strategy+business is published by PwC Strategy& Inc.
 
or, sign in with:
strategy and business
Published: July 1, 2000

 
 

The Last Mile to Nowhere: Flaws & Fallacies in Internet Home-Delivery Schemes

New Models Ahead

As the analysis indicates, the last mile consists of some tough terrain: lonely, expensive, and exposed to entrenched competitors. Though we're not ready to ring a death knell for these companies, we do believe they must further evolve their value proposition and focus on the incremental value of rapid delivery. Today, most try to avoid an explicit charge for that. In the future, the companies may need to be more explicit that delivery has a cost — and a value — to the consumer.

We also feel confident that new models will emerge as companies attempt to find the optimal trade-offs to meet consumer needs. In Japan, for example, a very different delivery model has already evolved. Thanks to extremely high delivery density over a relatively small land mass, takuhai-bin services can offer same- or next-day delivery to most Japanese consumers. Also, Japanese convenience stores provide an optional link in last-mile delivery, offering convenient neighborhood pick-up and the option to pay cash — important features given low credit-card penetration and physically smaller mailboxes in that country.

Winning in today's dynamic economy requires a commitment to refine and adapt the business model continuously to meet the ever-changing competitive landscape. Eventually, someone will find a value proposition that works — but many others will fail along the way.


Can Webvan and HomeGrocer Deliver Together?

The $1.1 billion acquisition of Internet delivery specialist HomeGrocer by its rival Webvan underscores the challenge in most current "last mile" business models. Access to capital may have triggered the all-stock deal, but the fundamental operating economics of the delivery business clearly offer a key motivator as well. Last-mile delivery simply cannot support a host of competitors; only by consolidation can these Internet retailers improve their economics and improve their odds of success.

The Economic Impact

Webvan and HomeGrocer have complementary footprints, with Webvan operating in San Francisco and Atlanta and HomeGrocer serving Los Angeles, Seattle, and Portland, Oregon. But expansion plans announced by each presaged competition in such key markets as Atlanta, Chicago, and San Francisco.

That head-to-head contest would have hurt both players. As shown in our analysis, delivery density and average order size serve as the two primary drivers of last-mile economics. Two delivery vans visiting the same neighborhood generates an inherently higher cost at the relatively low sales densities we predict for most urban markets.

Although the combination of the two companies will have no direct effect on average order size, it should propel it indirectly by helping the merged entity address the speed-versus-variety tradeoff. Combining a market's demand into a single distribution center lowers safety stock; to serve consumer demand, the two companies together need carry only as much reserve stock of an item as each would have carried separately. With less inventory investment per sales dollar, the combined entity could expand its product variety, while achieving the same inventory turns planned for the separate entities. This addition of new products offers a means to capture more of the consumer sales dollar and increase average order size.

In fact, broader selection has been part of Webvan's strategy from the outset: Webvan's founder, Louis Borders (of Borders books fame), originally pitched his idea with 3 million stock keeping units; the venture capitalists persuaded him to narrow his focus to the current offering, in the tens of thousands, as a start.

The combined scale of Webvan and HomeGrocer can also prove beneficial in negotiating better prices from manufacturers. Just ask any consumer goods company about the leverage that WalMart's $100 billion in sales provides in negotiations. But, like WalMart, the leverage does not simply result from being bigger and posing a greater threat of switching suppliers. The combined entity requires fewer deliveries from suppliers–and possibly in larger delivery batches — which can reduce costs for the supply base.

 
 
 
 
Close
Sign up to receive s+b newsletters and get a FREE Strategy eBook

You will initially receive up to two newsletters/week. You can unsubscribe from any newsletter by using the link found in each newsletter.

Close