Building Same-Day Delivery Operations That Do Not Lose Money

Competition in the last-mile fulfillment space is dense and filled with companies sitting on perennially red bottom lines. There might be a need to rethink strategies.

A hearty welcome to the 69th edition of The Logistics Rundown, a weekly digest that aims to put some perspective on what’s brewing within the logistics industry. This is a space where we religiously dissect market trends, chat with industry thought leaders, highlight supply chain innovation, celebrate startups, and share news nuggets.

It's been a brutal winter for the tech market, as companies continue to shed hundreds of employees in anticipation of a tipping economy. Many of these laid-off employees were reckless hires based on unachievable growth targets built on plans drawn with high-season fundamentals — something avoidable with a bit more foresight.

The growth-at-all-costs strategy might be viable in a nascent market with little competition. However, pursuing this strategy in a market swimming with similar (or even identical) contenders backed by hefty VC money purses can result in collective failure if companies aren't mindful of margins. 

The situation isn't very different within the last-mile fulfillment space. Companies have a skewed image of end consumers and their needs, with value propositions propping up expedited delivery as nothing short of an obsession within the consumer base. 

The 'Amazon Effect' has a role to play in this thought process. Over the last couple of decades, Amazon has truly effected a change in last-mile delivery norms, lowering fulfillment times from over a week to a couple of days (or less). This has forced companies within ecommerce and the extended delivery ecosystem to keep up. It isn't uncommon to see retail delivery and micro-fulfillment companies venturing into new markets and aggressively marketing their service, while promising free (or cheap) deliveries at too-good-to-be-true fulfillment times. 

While there are localized economies of scale once companies achieve a certain degree of last-mile drop density, heavy competition within a market will mean such efficiencies might never see the light of day. And unlike different industry segments, last-mile fulfillment companies struggle to retain customers, as brand loyalty is not a significant factor for such services. 

Companies can afford to run the show thanks to heavy subsidies to their operations via VC funding. Unfortunately, cash isn't limitless, which companies have come to realize today as growth stagnates while cash burn remains high.

In this melee, it's easy to forget what consumers want. We spoke to Aaron Walters, the co-founder and CEO of Carry Inc., to understand what the consumer 'really' wants. Carry is a micro-fulfillment startup in Brooklyn that's using groups of vans to act as mobile warehouses, sorting packages on the go at strategic NYC intersections. 

"We started off as an on-demand delivery company for retail. Something like what UberEats does, but working with retailers to deliver apparel items and small electronics stuff within two hours of ordering," said Walters. "But we quickly realized there wasn't much desire in the market for super fast delivery outside of food."

Walters explained that it was evident consumers were far more price sensitive than speed sensitive when it came to expedited last-mile. “If a customer has a ground shipping option on a retailer’s site for $7, and you offer a $15 same-day option, nine times out of 10, they’re not going for your option. It’s not like they don’t want their stuff fast, it’s just that they didn’t want to pay more for it.”

It’s not like they [consumers] don’t want their stuff fast, it’s just that they didn’t want to pay more for it.

This was an inflection point for Carry — "we decided to do same-day shipping at or below ground shipping prices. This led to us creating a model of mobile warehouses that allows customers to get their items on the same day without paying a premium. We batch our products on orders placed before 12pm and our customers receive it by around 3pm."

So, a good business model is to control operational costs while providing customers the best possible fulfillment service. Companies can theoretically pay for a large warehouse close to a dense metropolitan area to achieve excellent service levels, but there are no recuperating inventory storage expenses. 

Regardless, something of note is how micro-fulfillment is not a scaled-down version of the status quo fulfillment operations. For one, micro-fulfillment can only work if the company focuses on a few select low-priced retail goods and their variants. "As a retailer considering micro-fulfillment, you'd plan to split your inventory across multiple micro warehouses across the city. You'd need low-price retail and relatively low SKU numbers to do this. If you're a beverage company with a catalog of canned goods, micro-fulfillment is great for you as your products are cheap and easy to split," said Walters. 

This results in companies converting unused small storefronts and empty parking lots into micro-warehouses. "Today, it's relatively easy to pull up into a new city like Chicago or Los Angeles and open such micro-warehouses," pointed out Walters. "Scaling is really easy here, as companies aren't outfitting these spaces with high-end warehousing solutions."

Micro-warehouses have wire shelves put up in a couple of weeks, and companies have people delivering directly from there. These spaces have short lead times to get up and running. For companies that deal with low-priced retail and a moderate number of SKUs, micro-warehousing is a great way to expand quickly across denser cities. 

While such operations seem easy to replicate, there's a reason why larger freight forwarders like UPS or FedEx aren't too quick to jump into micro-warehousing solutions. "They work on a traditional hub-and-spoke model. For instance, they pick up packages from NYC, one of the spokes. They take the assorted packages to a hub that is a distribution center out in the suburbs. From the hub, they sort and send out packages to another spoke in another part of the country."

This hub-and-spoke model works well for long distances, and it's in the best interests of such forwarders to stick to that segment. "The shorter the distance, the less money they make. It makes more sense for them to ship goods cross-country than within New York. That's the main reason they don't do same-day delivery. It's too expensive to modify their model to fit the same-day delivery solution."

The Weekly Roundup

Freight rates will drop sharply this year. According to an estimate from Dubai-based DP World, it could drop by as much as 15-20%. “It is clear that there is a massive drop in demand, inventories are not clearing up, the orders are not coming through,” said Yuvraj Narayan, DP Worlds chief executive and financial offers in an interview with Reuters.

Despite soft demand from this past holiday season, trucking data shows e-commerce is still booming. While holiday gifts make up the lion’s share of trucking traffic over the season, this year it was automotive parts, engineering, manufacturing, and high-end consumer goods. This trend will likely continue as retailers attempt to shed excess stock amid weakening consumer demand.

Maersk expects a shift from air freight to ocean freight as rates continue to fall. “Ocean freight rates coming down in the first quarter of the year is likely to herald a shift from air to ocean transport, too, as air volume growth remains fairly flat. The Chinese New Year slowdown traditionally slows air freight demand.” 

International Trucking Company, J.B. Hunt expects freight demand to level out this year. While Hunt’s profits have backslid somewhat, the company believes that many businesses are finally on the other side of chaos caused by the pandemic. “We have had good signals from our customers about Q2 starting up back to a more normalized or having a more normal environment,” said J.B. Hunt President Shelley Simpson.

..said who?

“The bottom line is that conditions remain healthy, and there is little we see across our results or proprietary metrics that point to a meaningful slowdown.”

- Tim Arndt, Prologis’s chief financial officer, commenting on the strong warehousing market amidst a trucking slowdown

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