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 / First Quarter 2001 / Issue 22(originally published by Booz & Company)


The Last Mile to Somewhere

"Your article does not contain the kind of arguments I would expect from a consulting firm that prides itself on sound strategic analysis. The popular press has until now been unable to understand the strategic value of the instant-delivery model, and your paper was no exception. As founder of Expry, an instant-delivery firm starting up in Europe in October, I feel compelled to address the fallacy of the arguments in your paper…."

Mr. Facchinetti questioned our understanding of delivery economics, citing his knowledge of Kozmo and Urbanfetch. He also highlighted the superior value proposition of same-day delivery and asserted the strategic necessity of controlling last-mile delivery. Although articulate and logically structured, his argument flowed from a flawed understanding of delivery economics. As supported by our discussions with a number of last-mile players, high — and widely variable — delivery costs coupled with limited delivery density across the day prove to be critical challenges for these companies. Although we concede his point that the last mile will prove strategically critical in e-tailing, we nonetheless continue to question whether same-day delivery companies can control it.

We also received more supportive feedback, including an e-mail exchange with Robert Waller, chief operating officer of Urbanfetch. Mr. Waller's first letter indicated that Urbanfetch fully understood the economic challenges:

"Frankly, we concur with many of the basic observations of the authors. We are in particular agreement with their closing comment, 'Eventually, someone will find a value proposition that works — but many others will fail along the way.' "

His note explained the actions under way at Urbanfetch to build a "positive delta between costs per delivery and gross profit dollars per delivery." The Urbanfetch COO listed a half-dozen actions — equally balanced between improving margin dollars per delivery and lowering costs per delivery — that demonstrated a recognition of the challenges and a determination to address them. Unfortunately, even though on the right path, Urbanfetch ran out of time and disbanded its consumer business in favor of its growing and profitable Urbanfetch Express courier service for business customers.

Whether our analysis was misguided, as Mr. Facchinetti implied, or perceptive, as Mr. Waller indicated, there's no denying an evolution in the fledgling e-tail delivery industry. The shifts fall into five broad categories, all driven by critical operations strategies — essential components of any successful e-business in an environment directed (finally!) toward profitability. They are:

• A focus on cost structures. Like the dot-com startups before them, most last-mile deliverers originally focused on the land grab for market share, ignoring the cost side of the business. Impatient investors and companies' dawning realization that delivery economics don't behave like the information economics of a Yahoo (with minimal marginal cost for each additional transaction) forced a shift in focus among the players. Kozmo has laid off 300 people since last June. The smaller Urbanfetch eliminated 2 percent of its work force in August, even before it abandoned its consumer business. After Webvan signed its deal with HomeGrocer in early September, it delayed expanding into the New Jersey and Baltimore/Washington markets to sort out differences between its highly automated operations and the lower-cost approach of its new acquisition.

These efforts haven't gone unrewarded. Webvan's third-quarter results highlighted solid progress: 50 percent growth in revenues over the combined second-quarter results of Webvan and HomeGrocer. The company also showed improved gross margins, and inventory turns now approach 20 per year. Although it wouldn't provide details, the company explained that it continues to experiment with delivery models to manage capacity and improve the number of deliveries per hour. By controlling delivery options and tightening staffing levels based upon experience, Webvan, we suspect, has wrung out most of the startup waste on the delivery side and can now turn its attention to optimizing the distribution operations.

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