons why Uber could not compete in their portion of the supply chain. It’s true that some of these companies are very well protected; for example, international customs brokerages and dedicated chemical carriers are pretty far from the fray. But many will be impacted directly, and all will be in ways they may not expect.
The most straightforward challenge is that Uber’s customer service strategies are raising the bar for everyone in logistics in much the same way that Amazon’s raised the bar for all retailers. As a consumer, when you take an Uber ride, you can: see a picture of the driver, view the route, get a prediction of arrival and drop-off times, rate the quality of the ride, and communicate directly with the driver. Put simply, this is a great customer experience. Not coincidentally, it also keeps costs down for Uber by pushing customer support onto the driver, and it drives quality, as drivers are managed based on customer feedback (we call this the driver’s reputation capital).
As more and more folks use Uber, Lyft, and other providers with this new level of visibility, it will start to become a customer expectation for every type of delivery, whether passenger or package. First for consumers, then for business buyers. How do FedEx, UPS, and all the other logistics providers stack up? Not well. Many of them have little technology, and most do not allow any communication between recipient and driver; some are even prevented from doing so by union rules! How much longer will it be OK to order a $20,000 living room set from Restoration Hardware without this new level of visibility? Not long. How long until 3pl customers begin asking for this level of visibility? It’s already starting to happen.
As Uber enters delivery, they may not be a direct competitor for every logistics provider, but they are raising the bar for all. Providers that can rise to the higher-visibility challenge will be at a competitive advantage against those that can’t. Logistics will have an altered competitive landscape dependent on investment in technology and a focus on the end recipient.
Uber as a more direct logistics competitor is also emerging. Through their Uber Everything brand, Uber is beginning to offer delivery via their pool of two million drivers. I’ll cover how Uber is entering the logistics space in another post. In the meantime, if you’re a logistics CEO, CTO, or CIO, you’d better start looking for solutions to match the Uber level of visibility, as that expectation is coming to your market. And for some, Uber itself is coming as well.
Amazon is quietly expanding a program where they work directly with independent drivers to do package delivery from local Amazon warehouses. The program, called Amazon Flex, is now active in a dozen cities, and pay $18 and $25 per hour to drivers, who work 4-hour shifts. They have some vehicle requirements, but are not overly restrictive in their recruitment. In fact, the requirements sound a lot like Uber driver requirements without the background checks. But why is Amazon building it’s own in-house version of Uber Everything?
Because of delivery economics and competitive differentiation.
Amazon Flex is extremely cost efficient as it removes the margin a local delivery carrier normally takes— carriers, which often use the independent contract driver model, have historically done a significant amount of Prime and same-day deliveries for Amazon. Carriers traditionally pay about 65%, of what they charge shippers for a delivery, to their drivers, and they keep the rest to end up with a profit after covering the cost of sales, recruiting drivers, routing and dispatching, warehousing and customer service. Flex dis-intermediates the carrier by using Amazon’s fulfillment centers, customer service and replicating everything else with technology developed in-house (final mile software and a driver app).
By removing the carrier, Amazon is able to lower the cost by as much as 35%, while gaining even more control by interacting directly with drivers. Amazon is also showing savvy and a willingness to invest in the program by paying hourly wages. It’s a huge challenge to balance the supply (drivers) with demand (orders) when establishing a delivery network. By paying hourly, Amazon takes on the cost of low volume periods, a major departure from the approach of Uber and others that use an independent contractor model—they force drivers to accept low incomes during low volume periods. With sufficient order volume, Amazon Flex can shift to paying on a per delivery basis or towards paying out a higher wage based on a deliveries per hour metric, allowing them to control costs and drive operational efficiency.
Amazon likely wants Amazon Flex to be a closed network (i.e., proprietary) for competitive reasons. By working with carriers (local, regional, UPS or even UberRush), Amazon leaves open the possibility that their competition would simply use the same set of carriers to match their service offering (e.g., 1-hour, AM/PM). And, with Amazon’s massive, rapidly growing volume, they would effectively be subsidizing their competitors’ rates. Amazon Flex eliminates these possibilities, and puts more distance between Amazon and their competition.
It’s possible that Amazon may go a step further with Amazon Flex, making it “open”—i.e., available for others to use much like they do with Amazon Web Services. Such a move would put Amazon in direct competition with UPS as a common carrier; however, it’s unlikely since Amazon is dependent, for the time being, on UPS and FedEx. And Amazon Flex would need years to mature before they could risk alienating UPS and FedEx.
Why Is Amazon Doing This Now?
Amazon is unique in that they have the volume to establish a private, dedicated delivery network. They can shift Prime volume from local carriers, or from UPS, to provide instant volume to Amazon Flex drivers. No other retailer has the volume, or efficient local fulfillment centers, to make this happen. Meanwhile, Uber has paved the way for Amazon Flex’s recruitment efforts and independent contractor liability issues. Uber is spending billions developing an independent driver pool, from which Amazon can recruit. Uber is also leading the independent contractor classification charge, and is fighting legal battles that will ultimately benefit Amazon Flex.
Amazon’s private Uber network for package delivery is going to create even more challenges for retailers to overcome, and does not bode well in the long-term for UPS and FedEx. For retailers, a private network makes Amazon’s delivery economics and service levels nearly impossible to replicate. For UPS and FedEx, the proprietary network at minimum provides Amazon with negotiating leverage and potentially introduces their first competitor, one purpose-built for eCommerce and same-day delivery.
The Gap recently announced it will close more than 400 stores. Meanwhile Amazon is headed in the opposite direction, announcing that they are opening urban “micro warehouses” across the country, from which they’ll perform same-day local delivery of their most popular inventory. It’s amazing to watch the fortunes of two retail behemoths, and essentially all of brick-and-mortar retail, changing before our eyes. To understand why it’s happening, let’s compare Amazon’s customer fulfillment strategy to brick and mortar’s long-standing approach.
Amazon is focused on improving their already industry-leading delivery service levels by rapidly expanding the number of markets in which they offer same-day delivery. Both on-demand (i.e., get your order in one hour) and AM/PM service (i.e., order in the morning, get your order in the afternoon or evening) require inventory close to the customer. Consequently Amazon has added urban micro warehouses in low-rent metro areas that provide easy inbound and outbound logistics. These micro warehouses are optimized for rapid fulfillment, and aren’t burdened with the worries of a retail environment like cosmetic appearance, displays, or public restrooms.
Conversely, most existing retail brick-and-mortar locations are set up all wrong when it comes to rapid fulfillment and local delivery. Here’s why:
1. Cost – retailers pay high rents to maximize foot traffic, but Amazon can locate in low-rent districts;
2. Consolidation – Amazon consolidates inbound logistics at a single location in an urban center, whereas retailers usually have many dispersed locations;
3. Location – Amazon can locate their new facilities based purely on order history, whereas retail stores have numerous logistical and practical constraints when choosing a new store location;
4. Access – retail stores in malls and downtown areas are a nightmare for same-day delivery, as many people will be needing to quickly pick up and deliver throughout the day;
5. Design – retail stores have the consumer in mind for everything they do, whereas Amazon micro warehouses have fulfillment in mind for everything they do. Optimizing for both consumer sales and fulfillment efficiency is nearly impossible; and,
6. Scale – many retailers do not have enough large-footprint locations to effectively roll out same-day or local delivery services.
My local Gap store is in a downtown San Francisco mall, where it is impossible to find parking and get quickly in and out. This store will never be efficient for local delivery, and I estimate that 70 percent of existing retail locations have similar challenges. Some retailers such as Costco and Home Depot have warehouse-like, rapid will-call programs (i.e., order online and come pick up) and reasonable access (i.e., outside city centers, large parking lots)—and could to get into the same-day and local delivery game. But even these retailers will struggle to match Amazon’s micro warehouse model, as they need everything from space to pack packages to more staff.
Don’t get me wrong: not every brick and mortar location is in trouble in the age of e-commerce’s meteoric rise. Profitable, high-foot-traffic stores will persevere, and they also have value for e-commerce in that they provide branding, a showcase for inventory, and will-call. However, the popular assumption that brick-and-mortar retailers can leverage existing local inventory to effectively compete with Amazon on same-day delivery is simply not true.
How will retailers compete if they can’t leverage their stores? I’d expect new consolidated urban fulfillment centers to emerge. These would provide urban warehousing, fulfillment, and local delivery services as an outsourced service for multiple retailers—or anyone wanting to forward deploy their inventory. This way the retailers can pool volume and achieve per-delivery cost and service levels comparable to Amazon. Prologis, Alibaba, and FedEx come to mind as possible entrants into this new market, but only time will tell.
Uber has announced that it will provide drivers for Google Express, which has managed its own delivery operations until now. Google will maintain the pricing, the storefront, and the merchant partnerships while Uber provides the drivers through their UberRUSH offering. If this partnership comes to full fruition, it will be a big shift in the last mile logistics / same-day delivery landscape, with huge implications for competitors.
For Uber this is pure upside, as it accelerates its long-anticipated entry into package delivery. The volume that Uber gains by serving Google is hard-won volume, as matching up supply (orders) and demand (drivers) is expensive and operationally challenging, especially in the early days. But this is offset by the fact that Google essentially took on the cost of creating the market, then handed off the resulting upside (volume) to Uber. And Google will continue to generate even more volume for Uber as long as Google Express keeps working with merchants. Most importantly, Google’s retreat eliminates them as a competitor to Uber for last-mile delivery. Wow, well done Uber.
For Google, the partnership represents a significant retreat—although it’s clearly not a case of giving up, since Google’s venture arm has invested over $200 million in Uber– and may be an early signal of its changing aspirations in e-commerce. As I said in a post last year, Google Express is an important element in Google’s battle for relevance in e-commerce, and to date it has had an economically unsustainable model. It’s true that by outsourcing to Uber, Google Express is more focused and economically viable. But now that it’s without a proprietary delivery mechanism, will retailers continue to want to sign on with Google Express?
If I was a retailer, in the long run I’d prefer to work directly with Uber, as that would mean I could potentially serve all of my buyers with last mile delivery—not just the portion buying through Google Express. As UberRUSH expands and Google no longer has a unique (and subsidized) last mile offering, Google may find that interest from merchants wanes. With respect to e-commerce, they could be left on the outside looking in.
Let’s take a quick look at what this news means for some other winners and losers:
Postmates – Clearly, Uber’s assault on Postmates is under way. Postmates may struggle to raise its rumored financing at anything other than a down round.
Deliv – Like Postmates, and even with a recent round of funding that included UPS, Deliv doesn’t have the capital to compete with Uber for drivers and retailers. As a retailer, would you rather spend time integrating Uber or Deliv into your shopping cart?
UPS and FedEx – Neither have made much of a move into on-demand, but Uber’s creation of a non-union driver force and diversification of its delivery options makes a collision down the road more likely. (And this potential collision is undoubtedly what drove UPS to make its investment in Deliv.)
Consumers – Uber will be pouring billions into subsidizing package delivery and raising delivery service levels for consumers the same way they did for passenger delivery. We all may benefit from the lower costs and better service.
Drivers – Although it’s hard to combine passenger and package delivery, independent contract drivers now have new volume—and thus more ways to make money—flowing through their apps.
There is a long and challenging road ahead for Uber, as I discussed last year, but they look like a hands-down winner in their partnership with Google. Meanwhile, most everyone else now faces a more challenging landscape.
2015 was a banner year for Uber and the on-demand economy— endless press coverage, incredible valuations, adoption and expansion by noteworthy retailers, companies refocusing or dropping by the wayside, and a blizzard of lawsuits. Here are my predictions of what will make 2016 another interesting year:
Consolidation – Expect a bunch of acquisitions. Specifically, Google Express buying Instacart to reinvigorate their last mile, Uber doing their first acquisition, and some bottom feeders being ‘acquired’.
Disappointing Progress on Storefront Delivery – Retailers will continue to experiment with storefront on-demand delivery programs to counter Amazon’s aggressive same day strategy but low volumes, spotty service and high costs will make progress frustratingly slow. Expect to see companies like Deliv announcing new customers but volume remaining minimal and retailers struggling to justify their investment.
Amazon’s Logistics – As retailers continue to slow roll same day delivery in 2016, Amazon will do the opposite. Expect to see more and more stories about how Amazon’s logistics is their long term advantage in e-commerce. More and more Amazon customers will quietly be getting free same day delivery, extending Amazon’s lead.
Tipping – Driver retention and recruitment will force Uber and Lyft to introduce tipping in their apps. As drivers recruited in 2015 get through the end of the year tax season and realize their effective earnings are surprisingly low, expect driver turnover to increase. Drivers will move to where pay is best. Uber and Lyft can increase driver pay without damaging their margins or increasing prices by opening up tipping for drivers.
Last Mile Software – The supply chain software industry will start introducing product extensions to serve the last mile and storefront delivery. Expect Transportation Management Systems (TMS), Point of Sale Systems (POS) and Warehouse Management Systems (WMS) to build or buy to add to their functionality in this area.
Emergence of AM/PM – The buzz in 2015 was all about on-demand (i.e., 1-hour) delivery. That service level has its place in food delivery and with high priced items that have plenty of margin to absorb delivery costs, but it is not the long term winner in local delivery because of its cost, disruptive effect on store operations and lack of consumer need. Expect 2016 to be the year that low cost AM/PM delivery emerges, and for “order in the morning, get it in the afternoon” to establish itself as the standard same-day service level.
Forward deployed inventory – Sprig (sprig.com) uses forward deployed inventory (each vehicle carries it’s own inventory) to achieve rapid delivery. Expect UberEats, Amazon and others to increasingly place inventory near buyers either in micro warehouses or in driver’s vehicles.
Valuation Pressure – Tighter purse strings and sliding valuations mean that the “Uber for xxxx” companies funded in the last three years will face potentially fatal funding and valuation pressures.
Amazon is increasingly eating Google’s lunch when it comes to eCommerce. Amazon and Google compete in a number of areas, but it is their battle in eCommerce and last mile logistics that potentially has the highest stakes.
Google is reliant on ads with 90% of its revenue coming from advertising sales, therefore, search traffic is critical to Google. But when it comes to online and mobile retail, Amazon has become the dominant brand to the point that consumers are skipping a Google search, and going right to Amazon every time they want to buy, or even research, a product. In fact, according to Retail Dive, 39% of consumers go directly to Amazon vs. 11% starting with a Google search– a complete reversal from 5 years ago, representing billions in lost revenue for Google.
In response, Google launched Google Express, which picks up from retailers and delivers directly to consumers. Google’s goal is to add value to as many steps of a typical retail transaction as possible: search for the product with Google; checkout with Google Buy Button; process the payment with Google Wallet; and, get the order delivered with Google Express. Google’s eCommerce strategy is to provide services around eCommerce that will keep consumers coming back, and generate enough business for retail partners so that they help support Google (e.g., provide access to real-time inventory data). If you’ve ever used Google Express, it is terrific– it is consistently on time, vehicles are branded, the drivers are in uniforms and orders are nicely packaged. Unfortunately, Google has a service cost that is 3 or 4 times higher than Amazon’s same day delivery program.
Amazon has a nearly insurmountable cost advantage on Google. They have incredibly efficient, and increasingly automated, distribution centers, whereas Google must “shop” for orders, no differently than I do, at their retail partners’ stores; they have product margin with which to subsidize their value-add services, whereas Google doesn’t markup it’s retail partners’ products (and it is not clear if they ask for a sales “commission”); and, they have huge daily order volumes, which dramatically lowers delivery cost. I estimate that Amazon’s cost for a same-day delivery to be below $4 per package, while Google’s current cost is closer to $14.
Google’s high cost basis will improve by as much as 30% as retailers start to pick up the cost of “picking” from their own stores, and as their density and volumes grow. Google also has the ability to monetize eCommerce buyers through Google Wallet and ad sales so they do not need to exactly meet Amazon’s cost basis. However, Google Express still needs to lower costs significantly and there a few fundamental flaws that need to be fixed before they can become sustainable.
To date, Google is using a dedicated delivery model, using local delivery and courier companies to run branded vehicles for them that contain only their deliveries. This approach produces a high quality consumer experience, but it prevents Google from driving costs down by comingling their shipments with the 2 billion annual shipments the local delivery industry already does per year. By comingling, Google Express will reduce their tight grip on dictating every element of the service offering, but they will get to a much more sustainable cost basis.
Comingling with existing volume in the local delivery industry will also allow them to expand more quickly and cost effectively. Instead of opening up new operations and building density (i.e., deliveries within a tight geography), Google Express would work with existing couriers to perform their deliveries and share the burden of the infrastructure and the benefits of density. For confirmation of the effectiveness of this comingling strategy, look no further than Amazon itself, who uses a network of local carriers and comingles over 100 million packages a year.
If Google Express does not evolve, they run the risk of abandoning a key battle due to unsustainable costs, delaying roll-outs to new markets and even worse, losing the underlying retailers who are increasingly innovating in the last mile on their own. Without their underlying retail partners, they will not only lose the battle in the last mile but also the overall war on eCommerce.
Can you imagine ordering a printer cartridge from Staples online and getting that purchase delivered 15 minutes later? Believe it or not, that super-premium service level once existed in major cities in the U.S., Europe, and Asia. It was called “B15” for bike messenger delivery in 15 minutes.
In the 1990s, before the widespread use of email and online document exchange, the local delivery industry was delivering all those documents that are now digital: contracts, mortgage paperwork, blueprints, advertising proofs, and banking materials, to name only a few. Competition was intense among local carriers, so service levels started to rise.
Eventually, local delivery companies started staging a pick-up person inside large buildings that had offices that initiated significant volumes of delivery orders. These pick-up couriers would be immediately dispatched by radio to the floor where the order was ready, pick it up, and head down the elevator to hand off the package(s) to bike messengers or walkers, who headed directly to the recipient’s building. The walker or biker would hand the package to the drop-off courier staged in the recipient building, or deliver it directly themselves, resulting in an incredibly rapid delivery.
It was high times for the local delivery industry and the peak of on-demand delivery. Every owner and messenger loved the sexy margins that on-demand delivery provided. So it was sad times when on-demand delivery started to decline. The demise of on-demand delivery started with the fax machine, accelerated with email and was complete with Check 21 legislation in 2004 (http://en.wikipedia.org/wiki/Check_21_Act). Anything that can be electronically transmitted goes by email or fax today. On-demand delivery is now a modest piece of the local delivery market size and B15 is long gone.
However, e-commerce, rising customer expectations and the emergence of a whole new set of players is signaling a resurgence in on-demand delivery. In San Francisco alone, there are 68 apps that offer rapid local delivery as part of their offering (furniture, alcohol, cookies, etc.). In Denver there are 11 on-demand marijuana delivery companies currently active. Starbucks, Amazon and Google all have on-demand delivery initiatives.
Is this a flash in the pan of over exuberant venture capital money or are we at the front end of the re-emergence of on-demand delivery? My bet is we’re seeing the beginning of a long term trend and the market size for local delivery will be dramatically increasing as a result. Amazon sets the standard for e-commerce and they continue to roll-out same day (now available in 11 markets) and on-demand delivery (recently expanded to Miami). So we should expect a lot more retailers, distributors and 3PLs to roll out programs as they look to match this trend towards higher service levels.
When you couple the incredible amount of venture investment for emerging companies offering on-demand delivery and significant steps by established companies on on-demand delivery, it certainly signals a real re-emergence. Importantly, the fact that customer expectations are changing along the way reinforces that it looks like a trend to stay.
Will service levels rise again all the way up to the super premium B15 service level of the 1990s? It could happen a few years down the road, as more and more commerce moves online. In dense urban areas and neighborhoods near shopping malls, the density and distance equation just might match up. With better technology, the emerging use of retail stores as pick-up points and growing delivery volumes, it’s more likely than you think.
eBay Now ran a flawed and expensive delivery model from day one. eBay Now paid their drivers to enter retail stores, purchase an item, and then deliver it, all in less than one hour. That was a very high-cost model, since eBay picked up the entire cost of fulfillment and delivery. The one-hour service level also limited eBay’s ability to reduce costs by building routes and comingling packages. Add in the retrenching efforts at eBay, and it looks like they had the wrong model and no appetite for fixing that model.
Google Express does share some unsustainable characteristics (they cover the cost of picking inventory out of local stores), but they also have operational and volume advantages that eBay Now never did. Google Express offers a scheduled same-day delivery which is about 40 percent less expensive than eBay Now’s on-demand offering because they can establish efficient routes. They also are using their significant heft to work on retail partnerships to eliminate their fulfillment costs and are considering alternative delivery models to lower costs, such as comingling orders with existing local carriers. Google Express is also an important part of Google’s overall e-commerce strategy, as it brings retailers who don’t offer that service into the fold. Expect Google Express to stay in the game with some further changes to improve sustainability.
As far as the same-day delivery hype, with Amazon relentlessly pushing toward same-day as their standard, rising customer expectations, and continued investment in this space, the hype isn’t going away anytime soon.
San Francisco based start-up Postmates (www.postmates.com) recently announced an $80 million round of funding and plans to offer $1.00 on-demand delivery (http://blogs.wsj.com/digits/2015/06/25/postmates-raises-80-million-in-push-toward-1-deliveries/ ). It’s a good thing they raised more money because they’re going to burn through cash quickly offering 1-hour delivery at that price point. Considering both the steep path from where they’ve built their business (food delivery to consumers) to their ultimate goal (on-demand package delivery for the masses) and the reality of delivery economics, a $1 delivery is an impossibility. And let me present my unique same-day credentials: I have designed and implemented high-volume same-day and local delivery programs for huge retailers such as Amazon, IKEA, OfficeMax and Home Depot.
Postmates assumes that drivers collect tips to supplement their payment from Postmates, which is about $0.80 per $1.00 of delivery fee they collect. It’s highly doubtful drivers will get tips from delivering a package. When was the last time you tipped your UPS driver? This is particularly true in a B2B environment (where most of the current local delivery volume lies). Postmates is applying their current food delivery model, where tipping is the norm, to a package delivery model. Wishful thinking.
Postmates also mentions the creation of density as their path towards $1.00 delivery nirvana. Even the highest volume, best-run shippers in the world are unable to reduce costs to the point that $1.00 delivery is viable. Amazon, for example, pays couriers about $2.75 per package for their basic same-day delivery program and 2 to 3x higher for the equivalent to Postmates on-demand service level. It seems implausible that Postmates will ever come close to attaining this type of scale and, even if they did, they would still need to heavily subsidize delivery. Postmates would need to collect other fees from retailers, which would be counter to the $1.00 delivery claim, or they would be well down the path to an unsustainable economic model, which their investors are unlikely to support.
Why is Postmates making this $1.00 delivery offer? Marketing and PR.
It’s a highly questionable ploy to entice retailers into conversations and stir up the national media with an outrageous, seemingly impossible (because it really is) claim. This approach runs the risk of alienating potential retailers once the real fees come out and also begs comparison to Kozmo and other dot.com silliness, which is not good for their brand or for the tech industry as a whole.
It’s a popular belief that the on-demand passenger delivery companies (Sidecar, Lyft, Uber) will soon — and easily — transition their technologies and driver networks to offer package delivery services. These companies do have great brands, cash to spare, and world-class apps, but that transition is going to be harder than most realize:
1. Pickup – Passenger pickup is straightforward, especially when everyone involved has a mobile phone, is ready and waiting, and has access to photos of who and what to look for. Package pickup is much more complex and involves parking (commercial license plates), waiting in lines, and far less help in identifying the right package.
2. Drop-off – Package delivery requires customer signatures, scan compliance, taking packages into buildings to seek out the correct addressee, and liability insurance if an item is damaged or mis-delivered — all new procedures for Lyft, Sidecar, and Uber.
3. Comingling – Human passengers are unlikely to put up with a driver stopping to pick up or drop off a package. That means that drivers will find themselves forced to choose between passenger or package delivery, eliminating potential density benefits. And given that choice, most will probably find passenger delivery more lucrative and more interesting.
4. Drivers – Drivers who do passenger delivery are not automatically suited for package delivery. Parking, pickups, drop-offs, liability considerations, and the lack of social interaction may be frustrating for drivers used to dealing with live cargo.
5. Pricing – There are already local delivery companies in every market, making 1 billion package deliveries every year. They may lack strong brands, but they are a tempting alternative for shippers because their price points are already optimized, and they are experienced specifically in the package delivery business.
6. Enterprise Tools– Retailers and other potential volume shippers need enterprise tools such as dashboards, package scanning, established pricing structures, and payment processing tools. These are beyond the capabilities of the current crop of consumer apps and will take time to develop.
7. Customer Service – When an Uber driver encounters traffic with a passenger on board, no problem, as the customer is aware of the challenge in real-time. A customer waiting for a package, on the other hand, has a much lower tolerance for traffic, pickup, and drop-off challenges that can make a driver late. Before they are ready to deliver packages, Lyft/Uber drivers will need more elaborate customer support tools, and the companies behind them will need to direct far more of a focus toward operations and customer service.
8. Exceptions – Package delivery generally comes with a predetermined time window, whereas passenger delivery is more open-ended. It will take time, and probably a lot of disgruntled customers, before Lyft/Uber customers readjust their approach to the realities of package delivery.
9. Packaging – Passenger delivery has a unique set of concerns (cleanliness, politeness) that don’t translate seamlessly to package delivery (packaging quality, damage claims, controlled substances, perishable substances).
10. Operations – On-time percentage? Damage rates? Signature capture rate? Scan compliance? Stops per hour? Refused deliveries? Package delivery comes with a universe of operational metrics that passenger delivery providers aren’t yet equipped to address.
For these reasons and more, look for on-demand app-based providers to hesitate, falter, and even damage their brands while trying to break into the business of local delivery.
I’m going to take a brief break from talking about local delivery to discuss the local community. We started Grand Junction to improve the local delivery industry and, by extension, the communities the local delivery companies serve. We also wanted to make a direct impact on our community, so from day one we made a commitment to contribute 1 percent of Grand Junction’s revenue to those in need. Our employees nominate beneficiaries, then allocate points to determine how the annual pool is allocated. It’s been fun to watch the process and to see the variety of nominations. Here’s the list of the beneficiaries from our 2014 Fund:
1. Alameda Arson Victims Fund: Provides assistance to several businesses in downtown Alameda, California, who were the victims of random arson.
2. Food Runners: Picks up perishable and prepared food from participating restaurants, bakeries, etc. and delivers it directly to neighborhood food programs.
Enterprises with any complexity or volume in their supply chain have long used technology to improve efficiency and better collaborate with their partners. It’s no surprise, then, that, according to a recent Gartner analyst’s estimate, more than 50 percent of large shippers have a transportation management system/software (TMS). When integrated across transportation providers and populated with contracts and rates across modes, a TMS offers a huge potential return on investment, primarily from optimizing shipments for speed and cost. Unfortunately, enterprises are finding that when it comes to managing last mile logistics and local delivery, their TMS can have significant gaps.
Although a TMS allows shippers to optimize among the better-known last mile modes of small parcel carriers (FedEx and UPS), truckload (TL), and LTL carriers, they don’t handle shipments through local carriers (aka couriers) and independent contract local drivers. These gaps have been around since the beginning, and the majority of enterprises have been forced to close them through inefficient and ineffective manual processes or by building systems in house. Both a growing focus on improving the customer experience and the inevitable emergence of same-day delivery, storefront delivery, and other similar programs, which only local carriers and independent contract drivers are able to provide, are starting to shine a spotlight on these problems and make them a top priority for most shippers.
How do existing TMS offerings fall short for local delivery?
1) TMS providers are not integrated with local carriers. In fact, even the EDI networks / VANs, which many enterprises rely upon to connect them to their carriers, are not integrated with local carriers. This is a huge challenge with seemingly no solution, since there are thousands of local carriers in the United States alone, and by some estimates, nearly 60 percent have proprietary software.
2) Unlike the small-parcel, TL, and LTL industries, local carriers tend not to be technology enabled. They don’t have CRM / issue management or standard APIs for data exchange, and, in many instances, they do not have driver-level information. Driver-level information is critical when it comes to managing the customer experience, as drivers are often an enterprise shipper’s face to the customer.
3) There are no standard service definitions and rate structures in place for local delivery today. There is no CzarLite. To one carrier, a “same-day” delivery could mean pickup and delivery within 90 minutes, whereas to another, it’s pickup by noon and delivery by 6 pm. These differences make pricing and cost optimization very difficult.
TMS providers have no choice but to tackle these challenges as the last mile increases in importance. I expect to see standardization emerge (service level definitions, pricing, and APIs) in the industry, along with a set of emerging TMS providers focused on the last mile. Every TMS provider needs to address these challenges now, or they may fall prey to the “local delivery TMS gap” in their next sales cycle.
Last week I was talking to the owner of a small retail store in Oakland, California. He offers TV stands and mounts, sells many of them online, and ships about a dozen a week to customers around the San Francisco Bay Area. He uses UPS for all of his national and local delivery needs because that’s the only shipping method he knows. We talked about the possibility of his using local delivery companies and couriers. There are significant advantages over UPS, FedEx, and the Post Office: a scheduled delivery time, lower packaging requirements, and, importantly, lower cost. After paying all the surcharges, he pays UPS almost 30% more for a delivery than he would pay using local delivery.
I was amazed when the owner told me that no courier had ever walked in his door, or even called him, to offer delivery services. He also wasn’t aware that couriers did deliveries that weren’t urgent, perishables, or papers or envelopes. This illustrates a major shortfall in the local delivery and courier industry: the lack of high-quality sales and brand awareness. Most of the more than 4,000 courier companies in the US are started by entrepreneurs who “carry a bag” to get established. At some point, the owner needs to focus on operations (recruiting, technology, dispatching, payroll) and moves away from sales. What happens? Sales stagnate. In addition, most local carriers are small companies, so they don’t invest much in branding and marketing. The result is that courier companies tend to stall out below $5 million in annual revenue, leaving many local delivery opportunities to less-efficient options, like UPS and FedEx, fleets, or leased vehicles, and less-than-truckload providers.
Given that local delivery is a rapidly growing $46 billion industry, it’s only a matter of time before a national brand emerges, spending on marketing and high-quality sales to establish a nationwide local delivery provider. “Startups” will gain recognition, however, they can’t perform all of the services at scale that a local delivery company can (e.g., Postmates offers a premium same-day “ASAP” delivery). To date, OnTrac in the West is the closest to achieving that status. Amazon uses them heavily, and you probably didn’t even notice. The two most likely paths for the emergence of national providers of local delivery are for a new entrant to establish a national brand or for a Wall Street-style industry consolidation (roll-up). Both paths would require investment up front in marketing, branding, and sales, but the winners would emerge as the leaders in this increasingly important industry.
The telematics industry is a rapidly evolving market that provides in-vehicle technology for vehicles such as fleets. Telematics provides data to and from vehicles to manage vehicle performance, routing, and driver metrics. More recently, Telematics providers such as Telogis and Fleetmatics have moved into providing technology for passenger vehicles, such as GPS mapping and voice controls. Fast forward a few years, and Telematics could also be empowering a new fleet of potential independent contract drivers for the local delivery industry.
Telematics providers will eventually provide access to shipping marketplaces (Uship and Grand Junction) directly into vehicles that will empower individual drivers to sign on as independent drivers whenever it’s convenient for them. The telematics system will know a driver’s location, vehicle type, destination, and other relevant data that will make tendering a delivery pickup extremely efficient. Normal errands and road trips would turn into revenue-generating opportunities for every passenger vehicle. In fact, you may even see vehicle manufactures specifically designing and marketing vehicles with independent contractors in mind. This version of the future seems to match up with the emerging service economy driven by Uber and AirBnB.
Telematics represents an opportunity and also a threat to the local delivery industry. On the upside, technology costs, recruiting, and driver shortages would be problems of the past for local carriers. On the downside, drivers will no longer be captive to individual delivery companies, which might lead to dis-intermediation of the local carriers entirely. Carriers who bake these evolving dynamics into their business strategy can seize the upside. Those that deny or ignore the emergence of telematics may be left in the rear-view mirror.
Is that the right price point? Amazon’s version of same-day delivery is “if you order it in the morning, you’ll get it in the afternoon” (at Grand Junction we call that AM/PM same day). AM/PM same day is lower in cost than the one hour or ASAP delivery services you see elsewhere, since it allows for consolidation of multiple orders and the establishment of an efficient route (like a bus ride). One-hour or ASAP delivery requires a direct, immediate response with little room for consolidation (like a taxi ride).
While Amazon is charging $5.99 per same-day delivery, their actual cost is even lower. With their new forward-deployed warehouses, technology-enabled fulfillment, and tremendous volume, Amazon has the most efficient and high-scale supply chain possible. There is plenty of room for Amazon to drop that price. In fact, Amazon could go as far as giving AM/PM same-day delivery away for free for Prime customers, since the cost for AM/PM same-day is not much more than the cost for the next-day ground delivery they currently give away for free.
If Amazon commits fully to the new AM/PM same-day service level, imagine their advantage: the highest service level in the market, performed at a price no competitor can match.
While couriers have long been used for local or “last mile” business-to-business deliveries in the US, and for consumer deliveries in densely populated areas of the world such as Europe and Asia, the average American, when it comes to delivery, thinks only of big-name players such as FedEx and UPS. Or maybe they think of names, such as Con-way, that they saw on the side of a semi-trailer truck. Couriers, however, don’t only do next-day local delivery at rates lower than FedEx or UPS. They are able to provide a wide range of service levels for (quite literally) any product a business or consumer purchases. Because of their size and focus on a limited geography, couriers can do things that large national carriers cannot.
First and foremost, they can tailor their service based on the shipper’s desires, whereas national carriers cannot for reasons of efficiency and scale. Are you looking for same-day delivery of headphones from a retail storefront to a consumer, scheduled delivery of pharmaceuticals to drugstore within a 30-minute window, or two-person delivery and installation of a washer and dryer with removal of the old one? The local delivery and courier industry has these unique service levels covered.
It’s time that shippers reevaluate their delivery strategy, because technology adoption and advancement have solved the local delivery and courier industry’s traditional shortcomings, making couriers a better alternative to the national carriers or even a dedicated fleet. This will enable shippers to provide a better customer experience:
• Geographic Coverage – With a national carrier, a shipper only needs to work with a single company to offer delivery in the top 25 markets. Since couriers focus on a limited geographic area, a shipper looking to have a national local delivery network would potentially need to work with several dozen couriers. More transportation providers means more points of contact and potential failure, more parties to interface with your supply chain, and a generally more complex operation.
Many shippers choose to reduce what they have to deal with by working with a managed transportation services (MTS) provider that specializes in local delivery or “the last mile,” such as RR Donnelley or Ensenda. A growing trend among progressive companies that do not want to outsource — for example Restoration Hardware — is to use technology that streamlines communication and collaboration across internal teams and with their couriers, minimizing the need to scale using people. Until recently, these companies had two choices: develop and maintain software in-house, which was the approach most long-standing users of local delivery chose, or significantly customize existing transportation or fleet management software (TMS or FMS) and integrate it with customer relationship management (CRM). However, over the past few years, a segment of local delivery software specialists, which includes us (Grand Junction), has emerged in the supply chain management software industry.
• Visibility – When a retailer, for example, uses a national carrier, their customers get real-time, detailed tracking information throughout every step of the delivery process. Historically, couriers have struggled to provide anything other than proof-of-delivery, and even then up to 48 hours after the delivery’s completion; however, technology has enabled couriers to provide a competitive customer experience. Through the adoption of mobile technology for drivers and the emergence of sophisticated dispatch software, couriers have the information to manage their businesses better and provide FedEx- or UPS-like visibility.
A major challenge for shippers comes when they need to actually gather and present courier-provided information to their customer, or even make it usable internally to monitor and manage their couriers. Quickly it becomes apparent that the shipper’s IT team has a lot of work in front of them not only to build courier integrations, but also to maintain them. Unfortunately, many software providers, even the well-known TMS providers, don’t manage these integrations as a part of their solution, requiring companies to turn to EDI vendors. Grand Junction does, however, have preexisting integrations with >600 couriers and tools to monitor and drive scanning compliance, which makes the data usable and complete.
• Quality – The local delivery and courier industry long had a reputation for being low quality because it operated in an extremely low-cost and unsophisticated model. Whereas the national carriers hired full-time drivers and invested in training and technology to help them perform better, couriers did everything they could to keep costs low, from using independent contractors, who regularly came and went while working for multiple companies, to running their business by phone and paper. It’s not surprising that quality suffered. Today the industry is very different. The same technologies that have addressed the visibility challenges have given couriers information to better monitor driver performance and quality.
Shippers, however, still need to monitor quality and work with their couriers to achieve the customer delivery experience they want. Unless the vehicle has a recognizable name on the side, a customer is more than likely to hold the shipper accountable for delivery issues. Heavy users of couriers, such as Office Depot/Max (a Grand Junction customer), recognize this is the case and use automated alerts and business intelligence on top of real-time information to proactively monitor quality and performance throughout the delivery process.
While companies such as Amazon, Restoration Hardware, and Office Depot/Max may be far ahead of their competition as adopters of couriers, the bottom line is that technology makes it possible for any company to enjoy the advantages couriers have over the large national carriers without having to make hard trade-off decisions. Now is the time to reevaluate your customer delivery strategy and consider couriers. As a result, you can improve customer satisfaction and have the ability to implement same-day, storefront, scheduled, and two-person deliveries, all while saving money.
I recently visited a multi-billion dollar home-wares retailer, talking about their supply chain and how they deal with local delivery. I was surprised to hear they work directly with individual independent contractors (ICs) instead of local delivery companies, or having a dedicated fleet with employee drivers. It’s a tempting practice for any shipper (retailers, distributors, 3pls), since it removes some cost from the equation. In particular, shippers avoid workers’ compensation insurance and payroll taxes, since that burden falls to the individual drivers. Also, the retailer is dis-intermediating the local carrier, and the dollars that normally would go into the pockets of the local carrier end up as cost savings for the retailer. This direct to independent contractor model has been around for years but is increasingly visible, since it’s the model used by rideshare companies such as Lyft and Uber.
But going directly to independent contractors is in most cases illegal, as in the recent federal court ruling on FedEx’s Home Delivery operation. It’s a very fine line between having an employee and working with an independent contractor. Each state has different rules for qualifying workers as independent contracts vs. employees, which creates a blizzard of requirements to avoid stiff penalties and class-action lawsuits. One common thread is that the worker needs to get orders from multiple shippers to classify as an independent contractor. Does anyone truly believe that a local delivery driver running routes every day for the same retailer is an independent contractor? Across the country, state tax agencies and workers’ compensation boards are charging companies with mis-classification of workers, especially when it comes to transportation and delivery. Even worse, liabilities shift from the local carriers to the retailer when working with independent contractors, opening the door to even more lawsuits. Finally, recruiting, training, and managing independent contractors produces hidden costs that tend to be ignored.
All in all, I’ve seen this model explored by a good number of retailers who dismiss the strategy when the true costs and liabilities are uncovered. I’d expect the same for the this retailer once the legal counsel or risk officer get in the loop.
I recently had a conversation with an executive at a well-known distributor about why they use FedEx for customer deliveries instead of the local delivery and courier industry. Despite agreeing with me that couriers would provide greater flexibility, faster service, and, in many instances, more competitive rates, he quoted a line from decades ago explaining why customers paid a premium for IBM: “No one ever got fired for using FedEx.”
This underlines a valid concern about the difference between the customer service provided by a large national transportation provider — whether a parcel carrier such as FedEx or UPS, or a less-than-truckload (LTL) carrier such as Con-way — and the experience provided by couriers. In the former case, customers get real-time, detailed tracking info; deliveries are consistently made on time and without damage; drivers are professional and courteous; and, should any quality issues come up and a customer need to call, the company offers great customer service.
How do couriers compare? Historically, couriers have struggled to provide the same quality. However, they have laid a foundation in the last decade from which they can start to build a comparable customer experience. This is thanks to two factors: the adoption of mobile technology and the use of full-featured dispatch software. These give couriers the information to manage their businesses better and provide FedEx- and UPS-like visibility to shippers and end customers.
Despite these improvements, the industry’s fragmentation means that a company with a courier network covering the top 20 markets might require several dozen integrations to achieve visibility, as well as investing in the systems and people to maintain real-time, accurate, standardized information. With FedEx, UPS, or even a national less-than-truckload (LTL) carrier such as Con-way, only a single integration is required to gain the same level of visibility.
When it comes to those other elements of the FedEx and UPS customer experience — rapidly identifying and resolving quality issues, addressing a driver’s performance issues early, and providing responsive customer service — couriers have a long way to catch up. Amazon has invested millions in building the software and the team to help them get close to the couriers they use for Prime deliveries, while other companies with long-standing courier relationships, such as Cardinal Healthcare, have built systems themselves or customized existing ones, and tasked resources in each market to work with its couriers. The bottom line is that, without a software platform that specializes in local delivery and couriers that is specifically geared toward controlling quality, closing these customer experience gaps can take a long time, requiring significant expertise and a lot of money. Can you afford to take that risk?
Today, consumers have a few options when it comes to how they want their online purchases delivered. The service level choices are typically next-day, second-day, or economy, all of which are offered by FedEx, UPS, and the US Postal Service. Omni-channel retailing, which ties together online shopping and local retail stores, is leading to the emergence of new delivery options. Retailers are also being pushed by eBay, Amazon, and Google. Storefront pickup, hotshot (delivery within a few hours of ordering), AM/PM (order it in the morning, and receive it that same afternoon), and scheduled delivery are all new service-level options that are emerging for consumers.
Once a retailer ties its local store inventory to online shopping, it’s ready to offer storefront pickup (also called “will call” or “buy online and pick up”). It is also ready to offer a variety of other service levels, all of which are accomplished through local delivery programs. eBay Now offers one-hour delivery, and Google Shopping Express offers an outstanding scheduled delivery experience.
My bet is that all of these players will eventually offer the more cost-effective AM/PM same-day delivery service and charge a premium for the others.
How these local delivery programs that leverage local inventory are going to be rolled out remains to be seen. UPS and FedEx do not offer these services and have labor forces and infrastructure that don’t match up well (sort centers, scheduled line hauls, and aircraft are no help in local delivery). Dedicated fleets are a possibility for very large retailers with high online sales volume.
More likely is the use of the local delivery industry, which already provides all of these programs, for companies such as Grainger who are selling to business buyers. Delivery service choice for e-commerce is a great thing for consumers, but who are the losers here? That would be online retailers with no local inventory and retailers that fail to leverage their local inventory.
The local delivery industry is uniquely capable of providing same-day (one hour or AM/PM), scheduled, and two-person delivery programs. UPS and FedEx simply aren’t capable of (or experienced at) providing these services. What about next-day delivery programs? Can the local delivery industry compete?
It’s hard to believe that anyone can compete against the military-like precision and or brand trust that UPS and FedEx have. The short answer is that, from a cost-per-package perspective, yes, the local delivery industry can compete; but from a quality and brand perspective, there is a lot of work to be done.
First, the economics: Both UPS and FedEx are optimized to provide delivery across the country (intercity) through multiple hubs, automated systems, and on aircraft. They work with enormous cost structures to support, including largely unionized workforces, pensions, aircraft leases, and large management structures. The local delivery industry is made up of scrappy local entrepreneurs with simple cost structures and a workforce largely made up of independent contractors (ICs), not employees. The low overhead and flexible workforce combine for a very cost-effective operation. As a result, the local delivery is significantly less expensive than UPS and FedEx for next-day services at scale — roughly 2,000 packages in market in a day.
On quality, the local delivery industry has come a long way, but there is a lot of work left to do. Many local carriers have quality metrics that meet or exceed the quality of UPS and FedEx, but challenges remain for the industry as a whole. It remains very fragmented, with each market having dozens of carriers. There is also a serious lack of brand and industry awareness. Combined, UPS and FedEx spend almost $900 million on advertising and brand-building per year, according Hanover Research. The local delivery industry, as a whole, spends near zero, and the result is that UPS and FedEx are unchallenged as the only game in town when it comes to next-day. They have established a trusted brand that allows them to be forgiven for quality issues. The typical consumer is predisposed to be wary of the unknown local delivery company, whereas with the UPS and FedEx brands, the default assumption is success.
Since the economics are there to use local carriers, major shippers’ use is increasing, which in turn forces quality improvement. Amazon, OfficeMax, and others’ use of local carriers is evidence that the local delivery industry is ready for prime time when it comes to next-day and other premium service levels. These companies have shifted more than 100 million annual small-package deliveries away from UPS and into the local delivery industry. Expect more to follow that lead, particularly retailers moving toward an omni-channel model, as they offer same-day, scheduled, and two-person delivery programs.
Same-day delivery might be a hot topic in the press, but in private, most of the executives I know dismiss it. Having spoken with execs across businesses of every type and size, I hear a few myths repeated consistently.
Myth 1: Consumers don’t need or want things within a few hours of ordering.
The myth in this statement is really the phrase “within a few hours of ordering.” When most people think of the future standard for same-day delivery, they think of a service like eBay Now, Google Shopping Express, or Deliv, where the product is delivered within a few hours (not surprising, considering the amount of press these companies have received). The same-day delivery standard will eventually settle into an AM/PM model: order something in the morning, receive it by the following evening, and vice-versa.
Myth 2: UPS, FedEx, or the US Postal Service are the best options to make same-day deliveries.
None of these are viable options today. The local delivery and courier industry is a ready-to-go, very experienced, option. It’s full of small, nimble, highly flexible companies that are accustomed to operating nearly 24/7, even on most holidays, and meeting their customers’ needs as opposed to requiring customers to meet their operational practices. And while they’ve historically been involved in business-to-business deliveries and struggled with quality, over the last few years, couriers have gone “mainstream.” Want proof? Just look at the way Amazon has steadily shifted more and more of its next- and two-day deliveries away UPS and FedEx and onto couriers.
Myth 3: The economics around same-day don’t work because no one will pay for it.
If you look at the “all-in” (i.e., fulfillment and delivery cost) of a two-hour same-day delivery performed by a courier for a package, it can cost more than $30. However, if you consider the AM/PM service level, the cost starts to become reasonable. At higher shipment volumes using couriers, the delivery cost component starts approaching $15. And, while it would certainly require a big change in fulfillment strategy and more cost than fulfilling from a DC, companies could reduce their delivery costs even more by shifting next- and two-day volume onto couriers and off UPS and FedEx by using in-market facilities/stores.
Myth 4: Same-day delivery is something only retailers need to worry about.
If Amazon is doing same-day delivery, everyone should pay attention. As shown by its rapid expansion across categories from appliances to groceries, Amazon has its eyes on everything anyone buys. That even includes business-to-business purchasing, as illustrated by the company’s launch of Amazonsupply.com in 2012, which set it on a collision course with B2B industrial product distributor Grainger. Retailers AND distributors need to start figuring out a same-day strategy now, or they risk losing sales growth and market share.
There seem to be daily announcements from technology companies that have local delivery as part of their offerings: Munchery, Postmates, Shyp, Instacart, Sprig, and a host of others. Each of these new companies faces significant challenges when introducing, and cost-effectively scaling, their delivery operations in new markets. Matching up supply (i.e., drivers) with demand (orders) is a challenge and usually results in back-breaking Yelp reviews and disastrous customer challenges. Check out the poor reviews for each of these companies, and more often than not, they’re due to delivery issues. Worse, the cost of recruiting, building, and managing these proprietary delivery networks requires serious capital and clumsy geographical roll-outs.
Does every new tech company really need to build a proprietary delivery network? A shared delivery network, where multiple shippers access the same set of drivers and carriers, would improve availability, broaden geographical coverage, and dramatically lower costs. This shared supply model emerged in airline ticket shopping (i.e., SABRE), pharmaceutical distribution (e.g., McKesson), office supplies (United Stationers), and other industries as they matured. Why not learn from history and start out on the right foot? I fully expect the shared model to emerge in local delivery (led by Grand Junction); it would free up all these emerging companies to focus on where their value creation really lies: on sales, marketing, and the consumer front-end instead of the back-end logistics.
The terms “last mile” and “local delivery” describe essentially the same thing. In telecom, the last mile is the wiring that connects the house to the telephone poles. In the power industry, the last mile is the final step in the delivery of electricity (after passing through high-voltage transmission lines and transformers).
In the supply-chain and logistics worlds, “last mile” or “local delivery” refers to deliveries made to a business’s customers, typically from stores or distribution centers to nearby business or consumer buyers. I prefer “local delivery.” Local delivery encompasses a wide range of service levels, including same-day, scheduled, or next-day, and is accomplished using local delivery companies (also called couriers or local carriers) in pickup trucks, cargo vans, box trucks, and sometimes even drivers’ personal vehicles. Over the past five years, local delivery has become more and more associated with e-commerce deliveries.
As far as distance and geography, a local delivery initiates and terminates in a single market. A pickup from a distribution center just outside of Philadelphia and a delivery to the other side of the city is a local delivery. But a delivery originating just outside Philadelphia and delivering to Boston is not. That Philly-to-Boston (intercity) delivery typically goes through a cross-dock in the local market before it is really a local delivery.
All of this may sound obscure, but local delivery is critically important because it’s the one step of the supply chain that actually touches the customer. That makes quality critically important, and service levels become competitive differentiators. And since the last mile represents about 28% of a typical company’s transportation spend, cost control is very important. According the US Census, more than 4,000 local delivery companies serve this market, with annual revenues of $46 billion.
The last mile is a vibrant, yet largely invisible, industry, with a rising level of importance.
Need a cab? No problem! Need a driver? Let me get back to you.
The local delivery and courier industry’s shift toward using independent contractors as drivers has had unexpected results. The movement started because owners wanted to increase flexibility, avoid tax, and reduce insurance costs. But as a recent article in the San Francisco Chronicle pointed out, the shift to an independent contractor model has combined with a mobile app to create a highly flexible and available workforce that is no longer captive.
With the rise of Uber, Lyft, and others, taxi companies in the San Francisco Bay Area are losing access to their independent contract drivers at an alarming rate. Many taxi companies are unable even to put cabs on the road, since so many drivers have switched to the upstart providers. Gone are the days where drivers were forced to work for taxi companies to get access to fares.
The non-captive nature of the independent contractor workforce in the taxi industry made it ripe for disruption. When the ride-sharing services launched, they never had to endure the huge costs of hiring employees to match up supply and demand. Once consumers had new options, they moved toward the new providers, and the drivers followed.
The local delivery industry is about to experience exactly the same disruption. In fact, this industry is even more ripe for disruption, since it is a larger market ($46 billion), it has no national branding (the taxi industry at least has Yellow Cab), and the model has already been proven with the ride-sharing services.
So what can courier companies do? One bit of advice is for local delivery owners to embrace, participate in, and potentially even lead in these changes. Taxi companies fought the changes, and as a result may be going the way of local bookstores and video rental outlets.
UPS and FedEx didn’t stick to their service levels this holiday season, even though they had unprecedented package volume and decades of experience handling volume spikes. How did this failure happen, and what does it mean for the delivery industry?
Historically, UPS and FedEx have had a fairly predictable mix of residential and business deliveries. The rapid growth of e-commerce, however, is driving more and more residential volume. As the mix shifts, the volume “spike” associated with the holidays gets worse every year. In 2013, the numbers were dramatic: not only did the percentage of residential deliveries hit an all-time high, but overall volume was also up, as consumers did more of their buying online.
As the local delivery industry moves forward, this phenomenon will be the new normal. For UPS and FedEx, there is a huge cost to handling volume spikes. Why? Carriers need larger facilities, more aircraft, and more drivers during a spike, logistics that they don’t need during the rest of the year. As spikes grow more overwhelming, this underutilized capacity will become more costly to maintain. Based on the new normal, and the widespread failure over the holidays, here are a few predictions for what’s ahead:Expect to see UPS and FedEx roll back delivery promise times next year in order to avoid failures and reduce infrastructure investment;
1. Expect Amazon to continue investing in its network of local carriers as an alternative to UPS and FedEx and an outlet for spikes. And expect other retailers to follow suit faster than they have in the past: they learned the hard way with Prime that they can’t sit back for too long;
2. Amazon will roll out its own fleet in dense areas both to reduce dependency on UPS and in support of same-day delivery. The Amazon Fresh vehicles (https://fresh.amazon.com/) are a clear sign that the company wants to create a closed network that’s a competitive advantage; and,
3. UPS and FedEx will need to innovate further on delivery options, including Sunday, same-day, and scheduled delivery, to meet growing customer expectations and alleviate volume spikes.
Is Uber expanding from the taxi sector into the local delivery industry? And if so, can Uber leverage its existing network of drivers and technology to perform deliveries?
The answer to both questions is no. Turns out, this was a simple publicity stunt for Uber, rather than a bold move into a new market or a test of its infrastructure to service local delivery. Instead of leveraging a network of independent drivers, the company is using Home Depot to deliver the trees!
For companies that are looking to venture into local delivery, this marketing ploy is a cautionary tale. Vehicle requirements, handling concerns, regulatory issues, and operational challenges may compel passenger delivery marketplaces (such as Uber, Lyft, and Flywheel) to recruit an entirely new group of drivers to provide professional yet cost-effective delivery services.
The clearest operational challenge is that packages do not commingle well with people. If you hired Uber to take you across town, would you be willing to wait in the car while the driver went into a building to pick up or deliver a package? Not only does the lack of commingling destroy delivery density, but it also drives up package delivery costs. The result is that Uber will require a new set of drivers and new routing technology for multiple pickups and dropoffs. And it’ll need to support a wide range of service levels, from same-day to scheduled.
Do these challenges prevent Uber from moving into delivery? Absolutely not. The on-demand ride service remains the odds-on favorite to disrupt the local delivery industry, given its technology expertise and the strength of its brand.
An easier route for Uber is to work with existing local carriers and their drivers, who work as independent contractors. By leveraging these folks’ operational expertise, it will be able to make deliveries cost effective right off the bat. And, unlike the tree delivery story, this is a business model that’s not just for Christmas.
Sunday package delivery is a natural extension for Amazon, but it will be interesting to see if it can grow Sunday delivery with the US Postal Service. Amazon uses local carriers for Sunday delivery programs in some markets, and these carriers are likely to be more cost effective and flexible (with service, labor, and cutoff times) than the USPS in the long term. This move should make other retailers very nervous and ultimately serve as a wake-up call. Amazon has the huge advantage of scale/shipment volume, and local delivery programs like this, combined with its emerging same-day service, will give it even more of a lead. Who else has the volume and leverage to get the USPS to operate on Sundays?
Amazon is offering Sunday service to solidify its position as the “I want it now” retail option, but it actually has two other motivations. First, if successful, Sunday service will remove huge spikes in its distribution centers. With no outbound delivery available on Sundays, Mondays are huge days in Amazon distribution centers in terms of labor cost and facility activity and capacity. Sunday service will smooth out those spikes.
Second, Amazon is growing at such a tremendous rate, it will one day in the not-too-distant future outgrow UPS’s capacity or fill one of their vehicles for the day. It is very motivated to develop other carriers, and the USPS is one such alternative. This is also why Amazon is such a heavy user of the local delivery industry. Rewarding the USPS with this Sunday partnership creates goodwill with the USPS, which can be leveraged in the future.
Amazon’s recent unveiling of its drone project on 60 Minutes is another indicator of how important same-day delivery is to its go-forward strategy. Amazon views its competition as retailers in the mall, and it’s doing everything it can to eliminate any reason to go to the mall. Sunday delivery, locker pickup boxes, and same-day delivery are all moves to close the gap between shopping online with Amazon and brick-and-mortar shopping. To date, Amazon’s version of same-day has been the AM/PM model, where orders run twice a day from a central hub. This model is certainly low cost, but it does not allow for the premium same-day service levels now being offered by eBay, Google, and others who leverage local store inventory. The drone project is an attempt to fill this gap by skipping the AM/PM model and going directly to buyers for faster delivery.
Here’s the rub: the majority of online buyers are in urban areas where drone delivery is unrealistic, since remote-controlled helicopters cannot enter a building, take the elevator, and visit the third floor. And this points to one of Amazon’s weaknesses relative to other retailers. Its lack of forward-deployed storefront inventory prevents it from offering very rapid (one-hour) delivery programs to the masses. Amazon’s rural (Kentucky) and distant suburban (Tracy, California, about 40 miles outside the San Francisco Bay Area) distribution centers are fine for AM/PM same-day programs, but this limits who can be served with one-hour-or-less delivery. Traditional retailers already have local inventory in their stores poised for one-hour delivery of e-commerce orders, something Amazon will never have. If successful, this drone project will allow for one-hour-or-less delivery in close proximity to its distribution centers, but, unfortunately for Amazon, the number of people close enough to benefit is a very small percentage of buyers.
For once, traditional retailers maintain the upper hand when it comes to one-hour delivery, and this drone project, even if successful, will not change that.
Uber is doing an amazing job at disrupting the local delivery industry — at least the local delivery of people. But while it’s been applauded for opening up users’ access to taxis, what many analysts have ignored is its significant effect on drivers. Not only has Uber enabled drivers to escape from working for a taxi or black car company, but it has also empowered them to truly strike out on their own and be successful.
It’s inevitable that the local delivery industry also will soon be “Uberized.” Today, although local delivery drivers operate as independent contractors, they are dependent on delivery companies who drum up business using modest sales organizations and local brands. If local drivers had direct access to this pipeline, they would jump at the chance to control their situation more tightly and would probably benefit economically, since local delivery companies retain 30-40% of revenue.
The rise in driver independence is propelled by three changes. First, low internet and mobile technology costs now enable every driver to receive orders electronically. In the old days, delivery firms needed to provide Nextel phones or two-way radios. Secondly, local delivery companies have pushed more and more costs onto local drivers. By forcing them to work as independent contractors, delivery companies have freed them up to provide delivery services to anyone. And the last change? Powerful brands that aggregate the delivery orders and tender them directly to local drivers. That is where Uber, or another strong brand, will step in.
There are segments of the local delivery industry that are protected (for example, sorting for routes and store replenishment programs need cross-docks). But when it comes to on-demand delivery, local carriers are at high risk of being dis-intermediated.
Recently, eBay announced the acquisition of UK-based Shutl. We think highly of Tom, who’s the CEO, and Steve and Mike here in the US. They are going to be an important part of the puzzle for eBay as they try to get a piece of the $900 billion online-to-offline buying market, which Forrester Research estimates will account for nearly 50% of retail sales by 2013. Without any inside knowledge as to the reasons behind the acquisition, it appears to be an effort by eBay to establish a brand that will allow them to participate in transactions that do not happen inside the eBay marketplace. This strategy has been wildly successful for PayPal on the payment processing side and may translate well to the same-day delivery side when that market takes off.
From a local delivery industry standpoint, the acquisition is great news. When Shutl goes live with expansions in the US, they will use local delivery companies to do deliveries that were formerly handled by UPS or were picked up in the store. eBay and Shutl are at the front end of driving more and more volume to the local delivery industry, forcing the industry to improve quality even further. We expect the other large players trying to get into local commerce to move down a similar path.
Few people have heard of Grand Junction, and we’re OK with that. We’re the engine behind the emergence of same-day delivery in the US and Canada, and the architect of many recent quality improvements in the local delivery industry that have allowed it to become a true alternative to UPS and FedEx, private fleets, and the trucking industry. Our software-as-a-service (SaaS) platform processes a local delivery every two seconds, 24 hours a day.
Why are so many using the Grand Junction platform for local delivery? We did the hard work of integrating the entire local delivery industry, whose members are sometimes called “couriers” or “local carriers.” It was hard work, since nearly 60% of the industry runs on proprietary or small providers’ software. These integrations are rich, flexible, ever evolving, and require a lot of effort working one on one with carriers to keep them running. Retailers, 3PLs or “app” start-ups looking to offer same-day, scheduled or 2-person delivery now have a single point to access couriers and roll-out nationwide delivery.
We’ve also professionalized the local delivery industry, and upped the game in terms of quality, by taking the innovative approach of giving tools to local carriers so that they can self-manage quality, leaving less for the shipper to manage and a better experience for the customer. We believe this approach is a first in supply-chain software. Prior to Grand Junction, local carriers did not have tools such as CRM, GPS tracking, learning management, or alerts to manage by exception. As a result of our efforts and innovations, the local delivery industry, which was formerly the backwater of transportation, is moving up to prime time. OfficeMax, Transforce, and dozens of other retailers, distributors and 3PLs are managing or rolling out local delivery programs using Grand Junction’s platform.
Local carriers are the only game in town if you, as a shipper, are looking to offer same-day, scheduled, two-person, or AM/PM delivery programs, and Grand Junction makes it possible for shippers to roll out these programs quickly and with confidence. This “Last Word on the Last Mile” blog is a place for folks to join in the conversation about local delivery. I promise not to talk much about Grand Junction and will mostly share my 15 years of experience, making observations about this rapidly evolving market as the changes are taking place.