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


The Last Mile to Somewhere

• Refinement of the product mix. The we-deliver-anything-anywhere-anytime models built by the delivery dot-coms were about as sustainable as a pizza in a freshman dormitory. Although an extreme case, Urbanfetch uncovered one regular customer who had placed orders totaling nearly $1,000 over a year. Unfortunately, the $1,000 in revenue - mostly from video rentals - required more than 100 deliveries, plus numerous "free" pickups. This customer, supposedly desirable because of his loyalty, actually cost Urbanfetch several thousand dollars.

The surviving deliverers have eliminated such loss-making incidents. Keeping a close eye on profit potential, Kozmo in the fall trimmed its offerings from 25,000 items to 15,000. Before it pulled out of the consumer business, Urbanfetch had taken prudent steps to get rid of video rentals and other money-losers. It had also added a wine product line that was immediately profitable, because the company astutely selected medium- to high-priced vintages and instituted a two-bottle minimum from the start. Going forward, Kozmo would do well to take things up where its former rival left off.

• Fine-tuning of service offerings. Most last-mile companies believe they can achieve savings by moving away from immediate gratification and relaxing current delivery standards - but none is confident about how this will affect demand. Webvan, for example, stopped hyping same-day delivery and now hopes to attract consumers by allowing them to specify a 30-minute delivery window. That value proposition is proving attractive to customers in Oakland, Calif., where on a typical day, 30 percent of Webvan's deliveries were ordered two days earlier. Such advance notice enables the company to improve planning and lower costs, even with the 30-minute guarantee.

Webvan's grocery delivery rivals offer one-hour delivery windows and hope the company sticks with its precision offering, convinced that it equals financial suicide. Though we believe Webvan's unique scheduling software and hub-and-spoke network design could allow it to offer such superior service without a cost disadvantage, it announced a shift to a one-hour window in all of its markets in December. Though a drop in convenience for customers in San Francisco, Atlanta, and Chicago, the change is a service improvement in Webvan's other markets, formerly served by HomeGrocer.

• Expansion into business-to-business. The vast majority of consumers schedule deliveries for the evening or early morning, leaving delivery resources underutilized during the business day. Because of this, most last-mile players have programs under way to capture business customers to improve overall utilization. Kozmo now delivers prepared meals to the less price-sensitive business consumer. Webvan has introduced "Webvan at Work," a program that lets time-pressed employees order groceries while they're at work and pick them up in their company's parking lot on the way home. Additionally, some of Webvan's most valued customers are small Silicon Valley companies that order snacks, soda, and office supplies for employees.

Other delivery companies have implemented more dramatic swings toward B2B. Looking much more like a traditional courier service (and obviously no longer a "free delivery" model) Urbanfetch's Manhattan-based business service, Urbanfetch Express, has attracted several premier business accounts, including Condé Nast, Sony, and Cap Gemini Ernst & Young. has completely abandoned its original business model and now offers proprietary software and a nationwide fulfillment network to businesses for a fee.

• Extension of synergistic partnerships. The early crowding of the last-mile marketplace was madness, pitting companies in a battle to see who could deliver the least profitable goods to the most people. Consolidation eliminates competitors, ideally increasing delivery density (sales per square mile, a figure critical to profitability) and providing economies of scale in buying and merchandising.

Mergers — like the Webvan and HomeGrocer combination and the near-union of Kozmo and Urbanfetch — represent the most explicit form of partnership. A more subtle harbinger of future last-mile alliances, however, comes from that stalwart of e-tailing, Its partnership with (the independently managed Internet subsidiary of Toys "R" Us Inc.) highlights a well-worn core competency concept: Amazon contributes its expertise in Web design and e-tail fulfillment, while Toys "R" Us applies its superior knowledge of toy merchandising. This allows Amazon to continue to sell a huge range of products to its 26 million customers while avoiding the inventory risk that produced a $40 million write-off for the 1999 holiday season.

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