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Key Factors Driving Changes in “Last Mile” Deliveries

SCDigest Editorial Staff  /  Industry Veteran and uShip Executive Metzler Shares His Perspective with Stifel’s John Larkin  /  So called “last mile” deliveries are of course at the heart of the eFulfillment challenge.  /

SCDigest notes that just recently, UPS announced it was greatly expanding it locker program, adding 300 new locations across the US, after a successful test in Chicago. The parcel giant is making the move in part to gain delivery efficiencies in the face of high cost deliveries o consumers’ home versus the B2B parcels that until recently had been the bulk of its business, generally providing more parcels per stop, greater delivery density, and higher rates.

John Larkin, well-known transportation sector analyst a Wall Street investment firm Stifel, recently hosted a discussion on key trends on last mile deliveries with transportation sector veteran Dick Metzler, now Chief Marketing Officer of uShip, an on-line marketplace for shippers and freight carriers.

In an interesting research note, Larkin summarized the key takeaways from Metzler’s presentation and then Q&A session, which we summarize here.

The iPhone and the trailblazing work of Amazon and Uber have enabled and empowered entrepreneurs to solicit and receive venture capital funds as they endeavor to “Uberize” everything, including the freight transportation and last mile delivery spaces: During the first three quarters of 2015 alone, 13% of the venture capital deployed, or roughly $14 billion, was invested in the broader on-demand delivery space as many companies raced to emerge as the Uber of the freight world. But many of these companies have struggled because few had the route density or the revenue per delivery to drive sustainable economics. $5 per shipment in revenue is simply inadequate to offset the $10 to $20 cost per delivered item. Effectively, a cool app alone won’t be enough upon which to build a winning business model. With companies struggling, only about $3.3 billion of venture capital has been invested in the on-demand delivery space in 4Q15 and 1Q16 combined.

Consumer opinions regarding what they desire in a last mile delivery service keep evolving: Each year, more and more consumers list “free shipping” as the number one desired attribute of a last mile delivery program. A recent survey suggests that 88% of consumers look for free shipping first. The number of shoppers desiring same-day shipping for items purchased on-line continues to grow at a rapid clip, particularly amongst those that are frequent on-line shoppers. Among those who shop on-line two times per week or more, same-day delivery is desired by 63%, according to a recent survey.

Amazon keeps raising the bar: Had not Amazon offered same-day, and in many cases, same-hour delivery services, consumers wouldn’t know they needed them. Some customers are so desirous of instant or near instant-gratification that they are willing to pay a modest premium for same-day/same-hour delivery. Still, the vast number of customers in search of free shipping is willing to see their ordered items delivered within two to five days. Amazon customers have come to expect faster delivery, as 43% of Amazon Prime members expect delivery in two to three days.

Certain companies have built the density to be able to prosper in the last mile delivery space: These companies would include FedEx, UPS, the USPS, Uber, and Amazon. Recall that most on-demand start-ups have insufficient freight density to operate profitably and many can’t even cover their variable costs.

Other companies operate profitably by delivering freight, which generates higher revenue per stop due to the nature of the larger, heavier, and/or higher value product they are delivering: Examples of carriers operating in this niche are uShip, Lone Star Overnight, Cargomatic, Lugg, and Flexport. As with start-ups lacking sufficient density, those operating in the low revenue per stop niche also struggle to achieve profitability and many also fail to cover their variable costs.

It is unclear if Amazon plans to compete more directly with FedEx and UPS as it builds more “supplemental capacity”: However, suffice it to say that FedEx and UPS have vast fortress networks that will be difficult to attack without evoking a dramatic competitive response from the folks in Memphis and/or Atlanta.

Uberization of truckload with be a challenge; however, incremental Uberization of the existing large truck brokers is the most likely winning scenario: As Larkin has noted in the past, truckload services have many variations around a core theme. Variables include trailer size (53′ long or 48′ long, 102′ wide or 96″ wide, plug door or overhead door, etc.), trailer type (dry van, insulated, refrigerated, heated, flatbed, drop frame, dry bulk, liquid bulk, etc.), driver type (hazmat certified or not), driver requirement (teams or solo), safety appurtenances (electronic data loggers, speed limiters, anti-roller protection), etc. , which combined make it tough to fully systematize when freight often valued at $100,000 per load or greater is involved. Eventually, 3PLs and brokers will incrementally automate functions, one or two at a time, with an eye toward dramatically reducing manpower requirements per load over the next five to 10 years.

The less-than-truckload space lends itself more easily to Uberization, given that most freight rides on a standard pallet: The palletization of the freight reduces the number of variables to manage, as will the evolution and widespread adoption of dimensional pricing (i.e., DIM weight pricing). Metzler said his uShip company is like the Travelocity of the less-than-truckload space, and the brokers that often handle small-sized shippers for less-than-truckload carriers as the travel agents of old. uShip has a major leg up on the start-ups in this space, given its long history of successful software development and of handling low frequency, specialized loads for shippers/individuals.

White glove and brown glove last mile delivery for non-conveyable freight is still sorting itself out: There will be always be a role for white glove delivery companies like XPO’s last mile division to prosper, particularly when heavy and/or odd-sized products requiring installation are involved. However, the white glove service is expensive for some consumers who prefer literally to do some of the heavy lifting themselves. Metzler calls this no frills delivery of non-conveyable freight to a home or office “brown glove service.” Recently, less-than-truckload carriers have been handling much of the brown glove service. However, the less-than-truckload carriers are not well-equipped to make these one-off deliveries. They prefer to deliver to an industrial customer offering a loading dock and a fork lift truck to facilitate the unloading process.

Metzler suggested that there may be an expanding role for regional delivery companies who have been largely displaced out of the document delivery market by the advent of electronically transmitted documents. With some incremental retraining, some systems tweaks, and a slight upsizing of these companies’ rolling stock, Mr. Metzler speculated that partnerships between less-than-truckload carriers and regional delivery companies could evolve into the more optimal solution for providing last mile brown glove delivery solutions.

Autonomous drones, trucks, and delivery wagons will be transformational at some point: The technology virtually exists already to dis-intermediate the driver/pilot; the only question that remains is how long will it take to convince the federal government that driverless vehicles and drones will be additive to the economy, fail safe, and secure from access by terrorists? And, with unions, the railroads, highway safety advocates, truck and trailer manufacturers likely to lobby against the widespread adoption of autonomous vehicles and drones, it is literally anyone’s guess as to how long widespread adoption might take.

What’s that all mean in the end?

Larkin says shippers should expect FedEx and UPS to work collaboratively with Amazon and other e-commerce retailers and omni-channel merchants to find a mutually agreeable/mutually beneficial modus operandi. Less-than-truckload and truckload carriers that find a way to work synergistically with big truck brokers and 3PLs should gain a leg up on their competition. Large brokers and 3PLs that adopt technological solutions to reduce the manpower intensity of their operations over time should widen their competitive advantage over smaller brokers and in-house transportation and logistics departments (those belonging to shippers, receivers, retailers, wholesalers, and manufacturers).

He also believes regional parcel delivery carriers have a sizable opportunity to join forces with less-than-truckload carriers to facilitate brown glove deliveries efficiently. Non-automated freight brokers, load board operators, and venture capital financing app developers with no freight density and lacking high revenue per stop will gradually lose market share and ultimately downsize or fail.

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