Retailers struggle to profit from same-day delivery

In 2016, Deliveroo’s par­ent com­pa­ny report­ed loss­es of £129 mil­lion, while Uber’s loss­es amount­ed to £2.2 bil­lion. Oper­at­ing in the nascent and uncer­tain gig econ­o­my, they are the dar­lings of deliv­ery, yet their super speedy mod­els are still to prove prof­itable. So is our ultra-con­ve­nience soci­ety impos­si­ble to prof­it from  or are deliv­ery com­pa­nies sim­ply miss­ing a trick?

“The prime effect has com­plete­ly skewed cus­tomers’ views on price and time of deliv­ery,” says Hugh Fletch­er, glob­al head of con­sul­tan­cy and inno­va­tion at dig­i­tal com­merce con­sul­tan­cy Salmon. Not only is Ama­zon fuelling cus­tomer demand, it is, unsur­pris­ing­ly, ahead of the pack in meet­ing it too.

Amazon’s vast size and logis­tics capa­bil­i­ties have skewed cus­tomer per­cep­tions about the speed and price of deliv­ery

Amazon’s secret weapon is data. It uses this to reduce the cost of deliv­ery by pre­dict­ing what is like­ly to be need­ed, when and where. “Ama­zon is, of course, lead­ing the space in this regard, with sig­nif­i­cant spend and research already invest­ed into its [patent­ed] antic­i­pa­to­ry pack­age ship­ping, which finds economies of scale by mov­ing items to dis­tri­b­u­tion cen­tres clos­er to cus­tomers who are like­ly to buy them,” says Mr Fletch­er.

It isn’t a les­son that has been lost on dis­rup­tors such as Deliv­eroo, which com­petes direct­ly with Ama­zon Restau­rants and Uber Eats. Its spokesper­son says the com­pa­ny is cur­rent­ly invest­ing heav­i­ly in tech­nol­o­gy to improve its real-time logis­tics algo­rithm and arti­fi­cial intel­li­gence sys­tems.

The com­pa­ny says its Frank algo­rithm, which eval­u­ates the most effi­cient way of dis­trib­ut­ing orders based on the loca­tion of restau­rants, rid­ers and cus­tomers, has helped to reduce aver­age deliv­ery time for meals by almost 20 per cent since going live in Jan­u­ary 2017.

But while Deliv­eroo and Uber obsess about speed, Stu­art Hig­gins, direc­tor of retail at Bear­ing­Point, believes there are oth­er grow­ing con­sid­er­a­tions for deliv­ery com­pa­nies. “DPD has man­aged to cre­ate a prof­itable mod­el by not seek­ing to play in the low-cost home deliv­ery space, but instead focus­ing on val­ue-added ser­vices,” he says, cit­ing improved track and trace, a 15-minute deliv­ery win­dow and named dri­ver as exam­ples. “They invest­ed ahead of the curve and now some cus­tomers are typ­i­cal­ly pay­ing £1 to £2 more to select a DPD deliv­ery because they know it will give cer­tain­ty.”

Mr Hig­gins believes cus­tomers are less con­cerned about speed of deliv­ery and more moti­vat­ed by a guar­an­teed time slot. “They care about know­ing it will def­i­nite­ly arrive and when,” he says.

We’re start­ing to see a grow­ing trend in con­sumers demand­ing pre­ci­sion over speed to accom­mo­date their busy lifestyles

It is a view backed up by Will Lovatt, vice pres­i­dent, Europe, Mid­dle East and Adri­ca, at sup­ply chain spe­cial­ists LLa­ma­soft. “We’re start­ing to see a grow­ing trend in con­sumers demand­ing pre­ci­sion over speed to accom­mo­date their busy lifestyles, mak­ing it a pri­or­i­ty for retail­ers to offer the option of deliv­ery in pre­cise time and date slots select­ed by the cus­tomer, rather than plac­ing their entire focus on next or same-day deliv­ery,” he says.

As demand evolves and retail­ers are forced to expand their choice of deliv­ery options, Mr Lovett says deliv­ery com­pa­nies need to look ahead, start­ing with a clear pic­ture of how the sup­ply chain will look as it scales, and not rely on tri­al and error. He says: “This can be accom­plished through sup­ply chain mod­el­ling, run­ning var­i­ous sce­nar­ios and run­ning the met­rics on aspects such as cost to serve, pro­duc­tion capac­i­ty and inven­to­ry opti­mi­sa­tion, as the sup­ply chain evolves through dif­fer­ent iter­a­tions of design and strat­e­gy.”

Infra­struc­ture is also key, an area in which the incum­bents have an advan­tage over the dis­rup­tors, tap­ping into exist­ing flex­i­bil­i­ty and breadth. For exam­ple, CitySprint Group, own­er of retail deliv­ery brand, On the dot, has access to its par­ent company’s expe­ri­ence and net­work of more than 5,000 ful­ly GPS-enabled couri­ers, reach­ing 99 per cent of the UK pop­u­la­tion.

Chief exec­u­tive Patrick Gal­lagher says: “The key to our prof­itabil­i­ty is the abil­i­ty to lever­age an exist­ing client base, built over three decades oper­at­ing in the same-day deliv­ery space. With the inte­gra­tion of smart tech­nol­o­gy sys­tems, we have the added eco­nom­ic advan­tage of con­tin­u­al­ly intro­duc­ing new clients, ensur­ing com­pet­i­tive pric­ing.”

Anoth­er answer to the infra­struc­ture chal­lenge is being cham­pi­oned by start­up Stow­ga, which com­bines dis­trib­uted ware­hous­ing with on-demand ware­hous­ing, using tech­nol­o­gy to match organ­i­sa­tions in need of ware­house space with those that have spare capac­i­ty. Its instant search capa­bil­i­ty enables com­pa­nies to cre­ate a new sup­ply chain with­in hours.

“If unfore­see­able cir­cum­stances hap­pen, there are still sev­er­al oth­er ware­hous­es that will be able to keep the sup­ply chain afloat,” says Char­lie Pool, chief exec­u­tive at Stow­ga. “Larg­er num­bers of ware­hous­es locat­ed clos­er to the cus­tomer will enable fast ful­fil­ment to meet cus­tomer expec­ta­tions. In addi­tion, the mod­el offers the chance to cut fuel costs and emis­sions, and reduce dri­ver hours.”

Mr Pool says the mod­el tends to be more pop­u­lar with tech-savvy retail­ers that have a deep under­stand­ing of their cus­tomers and of pat­terns of demand. “That requires gath­er­ing and analysing data from across the sup­ply chain and design­ing a net­work based on that data,” he says.

There is cer­tain­ly some­thing to be said for col­lab­o­ra­tion in all its forms and Bob­by Shome, glob­al busi­ness direc­tor at deliv­ery man­age­ment spe­cial­ist Cen­tiro, says work­ing togeth­er is key to com­pet­ing with Amazon’s deliv­ery might.

He says: “To make this hap­pen in prac­tice, retail­ers and deliv­ery com­pa­nies must look to the tech­nol­o­gy dri­ving their logis­tics and oper­a­tions. This can make col­lab­o­ra­tion pos­si­ble by shar­ing accu­rate, time­ly infor­ma­tion across a wider net­work, mak­ing it pos­si­ble for retail­ers to pool their resources when it comes to deliv­er­ing goods.”

Both Deliv­eroo and Uber might be expe­ri­enc­ing loss­es, but as their rev­enues grow, the whole sec­tor would be wise to keep a close eye on the books.