How last mile tech startups can find competitive advantage
Glossary of terms for you newbies (and vets):
- Shopper: the customer purchasing product from an online store
- Retailer: a store that sells stuff online, offline, or both
- Carrier: a company that provides end-end (first mile, LTL, freight and last mile) logistics services with SLA’s — usually traditional companies like FedEx, UPS, Canada Post
- Last mile carrier: a company that only focuses on providing shipping services from a retailer to the shopper with a 1:many model — usually startups like ShipSwyft who provide same day delivery in Toronto
- Last mile courier: a company that focuses on providing shipping services from a retailer to the shopper with a 1:1 model — usually on-demand platform startups like Uber, Postmates, DoorDash & Instacart
- Delivery SLA: a commitment by a carrier (couriers don’t provide SLA’s) to a retailer to do something within a predefined set of rules — like delivering packages by a certain time (ex. guaranteed to arrive before 9pm)
- Last mile: the final delivery run between the retailer and end shopper
- Last mile tech: technologies that are disrupting traditional last mile methods (i.e. crowdsourced drivers, AGVs, etc.)
- AGV/drones/etc: autonomous guided vehicles (think self driving or semi-autonomous delivery vans, drones — like this Fedex Bot
- NPS: net promoter score — a measurement of a customer’s satisfaction (or dissatisfaction) with your service, for our purposes a delivery carrier!
- OTD: on-time-delivery rate — a measurement of how good a carrier is at delivering within the SLA provided to shoppers or retailers
Last Mile Carriers — Industry State
Now let’s talk about the unsexy world of logistics. There’s two primary forms of logistics: B2B distribution and B2C distribution (the latter is what’s covered by the news usually). The focus of this piece is on the fast growing B2C distribution (specifically, last mile) market where on-demand, crowdsourced carrier business models have disrupted traditional players like FedEx and Canada Post.
I researched 8 last mile carrier startups and concluded the following:
- all Startups, if not most, pitch the same value propositions: lower cost per delivery (usually due to their business model being they can crowdsource drivers and don’t need to invest in fixed assets like FedEx does… or… because they use “cutting edge” tech to batch orders into dense routes); real-time tracking to provide unparalleled visibility into the delivery lifecycle to shoppers; same day delivery increases average order value/sales/or some other metric retailers care about; & more similarities!
- Startups have identical business models: crowdsourcing drivers is NOT a competitive advantage. Yes, some startups do it better than others, but with uncertain regulation on the horizon & the low “stickiness” of drivers — crowdsourced drivers are no longer a source of competitive advantage in 2019. Now, some startups do have unique operating models (i.e. some startups are store-to-door while others are FC-door), but replicating these operating models or using them interchangeably is neither difficult nor proprietary knowledge in the industry
- most retailers have no clue how to do last mile logistics: Despite last mile being a competitive industry, retailers don’t know what they’re doing. In-store fulfillment isn’t efficient due to archaic inventory systems & warehouses were never optimized/designed for same/next day delivery. Interestingly, each last mile carrier startup has found their own niche, and, it looks like retailers are working with multiple startups in order to determine what works long-term (did you know most large retailers like Wal-Mart use many last mile startups?)
- most last mile carriers who have failed tried to be both carrier & courier: the key to running a profitable carrier business is unlocking drop density (# of packages delivered per hour). Carriers who’ve tried to become couriers (like UberEats) have had a difficult time managing these unit economics because: 1) on-demand courier platforms have massive scale both on the demand & supply side; 2) their technology was built to predict and match supply to demand in real-time; and, 3) on-demand courier platforms are able to charge fees in addition to the cost of delivery whereas most carriers are not because they operate on the back-end
- Startups are growing at the cost of customer experience: shoppers are demanding faster delivery, retailers feel the pressure to offer it to remain competitive, and hence last mile carriers are scaling operations (hiring more drivers, taking on volume they’ve never handled before, etc. etc.) — but all this is coming at the expense of delivering a SEAMLESS customer experience. A 2019 Capgemini report found that NPS across last mile carriers (traditional and startups) has been falling drastically!
Based on everything above: I suspect that most last mile carriers will end up competing on price to win contracts, or, own specific geographies (ex. Startup A owns DFW and Startup B owns NYC). Neither of these outcomes is good for the last mile industry because it suggests that without consolidation (larger Startup acquiring smaller Startup) the only winners in this space will be shippers — aka retailers who will continue to negotiate lower prices and/or divide total volume between multiple carriers!
So the billion-dollar question: is ‘same day’ last mile delivery a commodity service? And if it is, how can a last mile carrier startup create sustainable competitive advantage?
My answer: last mile delivery services seem like a commodity because customers (retailers) are sacrificing insistence on quality for the sake of meeting shopper demands… but this trend will reverse and retailers will smarten up at which point we will see that the successful startups are those that control costs via automation and increase sales via a commitment to delivering seamless customer experiences
Sources of Competitive Advantage
I admire Jeff Bezos, and working at Amazon, we have a culture where we live by our Leadership Principles (LP). The leadership principle that speaks out to me strongest is: customer obsession. It was customer obsession that drove Amazon towards Prime one & two day shipping, Kindle — and many more products/services that millions around the world have come to love.
First let’s define “sustainable competitive advantage” to be profits. We may each have our own definition of competitive advantage (valuation of a startup, amount raised, brand names of customers, etc.) but I think profits are what most stakeholder’s would (or should!) care about. Now, let’s explore HOW a last mile carrier startup could maximize profits (brief overview):
- Increase prices: in the short term, this is not feasible for last mile carriers (at least until the industry does not consolidate). There are many failed carrier startups who operated with the hypothesis that “customers will pay more for a bespoke delivery experience” (Doorman, Homer, etc.)
- Increase volume: for the sake of brevity, let’s only talk about enterprise sales! Remember, one enterprise customer is worth hundreds of smaller eCommerce retailers when measuring order volume
- Reduce driver pay: in the short term, this is not feasible for last mile carriers as drivers have a multitude of platforms to find gig work;
- Optimize unit margins: this is where things get VERY interesting — stay tuned and read on!
Automation & Customer Experience: sources of Competitive Advantage
Before we continue, recall Amazon’s Leadership Principle of customer obsession. Let’s apply the LP customer obsession to understand how exactly a last mile carrier can get more enterprise retailers (grow sales) and optimize margins ( cut costs) in the lens of thinking about the customer!
Who is a last mile carrier’s customer? It isn’t the retailer (well it is… but it isn’t as well!)…
I believe the customer for a last mile carrier is the shopper herself — why?
because in an age of hyper competitiveness in the retail sector, shopper satisfaction is the priority for every retailer — and all business decisions will be made based on what satisfies the shopper the best — including which delivery service to partner with
Ok — now if we’ve agreed the customer is the shopper, let’s explore what the shopper cares about. Based on my experience and discussions with industry experts, I believe when it comes to delivery, shoppers care most about:
- predictive delivery (time and tracking)
- delivery experience (ex. knowledgeable and courteous drivers)
Taking the above factors into consideration… let’s use the following matrix to guide what a last mile carrier startup should strive to achieve:
The above matrix describes three very different business models. On the far right rectangle, we have couriers (Uber, Postmates, Instacart) who on a cost per order basis are the most expensive but also provide the most customer value. This model works best for certain industries like food & grocery.
In the bottom red rectangle, we have traditional carriers whose legacy technology & capital-intensive business models do not allow them to deliver speedy (same/next day) delivery at a reasonable cost to shoppers.
Finally, in the green rectangle is where last mile tech-enabled carrier startups compete. There is a very small margin of error (the blue line in the green rectangle) but where each competitor lands on that blue line can be the difference between survival and demise. Maximizing shopper delivery speed expectations while maximizing revenues (aka delivery costs, since one person’s cost is another’s revenue) is only achievable with the right technology which improves a shopper’s delivery experience.
Why last mile carriers and couriers are NOT the same
I cannot stress this enough, DoorDash/Uber/Postmates/Instacart (couriers) are not the same as ShipSwyft/Axlehire/Deliv (carriers). Carrier business models are 1:many (usually) while courier business models are always 1:1. What’s the difference? Cost and technology. 1:1 is and always will be more expensive on per order cost (hint: UberEats is still not profitable, nor is anyone from their cohort despite massive scale) & 1:1 works perfectly for SMB businesses or food & grocery where perishables must be delivered on-demand. Technology is the next difference — 1:1 platforms use complex routing algorithms to randomly match supply to demand. Carrier back-ends rely mostly on API integrations for the flow of data between systems and batching software.
Carriers should look to maximizing their revenues (aka delivery costs) without risking the customer’s maximum willingness to pay — aka the green dot in Figure 3.
How can a last mile carrier startup achieve the green dot in Figure 3?
By providing predictive delivery and a seamless delivery experience. Sounds like a cliche? Well it is. Predictive delivery tools are abundant and a commodity — think:
- real-time GPS tracking of a delivery courier (check)
- text/email messages informing shoppers of delivery ETA (check)
- on time deliveries (most startups achieve OTD rates better than FedEx)
I believe that a startup that focuses on tools to improve the delivery experience itself will find competitive advantage. Most people erroneously believe that investing in tools and processes = additional cost. This is the farthest thing from the truth. Here’s why and how.
How investing in delivery experiences can reduce costs
At a high level, the best way to improve a shopper’s delivery experience is to make a driver’s job easier & faster so that they are more reliable and happier. Happier drivers will always take the extra step to put a smile on a shopper’s face, and drivers can only be reliable if startups invest in the right tools that maximize efficiency and accuracy.
Here’s an example of an investment in a tool that achieves all of the above:
A predictive model which ingests the make & model of the vehicle a driver is using for deliveries and optimizes the max. payload the driver’s vehicle can fit against the route the driver must take (route batching and optimization software is a commodity so I won’t even bother exploring that).
What would the effect on the startups costs and revenues be with the implementation of this system?
Costs: driver routes not only factor in traffic, distance & other factors — but they now take into consideration EXACTLY how many orders a driver should carry to maximize drop density, cost/package, OR any other metric the startup wishes to optimize against. The result is a lower cost structure and improved unit margins!
Revenues: In our example above, a carrier could increase its OTD rate and customer NPS scores — by increasing both of these levers, a carrier could win more contracts with retailers. Why? Because retailers assess carriers by these metrics almost exclusively. How would the system above lead to better OTD and NPS? Well, by optimizing against both the route and payload of the driver — the carrier reduces the risk of one of two situations: 1) giving certain drivers too many packages on a route or 2) giving other drivers not enough packages on a route. Each of the options carries its own risk (too many packages would reduce OTD rate and NPS) and not enough packages doesn’t optimize unit economics.
The above example is one of many tools/systems that I have explored which can improve shopper satisfaction WHILE reducing a carrier’s costs and/or increasing revenues — if you’d like me to talk about more exciting tools/systems, leave a clap so I can continue this in another post!
In conclusion — if carriers can remain customer obsessed and build tools that improve shopper satisfaction, than, retailers will always be more inclined to award the contract to that carrier. Competing on commodity tools like “real-time GPS tracking” is no longer an option, startups will need to learn their processes in extreme detail and create cutting edge tools/processes to unlock competitive value.
Quick Mention about Autonomous Delivery:
My opinion (and I will write a comprehensive analysis into the role AGVs will play in last mile tech in the future) is that AGVs will not disrupt the last mile industry in the way we think. Here are a few reasons why:
- AGVs eliminate (or drastically reduce) labour and (hopefully fuel) costs — but this holds true for suburban areas where most deliveries are to single-family homes. Research from McKinsey found that in dense, urban areas like Manhattan, bike couriers will remain king due to the sheer complexity of driving… let alone autonomous driving
- approx. 84% of the U.S. population lives in dense, urban cities — and a whopping 42% of the above segment live in apartment/condos. Customers have already proved that they expect delivery to the door, and not delivery to the “curb” — will AGVs be able to guide their way in/out of complex apartment buildings?
Summary: AGVs will have a place in the future, but, the complexities and shortcomings of AGVs will not replace a traditional human courier in the short term (I’m thinking 10 years at least)… in the short term, AGVs & drones will be fantastic sources of competitive advantage for suburban & rural deliveries!