Analysis

The future of home delivery: cracking the final mile

Online shopping has come a long way over the
 past five years, writes Planet Retail’s retail insights director, Natalie Berg. Websites have been upgraded
and mobile-enabled; there are more payment options than ever before, and click-and-collect has become a mainstream option for shoppers. But the one area – and the most important – that has caused mounting anxiety for retailers is the rising cost of home delivery.

Natalie Berg

Natalie Berg, Planet Retail

We believe there is a growing disconnect between shopper expectations and retailer capabilities. The competitive state of the sector has resulted in a proliferation of retail delivery services with delivery lead times getting shorter and shorter. Whereas next-day delivery was once considered impressive, today it’s all about same-day or even one-hour delivery, a service that Amazon in particular has been rolling out under the Prime Now brand in both the US and UK. Meanwhile, Sunday deliveries have been introduced in selected markets
and click & collect continues to rise in popularity, giving shoppers more choice and flexibility in fulfilment than ever before.

As a result, shoppers now expect delivery to be fast, reliable and – crucially – free. This is unsustainable in our view, and we are beginning to see the first signs of cracks in the system.

A number of retailers, including Amazon and Walmart Canada are quietly raising the minimum spend required to be eligible for ‘free’ home delivery.

This is especially important for online-only retailers like Amazon whose shipping costs as a percentage of sales have increased every year for the past five years. Raising the minimum online spend is an easier message to convey to shoppers compared to charging for a previously free service.

However, there are a number of retailers still going in the opposite direction in a desperate attempt to win the ‘shipping wars’. Earlier this year, for example, Target in the US halved the size of online orders eligible for free shipping from USD50 to USD25. We suspect this will be reversed in the not too distant future. Not only is it unhealthy for the retailer’s bottom line, but for the industry as a whole.

Looking to the future, we expect more retailers to begin charging for services such as home delivery and for low-value click & collect orders. In fact, in mid-2015, Tesco announced plans to introduce a GBP4 surcharge – on top of normal delivery fees – for online orders under GBP40.

Meanwhile, John Lewis will soon introduce a GBP2 charge for click & collect orders under GBP30. We believe this is entirely justifiable and could become the norm within the next several years (the exception being those retailers that fulfil click & collect orders from store stock, such as Argos or Halfords).

However, we believe that charging for low-value orders will either encourage customers to increase their spend online so as to be eligible for ‘free’ delivery or divert those small purchases back to the store. The only foreseeable challenge here, for click & collect in particular, is that retailers are raising expectations for those shoppers that are happy to pay the fee for small orders: they will expect a superior service, particularly in terms of waiting time/queue management.

Cracking the final mile is still very much seen as the Holy Grail of modern retailing. Retailers must continue investing in alternative fulfilment options in a bid to wean shoppers off cheap and speedy home delivery.

We anticipate further innovation in the areas of third party (e.g. Google Express, Shutl) and crowdsourced (Kanga, deliv) delivery, as well as greater ownership of the final mile. For example, the use of drones, retailers running their own delivery truck fleets, or even building smaller distribution centres closer to urban areas in order to win the same-day war. It should come as no surprise that Amazon is embarking on all three of these initiatives.

 

Click here to access your own full copy of ‘The Future of Retail – 10 trends of tomorrow‘ from Planet Retail.

 

3 comments on “The future of home delivery: cracking the final mile

  1. Surjodoy Ghosh said:

    My question to Natalie…. Why do you discount the power of innovation in design. Perhaps because in the last 43 years no real innovation has hit the industry. But then in this time fewer B2C deliveries was the order of the day till about the last 4 to 5 years when the last mile has appeared as more as an Achilles’s heal in the over all e commerce value chain.
    Actually there are alternative designs for doing distribution that aren’t expensive at all and can even take care of the environment.
    The Big question is ” Who is going to try out such designs?”

  2. Pierre Rossouw said:

    Agree with Simon, great article. The last mile is the most expensive part of the journey and presents the greatest challenge. Whoever cracks this best has greatest advantage.

  3. Simon Walshe said:

    This article provides a very fair and accurate assessment of where we are with home delivery and some of the challenges that will be faced for carriers and their customers (both receipt and despatch). Yes we have come a very long way in a very short space of time with highly sophisticated websites and apps for customers to chose their items, mode of payment and form of delivery but the fact remains that providing a reliable home delivery service which achieves consistently high QofS results requires investment. When you look at parcel delivery in terms of productivity it is lost utilisation that is often the achilles heel … failed deliveries and re-deliveries and what works well in one geographical area may not work nearly as well in the next. Receipt customers expect and demand speed and reliability at low cost (it is never actually free) and it is the carriers who can provide the best portfolio of delivery solutions who will be the ones to gain market share though as we saw from Christmas (mentioning no names Yodel) capacity and contingency planning must be able to accurately forecast and cater for volumes at peak.

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