Race to the Last-Mile: Challenges to Wal-Mart E-Commerce Deliveries
The last mile in the journey from warehousing to home delivery is by far the most expensive one. Wal-Mart is trying to unlock the last-mile riddle using a variety of approaches. Can they succeed where others are failing?
E-Commerce is Overpowering the Parcel Delivery Industry
The growth in e-commerce is vastly outpacing the rest of the retail industry. While total retail industry sales for the second quarter of 2017 grew 4.1 percent over that in 2016, e-commerce sales rose 16.2 percent.[1] This growth, coupled with the insatiable consumer demand for faster deliveries started by services like Amazon Prime, have stretched the existing parcel delivery infrastructure to its limits. Complications and cost premiums arising in the final leg of the delivery process have become known as the “last-mile” problem.
According to a McKinsey study, last-mile costs account for more than 50% of delivery costs, even if they take place over a small fraction of the total transportation distance. Additionally, customers are demanding faster deliveries but remain sensitive to delivery price changes, especially in the grocery sector.[2] Currently, most e-commerce retailers depend on third-party companies like FedEx or UPS to complete the delivery process. For retailers like Amazon, the gap between what they charge for delivery and what they pay to third-party companies is growing wider. With rising costs and fewer resources available to the market as a whole, efficient and innovative solutions to the last-mile problem can provide a crucial differentiator.
Wal-Mart: From Lumbering Beast to Plucky E-Upstart
Wal-Mart was a late entrant into the e-commerce arena, which has been dominated in the last decade by Amazon. However, recent investments by Wal-Mart into their online platform have paid off, as e-commerce sales in the previous two quarters are 60% greater than in the same period in 2016.[3] In a short time, Wal-Mart has successfully transitioned from a brick-and-mortar retail model to an omnichannel model.
Rising last-mile delivery costs are a fundamental concern for Wal-Mart since they derive a large part of their competitive advantage from offering the lowest prices. Wal-Mart is approaching the last-mile delivery challenge in a variety of ways:
- Encouraging customers to retrieve online orders in-store: The most straightforward solution Wal-Mart has implemented involves having customers complete the last-mile by themselves. In the past year, Wal-Mart has installed self-service kiosks where customers can pick up their online orders. Customers use a barcode, and a conveyor belt delivers the items within 45 seconds. The kiosk differs from delivery lockers since it can adjust the size of the storage compartments according to parcel size.[4]
- Use of ride-sharing services to conduct delivery: Wal-Mart is testing home deliveries through Uber, Lyft, and Deliv. Upon completion of their purchase, customers request delivery for a small fee. Wal-Mart’s associates then contact the delivery driver through the standard application, and the driver delivers the parcels. Wal-Mart notifies the customer via text and email when the order is on the way.[5]
- Acquisition of tech-oriented delivery startups: Two months ago, Wal-Mart acquired Parcel, a same-day last-mile delivery company operating in the New York Metro area. Parcel uses routing algorithms along with leased vehicles with a goal of delivering within a two-hour window. [6]
- Using store staff for deliveries: This approach is currently being tested in a few cities. Associates can deliver packages while on their way home from work. The program has only involved employees who volunteer through a proprietary mobile app for these deliveries, relying on traditional shipping methods to make up for any shortcomings. The app also provides features including navigational assistance and custom scheduling. The employees are paid at their hourly rates.[7]
For the long-term, and considering the challenges of rural delivery (where their competitive advantage is most substantial), Wal-Mart is also testing the use of drones for home delivery of small parcels and curbside pickup. Wal-Mart is also looking to use drones for inventory management purposes.[8]
The Path Ahead
From these options, I think that Wal-Mart should pursue encouraging customer pick-up as well as the acquisition of startups. Customer pick-ups allow Wal-Mart to leverage its multitude of stores into much lower delivery costs, allowing them to maintain their value proposition. Wal-Mart could even further encourage this behavior with additional discounts. The acquisition of startups provides Wal-Mart with innovative ways to attack the last-mile problem in different settings with an entrepreneurial approach.
In contrast, the use of ride-sharing services increases the cost of the goods for the consumer, and this additional fee might result in the loss of value that the customer realizes from Wal-Mart’s lower prices. The staff delivery program depends on the customer being at home to receive their parcel. Wal-Mart wages are less than what employees can make working for ride-sharing applications, and there is no compensation in the model for mileage. There is a myriad of additional risks (including the possibility of car accidents, parcel damage, or the behavior of employees during the deliveries) that Wal-Mart does not currently account for in their current operating model.
Wal-Mart’s approach to retail channel integration and last-mile delivery services show that traditional retailers still benefit from innovative problem-solving and an entrepreneurial approach. The challenge for the company as it moves forward lies in focusing on the solutions that allow it to maximize its current competitive advantages. But are these solutions enough for Wal-Mart to keep abreast of its tech-savvy competitors like Amazon?
Endnotes
[1] US Department of Commerce, “Quarterly Retail E-Commerce Sales 2nd Quarter 2017”, https://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf?utm_source=Triggermail&utm_medium=email&utm_campaign=New%20Campaign&utm_term=BII%20List%20E-Comm%20ALL. Accessed 10 Nov 2017.
[2] Joerss, Martin, et al., “How customer demands are reshaping last-mile delivery”, https://www.mckinsey.com/industries/travel-transport-and-logistics/our-insights/how-customer-demands-are-reshaping-last-mile-delivery. McKinsey & Co. Accessed 10 Nov 17.
[3] Keyes, Daniel, “Grocery drives online growth at Wal-Mart”, http://www.businessinsider.com/grocery-drives-online-growth-at-walmart-2017-8, Business Insider. Accessed 14 Nov 2017.
[4] Peterson, Hayley, “Wal-Mart is building giant towers to solve the most annoying thing about online ordering”, http://www.businessinsider.com/walmart-builds-pickup-towers-for-online-orders-2017-6. Business Insider. Accessed 13 Nov 2017.
[5] Perez, Sarah, “Wal-Mart will test last-mile grocery delivery via Uber, Lyft and Deliv” https://techcrunch.com/2016/06/02/walmart-will-test-last-mile-grocery-delivery-via-uber-lyft-and-deliv/. Tech Crunch. Accessed 12 Nov 2017.
[6] WalMart.com ” Wal-Mart Announces the Acquisition of Parcel, a Technology-Based, Same-Day and Last-Mile Delivery Company” https://corporate.walmart.com/article/walmart-announces-the-acquisition-of-parcel-a-technology-based-same-day-and-last-mile-delivery-company. Accessed 10 Nov 2017.
[7] Perez, Sarah, “Wal-Mart tests using store staff for last-mile deliveries” https://techcrunch.com/2017/06/01/walmart-begins-testing-using-store-staff-for-last-mile-deliveries/. Tech Crunch. Accessed 12 Nov 2017.
[8] Layne, Nathan, “Exclusive: Wal-Mart seeks to test drones for home delivery, pick-up”, http://www.reuters.com/article/us-wal-mart-stores-drones-exclusive/exclusive-wal-mart-seeks-to-test-drones-for-home-delivery-pickup-idUSKCN0SK2IQ20151027. Reuters. Accessed 14 Nov 2017.
Juan Carlos, thank you for a very thought-provoking read. While I agree that encouraging customer pickups could be a viable route for customers close to a nearby WalMart, I do feel concern for the population of consumers ordering from Walmart.com because Walmart stores are inaccessible to them. I think particularly about consumers living in rural/lower income neighborhoods in light of Walmart closures in those areas over the past year.1 Even with a discount, consumers may not be willing to trade the convenience of delivery services for the cost of transportation and time.
I am actually inclined towards WalMart’s attempts to vertically integrate via acquisition (through Parcel, for example) as a way to better deal with the “last-mile”. Perhaps through vertical integration, WalMart can find innovative ways to reduce the cost of deliveries for itself and continue to deliver on its customer promise of everyday low prices.
1 Meko, Tim, and Lydia Phillips. “Poor, Rural Areas Will Be Most Affected by Walmart Closing 154 Stores.” The Washington Post, 5 Feb. 2016, http://www.washingtonpost.com/graphics/business/walmart-closings/.
Juan Torres – thanks for the interesting article. I wonder whether WalMart will be better off partnering with third-party firms to solve the last mile challenge given it is traditionally not WalMart’s core competency to do door-to-door delivery. I am concerned about using WalMart staff for delivery as they tend to receive low pays, and the company may not be able to sign up enough volunteers to handle a meaningful volume of deliveries. The partnership with ridesharing apps looks more promising. I wonder whether WalMart should extend the partnership to restaurant delivery apps like Caviar as grocery delivery is similar enough to food delivery. As to your question about whether WalMart is doing enough to keep abreast with tech developments, I think the real challenge may lie in the actual or perceived culture of WalMart as a steady and slow-moving organization. It may be tough for WalMart to attract the kind of tech talents it needs to adapt to the new retail environment.
Juan Carlos, I think this in-store pickup tower is a game changer as it combines benefits from both in-store pickup and an Amazon Locker into one. The in-store pickup experience traditionally has not added much value when you’re still in a queue to get to an employee to find and give you your stuff. Against an Amazon locker, you’re getting the obvious benefit of Walmart pricing on various goods, including groceries.
There is a great benefit for Walmart and the drones as well. As Christopher Hewlett of PWC mentions in the article below, 70% of the US population lives within 5 miles of a Walmart store [1]. This is contrasted with Amazon’s PrimeAir drone program in which many epi-centers are >100 miles from the nearest metro population. While there are fulfillment centers in-between, we don’t know the frequency of when a two-step process would be required. The one advantage Amazon would ultimately have here though is the payload difference, as we see in-house Amazon drones are a little more robust [2] than those shown by Walmart’s supplier DJI [3].
[1] https://www.msn.com/en-us/money/companies/5-things-you-didnt-know-about-wal-mart-stores-inc/ar-AAqbuCv
[2] https://www.amazon.com/Amazon-Prime-Air/b?node=8037720011
[3] https://techcrunch.com/2015/10/26/walmart-drone-delivery/
Juan-Carols, this is fairly interesting. However, have you considered the difficulties with the positioning of Walmart geographically? Isn’t this just Walmart ceding major metropolitan areas to Amazon? According to this report from NPR, it seems like Walmart can double down on the pickup strategy you mention by having more prepared meals waiting for customers–that in urban areas, people are more interested in quickly getting convenience. This is something that can differentiate them with Amazon and a host of other grocery stores and e-commerce companies.
https://www.npr.org/sections/thesalt/2015/04/04/396890106/why-wal-mart-is-betting-big-on-being-your-local-urban-grocer
Juan Carlos, thanks for the great read. I think the last mile problem is fascinating, and I actually believe that one of the solutions will be further leveraging the network of vehicles that Uber/Lyft have on the road. These drivers could be routed more efficiently (similar to how UberPool works) to better match drivers with routes that may actually be more cost efficient than sending a good through the typical shipping channels. The article linked below highlights how the UberPool model actually increases the utilization of the driver on the road, and although it is talking about increasing driver earnings, it highlights the ability to streamline individuals on the road to fulfilling more tasks if you assume that a driver could pick up a package rather than a passenger at one point.
http://www.sherpashareblog.com/2015/12/the-math-behind-uberpool-why-uberpool-rides-can-actually-be-the-best-option-for-drivers/
JC,
Very insightful. Who would have know that the last mile is such a complicated one to travel for big online retailers?
I do have some concerns with Wal-Marts proposed practices for the future. I wonder whether asking customers to pick up at Wal-mart will be a problem for Wal-Mart in the future? As a consumer, the entire purpose of buying online is so that I do not have to drive to the store, usually the free times that I do have are during rush hour traffic or time that I would rather spend for myself. Once I make the commitment to get to the store, I might as well spend the extra half an hour to buy the items.
My other concern is, what if the people who buy on Wal-Mart are buying online because they cant get to a Wal-Mart, do not have a car, do not live near a wal-Mart. This might really cause problems and lose a lot of customers for them long term. My last point would be, what happens if this Uber/Lyft thing takes off, and suddenly you need a lot more drivers to be able to keep up with delivery demand. I think of my own purchases, and when I go grocery shopping, usually half the car gets filled. Let’s be conservative and say 1/3 of the car is filled, so you can essentially deliver groceries for 3 families or households. Now for a fourth delivery, Wal-Mart needs another car, and if there say 600 deliveries, you need 200 cars to deliver, since majority of ride sharing drivers have regular size vehicles. Furthermore, will a drive prefer to pick up 3 passengers, rather than spend time loading/unloading your stuff and will you be willing to pay an additional delivery fee and unloading fee to the driver. I worry for wal-mart that they need a better solution than what they are suggesting now.
Juan Carlos,
Very interesting research on how WalMart is going to compete with Amazon in the digital age. I agree that Amazon is a threat to WalMart’s fundamental business model and they will need to adapt and adopt some of Amazon’s practices in order to survive. I would challenge your recommendation, however, that the way to tackle the last mile would be to implement pick-up boxes in WalMart. I don’t know if a customer would log on to WalMart’s website and shop for items that they then have to pick-up in store. The items that WalMart is offering will most likely also be found on Amazon for similar prices so if the consumer can get a particle board coffee table on Amazon delivered to her door, why would she order and pay for it on WalMart’s website and then travel to the store to pick it up? Additionally, this model is most likely unfavorable to WalMart because they sell a great deal of merchandise on “impulse buys.” I would argue that WalMart would not want people that are willing to drive to the store to make their full orders online because the consumer will no longer walk around the store shopping for merchandise and make these impulse buys. I think you are correct in saying that WalMart must continue to compete with Amazon on price and should focus on acquiring start-ups in the delivery space. If WalMart can beat Amazon at the drone game, or have an internal delivery process that competes efficiently with UPS / FEDEX / USPS, they may be able to keep costs lower than Amazon and continue to reach a wide audience of price conscious consumers.