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Can Same-Day Delivery Overcome Its Costs and Complexities?
A survey from UPS-owned Roadie finds retailers still seeking to determine whether the sender or customer should cover the costs of same-day delivery, as the practice makes the last mile “more expensive, more complex and (sometimes) less efficient, placing more pressure on companies to meet customer expectations without breaking the bank.”
On the positive side, the survey of 150 organizations offering same-day delivery found benefits to adding the offering, such as higher customer satisfaction, sales, and retention rates. The majority of respondents (80%) reported increased revenue after implementing the practice.
However, the related costs were significant, including close to half of respondents reporting six-figure startup costs (with a median cost of $400,000). Moreover, operational costs rose for 79% of companies after rolling out same-day delivery, including those related to inventory and shipping.
To compensate for the costs of same-day delivery, Roadie advises creating efficiencies at the distribution point, whether that’s a store location or warehouse. Steps may include adding a dark store to speed picking and packing, investing in micro-fulfillment centers to bring inventory closer to households, tapping automation, and consolidating orders. Roadie’s survey found 79% of respondents either charging for delivery or having raised their product prices to offset costs.
McKinsey analysis that came out late last year found same-day delivery remains a “small segment of the market,” making up between 2% and 3% of the courier, express, and parcel (CEP) market in the U.S., with the growth slowed by COVID-related capacity constraints.
Globally, same-day delivery was found to be more prevalent in major cities. McKinsey wrote, “Currently, only large metropoles can generate the demand and supply volumes to enable same-day services.”
McKinsey also found that, excluding the grocery channel, only a few retailers “are large enough to build same-day networks,” and urban regulations, tied to concerns over autonomous delivery vehicles, air quality, and congestion, can restrict same-day delivery.
For consumers, surveys show a greater willingness to pay for reliability over speed. Many consumers also miss the daily cutoff deadlines for making same-day orders, typically before 1 or 2 o’clock in the afternoon. McKinsey wrote, “Extending the time limit is an option for boosting same-day orders, but it may require ramping up capacity by, for example, introducing increased automation.”
The research from Roadie and McKinsey comes as same-day delivery is receiving greater attention. Target is rolling out a new paid membership offering that includes home deliveries as a key perk, while Walmart is offering home deliveries earlier in the morning. Kroger said last week that online sales grew 12% in 2023, led by a 25% jump in delivery sales.
Last December, Amazon celebrated its 1 billionth package delivered from its same-day sites, which total more than 55 locations in the U.S.
Discussion Questions
What path or tools do you see to securing sufficient ROI (return on investment) for same-day delivery?
Will raising product prices or charging more for delivery be necessary?
Poll
Loading …BrainTrust
Bob Amster
Principal, Retail Technology Group
Trevor Sumner
Head of AI and Innovation, Raydiant
The recent push for same-day delivery is mostly driven by a desire, or a perceived need, to compete with Amazon. It’s primarily a battle for market share. That’s fine as it goes, but very few retailers have the volumes, coverage and infrastructure of Amazon to allow them to compete profitably in this space. What’s also interesting is that consumers like same-day delivery but only if the cost is subsidized. When the fees are increased, the popularity of same-day drops right back with many more consumers being satisfied to wait one or two days for lower or no fees. This is a hard battle for retailers to win without damaging margins.
Same day is great as a competition point, but it is also about competing against the convenience of brick-and-mortar and the real need to deliver groceries and food same day.
Which raises the point that most omnichannel retailers offering it are ultimately competing with, or at least somewhat cannibalizing, sales from their own stores. And they’re transferring those sales from a more profitable channel to a less profitable one.
Same-day delivery is expensive, period. You can push expenses around all you like, adjusting processes and optimizing your logistics, but the costs still add up and for most retailers, same-day delivery is dilutive to profits. While same-day delivery seems to have been the holy grail during the pandemic era, where same-day deliveries actually mattered, it has lost its impact in a post-pandemic world. Other than perhaps food items and medication, what discretionary purchases do consumers really need same-day delivery for? The fact that Target is offering same-day delivery to loyalty members has nothing to do with profitability and everything to do with acquiring of new members. Ultimately, retailers need to decide what’s most important to their customers. They shouldn’t chase same-day delivery for the sake of it, misguidedly believing that by doing so they will win over shoppers. As noted, same-day deliver just isn’t that important to most consumers for most goods. If retailers want to offer it, fine. Charge a reasonable fee, and let consumers decide.
Seldom in a discussion does one have to travel such a short distance to get the answer posed at the top of the page:
A survey from UPS-owned Roadie finds retailers still seeking to determine whether the sender or customer should cover the costs of same-day delivery
Translation: No. It cannot and will not until retailers and customers both accept the (until not too long ago unremarkable notion) that one should pay for premium service; insofar as it seldom makes sense – for most anything short of lifesaving medicine or legal documents – the offering should be rare, indeed.
The desire for same day delivery is more about competing with brick-and-mortar than Amazon. Grocery is an immediate need and convenience driven. New robotics at micro and macro fulfillment are making packing more efficient. The key is the last mile of delivery and the expense and time. Drones are interesting but underpowered for large orders. Autonomous cars or a version of it like a parcel on wheels will be the key unlock. And we are far away from that. The current delivery cost of $7-10 is prohibitive to scale, but will take hold in more affluent markets, especially if they can solve the disastrous missing item and shoddy replacement rate of Instacart shoppers as a comparison.
The economic unlocks from technology are coming, but it is still years away.
Same day delivery is inherently complex, and that won’t change. As for can costs be decreased – delivery perhaps – but those costs will be included somewhere. For same day delivery, the notion of “customer expectations” is fuzzy. If consumers are asked something like “would you use” such a service, the response is likely “yes”. Would they pay more than a nominal amount, likely not. Further, if the notion of “would you use” is changed to “do you need”, upon examination it’s most likely not a truly significant requirement – as in, the next day is typically just fine. Finally, if we as consumers are willing to let delivery companies better consolidate a myriad of orders to reduce the effort and expense across the whole, we may all be better off on numerous fronts.
Other than medications, what do we need same-day delivery for? I have never understood it. Oh, maybe something to complete a meal or a tool for a project, but then I see it as a special service and am willing to pay extra. So here is my answer.
The best way to make ROI reasonable on SDD is to charge for it. The McKinsey survey noted only 2% to 3% are SDD. I am quite sure if retailers charge a premium for SDD, that percentage would drop dramatically. Less than 1%?
The costs are never (I know, a strong proclamation) going to come down to the level that people will pay and companies will make money for. There may be a surge due to transfer to electric vehicles, until people figure out the true costs of owning/maintaining these vehicles. Not to mention the fact that groceries, especially fresh groceries, are a very sensual item to shop for-who wants someone else picking out their melons? I know I know-some of us do not mind. But not enough for this transition to completely happen.
This will continue as a service, but a niche service at best.
I don’t think that this panel has access to the actual numbers. I don’t, but – as Gene Detroyer indicates – seldom does anyone really ‘need’ same-day service and, if one does, one should pay the premium that makes the transaction a win/win for provider and consumer. A good deal is a deal with which both parties are satisfied and, if retailers are willing to continue to lose money on some of these services, they are racing to the bottom. Unsustainable in the long term.
If customers begin to EXPECT same-day delivery, the industry is going to be severely challenged. It would be a good idea to charge a premium.
…and how many will ask for SDD even when they don’t need it?
The same-day delivery operating model is a highly costly endeavor. Unless you have the benefit of a regionalized supply chain and the physical stores as a potential micro fulfillment center, it could significantly impact any potential ROI. While the expectations are mounting for same-day delivery, in most scenarios, customers are more than happy to have the less costly option of next-day or two-day shipping. Even if the perception of this need is out there, rarely, if ever, does Amazon offer same-day delivery unless the customer is willing to pick up the item in the store.
The changing consumer behaviors, accelerated by the pandemic, made the business case for establishing BOPIS and curbside pickup as a viable, sustainable, and profitable operating model. According to a forecast from EMARKETER, the number of click-and-collect buyers in the US will increase to 150.9 million in 2024, representing 53.1% of the population.
The rise of BOPIS and curbside pickup has significant advantages, including:
Customers that want the incredible convenience of shopping from their couch should be willing to pay for that incredible convenience. Free delivery is amazing. Same day delivery is amazing. Free same day delivery is jaw dropping. But of course a lot of free delivery isn’t really free. It’s pre-paid, up to a point, and then becomes free. The conversion from the shopper as an unpaid worker (picker/packer/delivery person) to the retailer bearing all those expenses has destroyed the profitability of some businesses. The math says charge fees. Competition and customer acquisition says don’t charge fees. Long term survival says charge fees. Even Amazon acknowledged this a while ago with the implementation of some fees. Math and long term survival will win the game in the long run, but the expectations that Amazon created will not go away any time soon.
Same day delivery for hot food is one thing because the margins are built for it (think pizza delivery), but for other products the margin just isn’t there for most retailers. Amazon can set the standard but most retailers can’t execute profitably, and sometimes it is okay to walk away from a customer segment
In my view, achieving a satisfactory ROI for same-day delivery demands a strategic approach. While adjusting product prices or delivery charges may be inevitable to cover expenses, it’s vital to explore avenues for operational efficiency and customer value. Leveraging dark stores, micro-fulfillment centers, and employing automated technologies like Order Management Systems can optimize processes and lower costs. Moreover, extending order deadlines and refining delivery routes can enhance the fulfillment service without substantial financial implications. The key lies in striking a balance between managing expenses and meeting customer expectations for faster and more reliable delivery.