Grand Junction - Local Delivery Reinvented

Category Archive: Retail

  1. Retailers: Reinvent Your Supply Chain or Go Bankrupt

    Leave a Comment

    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.

  2. Amazon’s Flex Program Is a Private Uber

    Leave a Comment

    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.

    Competitive Differentiation
    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.

    Wrap Up
    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.

  3. Why Retail Stores Won’t Support Same-Day Delivery

    Leave a Comment

    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.

  4. Google Express Is Dying. (If It Can’t Evolve to Better Compete with Amazon)

    Leave a Comment

    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.

  5. Local Delivery: A Fragmented Industry, Even More Fragmented Sales Efforts

    Leave a Comment

    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.

  6. $5.99 for Same-Day Delivery… What’s the Right Price and Service Level?

    Leave a Comment

    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.

  7. Where’s the eCommerce Delivery Choice?

    Leave a Comment

    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.

  8. I Don’t Want to Sit Next to a Tree on My Next Uber Ride

    Leave a Comment

    Uber’s recent offer of Christmas tree deliveries raises critical questions for the local delivery industry.,0,37697.story#axzz2mXGURaZP

    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.

  9. Odd Bedfellows: Amazon and the Postal Service on Sunday

    Leave a Comment

    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.

  10. Psst…Amazon Drone Announcement Actually Reveals Weakness

    Leave a Comment

    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.

  11. What eBay’s Acquisition of Shutl Means

    Leave a Comment

    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.