Getting goods to consumers

Which home delivery model will capture the top market share?

By -- Modern Materials Handling, 9/1/2000

There are a variety of service companies that deliver parcels direct to the consumer: FedEx, UPS, DHL, USPS, and the like. Numerous less-known firms have joined their ranks on a regional basis. Moreover, grocery home delivery companies are springing up almost weekly. Our neighborhoods may one day resemble freeways, forcing us to escape further into the countryside for peace and solitude.

Interestingly, none of these home delivery providers are making money. If you ask them why, they will tell you it's because they are building the requisite infrastructure and advancing toward the magic volume that triggers profit.

I wonder if the highly successful parcel delivery companies, who have built their firms on business-to-business (B2B) models, (USPS is an exception, but it is federally subsidized) can succeed in the business-to-consumer (B2C) channel. The two major competitors (FedEx and UPS) created businesses based upon next day, reliable delivery. And therein lies what I believe is the strategic thinking problem.

They continue to think that B2C is an overnight delivery model. And to some degree, they are correct. Some consumers demand next day delivery on some groceries and other instant-gratification, must-have items. But for many consumers next day delivery probably is not a requirement.

As an observer of this emerging B2C channel, I believe that for most consumers a reliable twice a week delivery service would be satisfactory, and even desirable. This service would be even more desirable if it could deliver all e-commerce parcels regardless of origin.

For instance, imagine a network of merge/sort/buffer centers strategically located in key metropolitan areas. These centers would receive parcels from a variety of e-commerce companies through common carriers and/or parcel delivery companies. These highly automated centers would typically hold parcels 48 to 72 hours and sequence them to awaiting vans for delivery on the scheduled day(s) selected by the consumer. Grocery home delivery centers, when properly designed could serve this function.

This model's differentiating characteristic is the flexibility of the metropolitan centers to hold and sort parcels automatically and economically. The benefits of this concept are not shabby. The cost of delivering a parcel with traditional services ranges from as low as $5.00 to as high as $10.00 or more, depending on size and weight.

Today there is limited but increasing consumer resistance to these high delivery costs. As the direct to consumer market captures 20% or more of the consumer goods volume, (a staggering sum in excess of one trillion dollars) a low-cost efficient method of getting the goods to the consumer must emerge. Automated buffer centers with scheduled home delivery could reduce the delivery cost per parcel to under $2.00.

Other models are being tested, such as pick-up stations at convenience stores where parcels would be collected and held for customer pick-up. Retail grocery chains, such as Ship & Shop in the Boston area, are testing this concept. UPS and Blockbuster Video are testing a similar parcel pick-up model.

The direct to consumer landscape likely will have a number of options. I think the home delivery services designed to buffer parcels will capture the major share of the market. What do you think?