The Economics of Last-Mile Delivery

Written by

Team Egen

Published on

Oct 12, 2021

Reading time

3 min read

  • Retail
  • Innovation

The current last-mile environment continues to challenge many retailers and grocers. To address these challenges, they are taking three approaches: subsidize the cost, outsource third parties, or bring last-mile delivery in-house. Find out which one is winning.

More than a year-and-a-half into COVID-19, the pandemic that shook the foundation of global commerce has no clear end in sight. And the fact remains: the economics of last-mile delivery remain broken.

In shipping, the last mile is the most expensive leg of the journey.  It accounts for more than half of a company’s total shipping cases, Business Insider estimates. And right now, it’s more important to customers than almost any part of the online shopping experience.

According to Arvato, 53% of customers say speed is the most important factor when it comes to online order fulfillment. And Capgemini reported that 55% of consumers say that a two-hour delivery option would increase their loyalty.

Yet, only 19% of retailers overall offer deliveries within two hours or faster. And many grocers are still leaning heavily on third parties, such as Instacart and Shipt, for fulfillment.

Even worse, customers today don’t believe in second chances. Get it wrong once, and they won’t hesitate to move on to the next retailer or grocer. According to GoFor, the vast majority of customers (84%) won’t return to a retailer after a single bad delivery experience.

For retailers and grocers, there’s no going back. Online grocery delivery is growing at a fast clip — and it’s expected to maintain an upward growth trend with an estimated compound annual growth rate of 29% from 2020 to 2024, Deloitte recently reported.

Retailers and grocers must overcome the broken system that is last-mile delivery to win customer loyalty and blow away the competition.

The $1 million question: WHY?

The question remains: Why does the last mile remain so broken?

Retailers and grocers are now forced to trudge through this broken last-mile delivery system. But how are they doing it? They are taking three approaches.

Subsidize the cost: The first strategy for some companies, such as Whole Foods and Amazon, is to simply eat the costs by subsidizing last-mile delivery. These firms realize that this moment is a once-in-a-lifetime opportunity to acquire new customers and by getting last-mile delivery right, despite the expense, they’re meeting customers’ fast delivery expectations and potentially fostering customer loyalty.

This situation is highly fluid. For more than18 months, Amazon and Whole Foods offered free shipping at $35 or more. As of August 2021, that dried up.

Partner with technology firms: Another tack companies take is to continue working with third-party fulfillment vendors, such as Instacart and Shipt. In fact, this is the approach many grocers and retailers have resorted to — particularly since COVID hit. In 2020, Instacart added about 350,000 more shoppers to its platform.

At the time, it made the most business sense — it was quick to get up and running, it was cost-effective, and it helped retain customers in a time of unprecedented economic uncertainty.

But partnering with these types of platforms also means that grocers miss out on valuable customer data because the delivery platform owns that data — not its grocery store client.

Taking last-mile in-house: The third approach, which every retailer should be exploring, is taking last-mile in-house. And for good reason.

With the right software and third-party logistics (3PL) partners, grocers can abandon the third-party delivery platforms and instead own the end-to-end process themselves — while capturing valuable data and cutting costs.

While Instacart is only getting more expensive, other endpoints are getting cheaper. More regional 3PLs crop up daily to compete with the likes of Amazon, UPS, FedEx, USPS and DHL.

Regional 3PLs such as Better Trucks, offer better rates, better customer services, and the cutting-edge technology that consumers have come to expect.

When you own the last-mile, everything in the fulfillment process gets smarter. You can improve picking efficiency and route optimization, and you can better forecast the merchandising decisions you need to stomp the competition.

With the help of artificial intelligence and machine learning, last-mile data can be fed into targeted promotions and cross-selling campaigns. You can capture real-time intelligence and conduct predictive modeling.

By better harnessing the data you already have and leveraging it to create the truly seamless, personalized experiences customers now demand, you can build back customer loyalty and substantially reduce the chance your valued customers will switch to a competitor.

Short-run vs. long-run

While the third approach, owning your own last mile, can be more challenging in the short run, in the long run, many retailers will find it’s the only sustainable route.

As firms continue to explore different delivery options — including delivering from local inventory, micro-fulfillment centers, and locker pickups — this space will continue to evolve quickly in the next few years.

But the benefits are undeniable.

According to Capgemini, 55% of consumers won’t hesitate to switch to a competitor if that company offers faster delivery and a better overall customer experience. Customer satisfaction benefits from getting a great last-mile delivery service.

·   53% say they purchased paid memberships for delivery.

·   58% share positive feedback on social media.

·   73% are more willing to try new offerings.

·   74% increase spend with their retailers.

·   82% share positive feedback with friends and family.

The reality is clear: future of last-mile will belong to those who own it.

Download our CIO Playbook: Engineering Last Mile Delivery

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