By: Michael Lierow
This article first appeared in the Postal and Parcel Technology International Magazine.
Parcel delivery providers have long complained that the continued growth of e-commerce will lead to the demand for more last-mile drivers – already a scarce resource. This in turn might drive up labor costs to a point where to-door deliveries become too expensive.
Consider Germany, which is a good example of developed countries. Oliver Wyman’s research indicates that annual parcel deliveries will roughly triple in the next 10 years, reaching nine billion by 2028. E-grocery (fresh) deliveries, which now account for 1% of grocery shopping revenue, will likely rise to 10% by 2028.
This added volume will require more last-mile drivers – 200,000 in 2028, up from 90,000 today. We project that hourly wages, now at €15 (US$17), will increase up to €30 (US$34) in real terms, driven by the availability of drivers and increased wages in Eastern Europe. That will push the cost of delivering a parcel from around €2.50 (US$2.80) today, to €5.00 (US$5.60) in 2028.
Will consumers accept paying for this? Can this be hidden in Amazon Prime flat-shipping rates? Almost certainly not.
Parcel delivery services must also contend with another dynamic that further complicates the landscape. Since most people order online at weekends, deliveries on Monday and Tuesdays are 30% higher than during the rest of the week. Thus, a delivery service might need nearly twice as many drivers early in the week than later, complicating workforce management.
Multidrop solutions should become the new norm, but home delivery should be available at a surcharge.
All the while, Amazon, once merely a shipper of parcels, will increasingly behave more like a digital-native logistics provider. By 2028, Amazon is likely to fulfill 3.6 billion parcels (up from 1.4 billion today) in Germany. We estimate that Amazon itself will deliver half of these parcels (1.8 billion), with a subcontracted fleet of 20,000-32,000 vehicles.
So how can traditional delivery services remain competitive?
Rather than delivering one parcel to a customer’s door (single drop), parcel services will increasingly deliver multiple parcels to multidrop solutions, such as lockers and shops, within the last-mile range of destinations. While multidrop solutions should become the new norm, home delivery should be available at a surcharge. First-class customer convenience solutions (apps, notifications) are required to ensure customers will accept the surcharges. Some customers might also be willing to pay, say, €0.99 (US$1.10) for last quarter-mile delivery by a robot – a service already being tested by some logistics players. If 30% of parcels in Germany (three million packages in 2028) were to end their journey at multidrop solutions, that would save delivery services €1bn (US$1.1bn) per year.
FLEXIBLE DEPOT-AND-HUB COST STRUCTURE
Just as demand for last-mile drivers fluctuates during the week, so will the demand for sorting capacity. ‘Agile’ depots, where certain sections can be shut down or opened as needed, along with agile line-haul and routing schedules, where hubs are bypassed on heavy delivery days and used on slower days, are required. Applying these ideas at scale could reduce the addressable operational costs by up to 20%.
BREAKDOWN SALES AND OPERATIONAL SILOS
Machine-learning models are able to forecast daily demand per depot up to four weeks in advance with a small margin of error, even for peak days. With that data, the sales side of the business could incent retailers to offer midweek promotions, thus artificially creating a second delivery demand peak at the end of the week; sales could even differentiate last-mile pricing by day of week. Some customers might be willing to pay more for home delivery and others might agree to delay delivery for a lower fee. This could be a win-win for retailers and logistics providers.
Ultimately, operations-centric parcel services need to become even more consumer-centric. It’s time for parcel players to accelerate innovation in the battle to win over the customer.