Gone are the days when a three-to-five-day shipping standard was acceptable. As retailers look to compete not just on price point, but also on delivery time, in an increasingly competitive marketplace, they must face the last-mile, same-day delivery challenge head on. Consumers have come to expect ease, speed, reduced or free shipping costs for many of their online purchases. But they are still willing to accept some limits on the type of product purchased and the location of the buyer, as well as the time and cost incurred to fulfill an order.
The prevalence of free shipping and ship-from-store options has inspired creative approaches from global retailers to ensure on-time delivery. In fact, the ability to deliver on time — particularly for milestone, gift-oriented holidays such as Christmas and Chanukah — may depend on supply chain and related real estate decisions made much earlier in the year.
Online retailers — such as Amazon, Net-a-Porter, and Etsy, among others — have been or are beginning to offer same-day delivery. Meanwhile, traditional retailers are searching for innovative ways to compete with this delivery model. In the race to keep up with e-commerce players, retail giants Macy’s and Bloomingdale’s both launched same-day delivery services in 50 of their stores — across eight of Macy’s markets and four of Bloomingdale’s. And Macy’s recently decided to close some stores to focus more intensely on e-commerce.
With their enormous infrastructure advantage, traditional delivery providers like FedEx, United Parcel Service (UPS), and the U.S. Postal Service (USPS) are the largest providers of last-mile (home) delivery. For years, the United States’ $700 billion freight transportation market has been dominated by these shipping giants. Both FedEx and UPS have been expanding their network capabilities to provide two-day, next-day, and same-day shipping for retailers and e-tailers under pressure to deliver quickly. Gone are the days when a three-to-five-day shipping standard was acceptable. As retailers look to compete not just on price point, but also on delivery time, in an increasingly competitive marketplace, they must face the last-mile, same-day delivery challenge head on.
However, delivery strategies are becoming increasingly more creative in response to more demanding customer expectations. Some new delivery service players are shifting away from the traditional delivery models. UberRUSH, for instance, is providing major retailers such as Nordstrom, Rent the Runway, and Cole Haan with a very large, nimble, on-demand urban delivery fleet in selected cities that would be very costly to build from scratch — yet Uber does not own any cars. Google now offers Google Express, a consumer membership-based local delivery service. Meanwhile, Starship Technologies’ co-founders have developed an even more creative solution, hoping to automate the last-mile delivery process with robots designed to navigate the streets at up to four miles per hour to their destinations, ideally helping to ease delivery congestion and costs.
Retail behemoth Walmart is actively seeking regulatory approval to test drone deliveries, and a newly enacted FAA rule will likely make this option a reality. Amazon recently launched its own on-demand services, named Amazon Flex, which mimics Uber’s model of independent contractors and a mobile app for service, and allows Amazon to deliver goods within an elusive one-hour window. Similarly, newcomer Instacart deploys a fleet of personal grocery shoppers using their own cars and smartphones. For these new players and delivery service disruptors, expedited “final mile” delivery is at the core of the value proposition.
Some retailers are creating partnerships with innovative startups to get the goods to their customers. Walgreens, for example, is working with on-demand startup Postmates to make popular items available for fast delivery. ShopRunner provides two-day shipping for its online retail brand partners. Then there is Deliv, which partners with shopping malls and on-demand drivers to provide same-day delivery for retailers that lack their own logistics infrastructure.
It is clear that we have not seen the end of new and highly innovative last-mile distribution strategies. New property types include one-million-plus-square-foot mega e-fulfillment centers, parcel sortation hubs, local parcel delivery centers and urban logistics depots, return processing centers, and food fulfillment centers, as well as new forms of last-mile fulfillment centers.
Creativity Comes to the Distribution Landscape
What success really boils down to is good old-fashioned logistics. Chinese e-commerce giant Alibaba saw sales hit a new record of $14.3 billion on Singles’ Day in 2015, while handling a record-breaking 80,000 orders per second at its peak. Creativity alone didn’t get those orders delivered in a timely manner — a robust supply chain network did. It took capital, the infrastructure of vehicle fleets, and the real estate required for rapid deliveries. The company estimated that 1.7 million delivery people, 400,000 vehicles, and 200 airplanes would be needed to handle packages holding everything from iPhones to underwear.
In the big cities, access can be a challenge. In major markets with heavy sales volumes for many retailers, last-mile delivery often involves navigating trucks and delivery vehicles in dense urban areas where land is costly and opportunities for large-block development are often scarce. Amazon, for instance, is opening six major distribution centers in a ring around Chicago, all in the suburbs where large-scale real estate is cheaper, while providing access to large consumer population centers and their network of smaller, more urban last-mile delivery facilities.
New Top Distribution Markets: Front Nine and Back Nine
As transportation costs continue to escalate and sustainability becomes more important to companies and consumers alike — along with consumers’ desire for instant gratification — retailers, e-tailers, and their distribution partners are seeking facilities closer to their customers. They’re rethinking the distribution network. And while the “front nine” distribution hubs such as Chicago, Los Angeles, and New Jersey/New York continue to thrive, “back nine” secondary markets are beginning to attract the attention of supply chain executives. According to JLL’s Leaderboard: The Top 18 U.S. Distribution Markets report, areas such as the Carolinas, Florida, and the “Honky Tonk Triangle” of Louisville, Memphis, and Nashville offer the transportation options, affordable real estate, and access to markets that competitive retailers are seeking.
Optimizing the supply chain means creating a delivery network that has the right balance — minimizing operating costs, such as transportation, labor, inventory, and real estate, while being in position to meet customer service expectations. In a world of three- to five-day delivery, fewer distribution centers were required. In a consumer world expecting next-day or even same-day delivery, more facilities will be required closer to the customer. While automation and robotics have added speed and accuracy to central warehouse operations, human capital and ingenuity still count when it comes to last-mile delivery. In a world of three- to five-day delivery, fewer distribution centers were required. In a consumer world expecting next-day or even same-day delivery, more facilities will be required closer to the customer.
Inside the Box
Retailers and their distribution partners are testing new approaches to improve their product flow and balance operating costs with service delivery levels. Ultimately, retailers must master the delicate balancing act of last-mile delivery and the investments required to succeed in keeping up with growing consumer demand levels.
The need to deliver packages to customers when and where they want them has sparked a renaissance in distribution center development, related technologies, and management. Entirely new types of facilities have emerged to transform the global supply chain, all aimed to satisfy consumer demand — during the holidays and throughout the year. New property types include one-million-plus-square-foot mega e-fulfillment centers, parcel sortation hubs, local parcel delivery centers and urban logistics depots, return processing centers, and food fulfillment centers, as well as new forms of last-mile fulfillment centers.
In addition, new distribution models are emerging. Of course, traditional fulfillment and delivery continues, with online retailers tapping traditional parcel carriers for shipping orders from distribution center to parcel hub to the customer, or outsourcing to third-party logistics providers. In secondary markets with lower customer density, large global retailers are making the most of their existing real estate to ship from stores, with the scale, system of stores, and product volume to reach many customers throughout the country. Some are turning excess brick-and-mortar locations into “dark store” fulfillment centers, providing last-mile convenient pick-up locations for consumers rather than last-mile delivery.
In dense, urban areas, timely last-mile delivery is essential for staying competitive. Branded delivery services, such as Amazon, Google, and UberFresh, are gaining popularity; and eBay — among others — has launched its own delivery service, eBay Now. Several retailers and online giants are experimenting with locker pick-up systems, although these require heavy infrastructure to fulfill orders quickly from stores or infill fulfillment locations.
Increases in freight costs, trucking capacity concerns, labor availability, the impact of e-commerce, more competitive delivery requirements, talent management, global complexities, and risk mitigation — these are only some of the operational concerns keeping supply chain professionals up at night. Retailers and e-tailers alike are discovering that they need both cutting-edge logistics and an efficient warehouse network to compete. Making efficient use of these new types of spaces and optimizing the distribution network will require distributors to rely heavily on Big Data and analytics to help stay ahead of consumer demand. Meanwhile, warehouses and drivers will want to give and receive real-time information about their capacity.
Before the Doorbell Rings
When it comes to supply chain optimization and distribution network strategy, companies need to be innovative and nimble. For many companies, there’s a gap between supply chain strategy and real estate execution. Integrating these two important functions is the key to successfully “owning” the last mile.