Snapshot : The recent pandemic crisis has brought online delivery sharply into the limelight. In this article, we review the last mile cost in e-Commerce and look at what the last mile means for the customer, the deliverer and the business owner.
Opportunity in a crisis
An old boss of ours once told us that in every crisis, you can always find opportunity. It’s a great attitude to have. Because if you look at the definition of a crisis; “a time of intense difficulty, trouble or danger,” a crisis has to end at some point.
There’s always a time after crisis.
And if you run an e-Commerce store at the moment, you should have one eye on what that post-crisis world will look like.
In these challenging times (feel free to mark that off on your buzzword bingo sheet), now, more than ever, (we are really on a roll with the buzzwords today) is a good time to work out how to minimise the last mile cost and maximise the last mile opportunity for your online store.
Because as we’ve learned from the mostly deserted streets of Sydney over the last 10 weeks, if there were an actual apocalypse (think Mad Max, 12 Monkeys or Walking Dead style), there would still be joggers and dog walkers out and about.
And people would still want products delivered to their doorstep.
The roads and pavements are awash with so many socially distancing Uber Eats and Deliveroo drivers and cyclists, it’s a very visible representation of the last mile in action.
The origins of the last mile
If you don’t work in e-Commerce you may not have heard the term last mile before. We’ve always understood the term to mean the movement of an e-Commerce product from its last central storage point to the online shopper’s doorstep.
But interestingly, it didn’t start as an e-Commerce term.
The term “the last mile” actually comes from the telecoms industry.
It’s because in telecoms, the speed of delivery of data is determined by bandwidth. And the bandwidth capacity between major data centres is usually high. And it’s usually much easier to manage and upgrade, than the bandwidth capacity between a major data centre and the individual household and business end data points it services.
This link between the data centre and the end data point is where the term the last mile comes from.
This set-up often uses the analogy of a “tree”. The connections between major data centre connections are the ‘trunks’. And the connections to individual end points are ‘twigs’.
It’s a neat analogy because there’s a lot of strength and flex in the trunk, while twigs are very susceptible to breaking. They are the weak point of the ‘tree’.
The miles BEFORE the last mile are driven by efficiency
Bring this analogy into the world of e-Commerce, and you can see the parallels.
When finished goods come out of the factory, they might be temporarily stored in a “Goods out” area. But while they are there, they generate no income.
So, for the manufacturer, there is drive to move the goods to a place where they can generate income. This is either in store (via the retailer’s warehouse) or for e-Commerce stores, a distribution centre or warehouse.
The transport of goods between these major distribution centres (along the ‘trunk’ of the distribution channel) works at large scale. Think container loads of goods moving around at the same time. It has high bandwidth and capacity.
They are designed to be a super efficient system to transport goods from Factory to Warehouse A to Warehouse B to a physical store.
Reduced friction points
Modern warehouse facilities are designed to reduce the friction points in the journey of a product from point A to point B.
As anyone who works in supply chain will tell you, anytime someone ‘touches’ a product (a ‘friction point’), it incurs a cost.
Put the product in a box to be dispatched? Cost.
Load the box onto a pallet? Cost.
Load the pallet onto a truck? Cost.
And so on as the product moves through the supply chain.
So, the high efficiency factor is set up to keep costs as low as possible. To reduce the amount of ‘touches’ or friction for individual products.
Where you locate the warehouses. How you organise the goods in the warehouse. Which products go out on which trucks. All organised and systematised to be as efficient as possible. The goal is for businesses to keep the costs low. And maximise the profit they can get from a sale of each product.
If you ever get the chance to visit a modern warehouse, we highly recommend it. Check out how many processes they have. How focussed they are on efficient operations.
Physical stores are highly efficient
Despite mail order with its long history (which dates back to 1861) and the recent boom in e-Commerce, most physical goods are still sold through physical shops.
The last e-Commerce penetration numbers we saw (admittedly pre-pandemic) put the global average on online sales at only just over 15% of all retails sales.
Physical shops are highly efficient from a supply chain or manufacturer point of view.
Because the “twigs” of the supply chain system are run by the shopper, not the manufacturer or retailer. The shopper takes the time to come to the store and pick up the product and takes it home … at no added cost to either the manufacturer or retailer.
The shopper pays for transport. They take the hassle of parking. They give up their time to collect the goods. So, the shopper actively takes ownership of the ‘last mile’.
Happily and willingly.
Then along comes e-Commerce.
When rather shift their fat, lazy arses to the shopping centre or supermarket, the consumer clicks a few buttons on their screen.
And hey presto.
The goods show up on the doorstep at some chosen point in the future. And while that might seem like ‘magic’ to the shopper, it is anything but magic to the online store owner.
The last mile in e-Commerce buggers up efficiency completely
As we describe in our skill guide on the D2C order to delivery process there’s a LOT of factors to consider when a consumer places an online order.
Not just the management and dispatch of the order from the warehouse.
Not just the cost of labour and transport and insurance to get the product to the doorstep.
But all the potential delivery issues. Products delivered to the wrong address. The wrong product delivered. Damage in transit. There’s many scenarios that all add to the last mile cost.
When you add them all up, in many cases, the cost of an individual delivery might actually exceed the value of the order. And you don’t need to be a business expert to work out, that’s not a sustainable business model.
It often freaks out accountants when they look at all these challenges. It can create a lot of barriers to setting up an online store, and it’s hard if you don’t already have a great e-Commerce culture.
Let’s consider that last mile from the point of view of the different people involved and work out exactly who pays this last mile cost.
And who benefits from this last mile opportunity.
The consumer viewpoint
Here’s something you can do if you are bored.
Or ever trying to convince someone in your business why e-Commerce is a great opportunity from a consumer point of view.
Imagine one of your potential customers sat at home. And they see one of your AMAZING adverts. And they think, oh, I really need that product. It does happen, doesn’t it?
Now write out all the steps that need to happen between that thought and the product being in their hands if they (a) have to go a store to buy it or (b) can order it online.
And when we say all the steps, be as detailed as you can be.
For the store visit, we mean down to the level of changing out of those lockdown sweatpants. You have to go out to the car and wonder whether it will actually start. You have to stand at a reasonable social distance in the check-out queue. The list goes on and on.
How long is your list?
We reckon at least 15 steps if you are lucky. Most of which have to then be repeated in reverse to get you back home.
Now, check out your online list. If you order on Amazon, your list might only be four items long. Get phone out, open up Amazon app, search product, 1 click to buy.
And still in your sweatpants.
As this e-marketer survey which came out today shows, fast, free shipping is the top driver for Amazon shoppers. And Amazon is really the benchmark for online shopping.
Makes sense right? Who wants to wait?
The convenience of ordering online cannot be under-estimated for the consumer.
And as per our guide to online store business models, there are ways to position the price and delivery cost so it still feels beneficial to the end consumer.
You can set minimum order spends to cover costs. Or make the consumer pay for part of the delivery cost and still make a profit.
It’s only really a business with the scale of Amazon that can afford to suck up the cost of ‘free’ delivery. And it’s only sustainable if you can get the cost per order delivery to doorstep below the cost per order to a store.
So from a consumer point of view the last mile opportunity is a massive benefit in terms of convenience. And a relatively small consideration in terms of the price they pay for that convenience.
Until it goes wrong of course.
The delivery driver and company
And here’s the thing.
Work your way back from the point of the order arriving on your doorstep and the first challenge with last mile cost is the delivery driver.
Because let’s face it, they are all human and humans are by nature not efficient.
Our last three parcel deliveries that came through Australia Post have all resulted in a card in our mailbox. “We couldn’t deliver because there was nobody home”. Which has meant a trip to the sorting office to collect.
In other words, we PAID for the last mile.
Total bullshit of course. Since with the damn lockdown, there’s ALWAYS someone at home.
We don’t believe they actually tried at all.
But it’s left us with a bad image of Australia Post and a likelihood that when given the choice next time, we’d pick online stores who use couriers rather than Australia Post. Because clearly the delivery driver in this case is a lazy bastard. Or a liar.
Compare that to deliveries we’ve had recently from Uber Eats.
And a quick shout out to Wesley, Mehmet, Dalibor, Gabriela, Aziz and the many more delivery drivers and cyclists who’ve been 100% reliable in their deliveries.
But that system is very different to Australia Post.
You can track the order to the minute. You are notified at each step of the process. It’s highly efficient and transparent.
That’s not to say, as a business, it’s all good for Uber and Uber Eats. There’s plenty written about their exploitation of the gig economy and the way they manage people. Jobs that are actually not jobs with low pay, no job security, sick pay, holiday pay or fringe benefits.
But if you look at the companies behind the drivers, you can see that where they make their money is that they have the same motivations as the people further up the chain in the warehouse.
They are looking for operational efficiency.
It’s all about process and keeping costs as low as possible. That’s why the drivers are all contractors not employees. That’s why they make them sort out their own tax and insurance and cover all their own costs.
That’s what keeps the delivery cost of your Pad Thai or Large Hawaiian down to $3 a pop.
In any case, we’re pretty sure all these sorts of deliveries will be taken over by drones or self driving cars at some point in the future anyway. Check out Google’s Project Wing to see more of this.
The business owner
So, what about the business owner? Especially, if that’s you.
How should they look at the last mile cost and the last mile opportunity?
If you own an online store or are a restaurant who has to rely on deliveries at the moment, you’ve probably given it some thought. But for many people who claim to be entrepreneurs and e-Commerce store builders, they clearly don’t give it the thought they should.
The idea for this whole post was sparked by a recent Reddit thread where someone legitimately asked why more businesses didn’t move to delivery.
And if you look through the list of responses, you can see that most people who are entrepreneurs don’t have a clue about how products move from A to B.
No idea about the last mile cost.
In fact, in our experience, most marketers in bigger businesses have no idea what people who work in supply chain actually do either. Which is a challenge.
Start the last mile with the consumer, and then work backwards
For us, the last mile opportunity has to start with the consumer. If convenience of delivery can make a consumer choose your product over a competitor, then there’s an obvious business opportunity.
The actual last mile opportunity is really down to the value that the consumer sees in the reduction of steps (and costs) they need to get hold of a product buying online versus in-store.
And if that value is more than the perceived last mile cost of physically going to a store, then that’s where e-Commerce online store owners can look for opportunities.
Opportunities to improve service and keep the last mile costs as low as possible.
In other e-Commerce news this week
Two e-Commerce stories we picked up on this week.
We were glad to read about IGA and that they have managed to launch an online shop.
As we mentioned in a previous article, they were lagging behind Coles and Woolworths to support their customers with online delivery.
Given the complexity of their franchise system, we can imagine that was a lot of work for the team who did it.
But dig a little deeper, and you can see that it’s a very bolted together offer. You have to register. You have to check whether any of the stores in your area deliver.
When you shop, the prices are indicative only. Um, what?
And then when you place the order, it doesn’t go through until the store packs the order and calls you, yes calls you, to take the payment.
We’ve set up e-Commerce systems from scratch. It’s bloody hard work. And you often have to make compromises just to get the damn thing up and running.
But this one, clearly still needs a lot of work.
Facebook has also announced a new feature that lets you set up a shop in the app. In partnership with Big Commerce.
We’re a little underwhelmed by this, but haven’t really seen it in action yet.
If you are already an online store owner, there are plenty of ways to build your store already as we cover in our skill guide on online store websites.
So all this does is potentially reduce by one step the link from the social to the shop.
But if you run your own shop on a dedicated website, this brings a lot of added flexibility. Right down to adding features and managing your own code, which will be nigh on impossible via Facebook.
We can’t see too many people jumping on this ship and trading off all that flexibility to save one click.
And you know what?
Given Facebook’s reputation on managing personal data, many online shoppers might well be unwilling to hand over even more data about what they do online.
Let’s see how the take-up of the service goes.