March 26, 2025
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Are Last-Mile Costs Becoming Bigger Burdens to Online Profitability?
A new survey finds e-commerce profitability being increasingly undermined by rising last-mile costs caused in part by efforts to fulfill high expectations around delivery.
The survey of 550 e-commerce decision-makers at retailers across Europe from London-based paper and packaging company DS Smith found 84% experienced cost increases around the last mile of deliveries within the past year, including 39% facing double-digit hikes. Similar increases are expected over the next 12 months.
As a consequence, 39% of those surveyed reported lower profits in their e-commerce operations.
Among the steps being taken to reduce costs:
- 59% are reviewing their returns policies.
- 57% are imposing minimum order values for deliveries.
- 36% have increased delivery fees charged to end consumers.
- 35% have increased the price of their products.
- 27% are cutting back on sustainability initiatives.
Cost pressures are expected to continue as retailers feel they’re falling short of delivery expectations. Of the respondents, only 33% felt they’re meeting their consumers’ expectations around delivery speed, 36% around delivery cost, 30% around the flexibility of delivery times, 39% around sustainable delivery options, and 28% around sustainable packaging.
Last-mile expenses can account for up to 53% of total supply chain costs, as failed deliveries and higher fuel, vehicle, and labor costs strain the system. Another reason expenses are so high is that it’s difficult to optimize logistics for small orders for delivery to many different locations, often within a short window of time.
AlixPartners’ 2024 Home Delivery study, based on a survey of 110 North American transportation, logistics, and supply chain executives, found 85% seeing reducing cost per order as a top priority for last-mile delivery, with 72% not believing home delivery is accretive to their profitability.
According to the survey, 40% have shifted volume away from UPS and FedEx to other providers in the last year to reduce costs, 49% have increased the spending threshold for free shipping over the past 12 months, and 47% are reducing split shipments. More merchants are also tightening return policies and utilizing artificial intelligence. AI use cases cited include optimizing driver schedules based on shopping and traffic patterns and regulatory requirements across different regions, minimizing fuel consumption and emissions, and adapting to real-time traffic and road conditions.
AlixPartners similarly found retailers struggling to meet delivery expectations. An accompanying survey of 1,100 U.S. consumers found 92% agreeing that offers of free shipping impact purchase decisions. Consumers also expect orders on average to arrive 3.5 days from order placement, yet 47% of the supply chain executives surveyed indicated that they couldn’t meet that threshold.
BrainTrust
Lucille DeHart
Principal, MKT Marketing Services/Columbus Consulting
David Biernbaum
Founder & President, David Biernbaum & Associates LLC
DeAnn Campbell
Head of Retail Insights, AAG Consulting Group
Recent Discussions
Discussion Questions
Will last-mile costs soon stabilize for retailers or continue to squeeze e-commerce profitability?
What obvious and less obvious methods do you see to reduce last-mile delivery costs?
Poll
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The problem is that the price the customer pays does not fully reflect the price of fulfillment. The other problem is consumers expect faster delivery but very few retailers, bar Amazon, have the scale do so this in a cost effective fashion. This problem has only gotten worse as costs have escalated and expectations have become heightened!
One wonders if the delivery expectations have any value to the shopper.
I truly don’t understand why this is a new story. And consumer expectations for rapid delivery were stoked by Amazon and, if I’m honest, people like us, who kept claiming consumers wanted faster and faster delivery. I tried, I was a lone voice saying “people want it when they want it” that morphed into “please don’t leave product at my doorstep at 4 am. Seriously.”
I feel badly, but if it can be made to work by creating minimum order values it will be in line with how the entire supply chain works (am I the only one old enough to remember the term EOQs?). Has that analysis been done? Why not?
this is not a time to raise prices. Consumers are hurting enough
What will the consumer do if given the choice of fast delivery at a premium or efficient delivery?
44% of online grocery shoppers in our latest study, just out a few weeks ago, indicated they would pay an additional fee for guaranteed two hour delivery. So for almost one out of two of these shoppers, it is worth a premium.
Why would they stabilize? We have a tight labor market, and fuel costs about as low as they are likely to go….so, no, I don’t see relief (and really, when was the last time costs went down for a sustained period of time?) It’s possible a recession lies ahead, and that could lower costs…but it would likely lower revenues as well.
The problem, of course, is the (continued) failure to properly account for shipping costs in the profit equation, treating them as some kind of vague overhead; and that many do so makes it hard to justfy raising prices, lest one seem uncompetitive. (The “free” – there’s that four letter word again – return issue is perhaps even worse, so let’s leave that First Mile issue for another day.) So what to do? Perhaps rationalize what you charge for shipping, and hope it will spur a vitruous circle of others doing the same.
Retail pricing was established in the ancient practice of customers doing all the work. Driving to the store. In effect, doing all the picking and packing. Paying at the register. Self delivering to their house. Not a drop of sweat or a nickel of expense for the retailer after they set the inventory in their stores. Mail order or early ecomm orders came with delivery charges. Along comes Amazon and they embed the word “free” into customer thinking and expectations. It wasn’t free of course, but the charge for Prime status might be one of the best values in retail. My Prime fee for 2025 is probably paid for by now. My deliveries for the balance of the year are indeed free.
I love the convenience of shopping on-line for products that aren’t available locally. It’s access + convenience. And if it takes 2 weeks and a $10 shipping charge, so be it. I’m not just paying for the shipping. I’m paying for the access + the convenience + the shipping. I think that’s a pretty good deal.
Not quite ancient: delivery was once commonplace, from the corner grocer to the downtown department store (recall those sepia-tinted photos of delivery vans lined up down the street…and into the next state?) And how could it not be when no one has a car, few had a carriage, and everyone worked 25 hours a day? When stores opened suburban branches, they kept the downtown pricing, but handed over the drayage to the customer…free money! What killed it, I think, was discounters, and other trouble makers, who saw no need to stay with the old formulas. Now people want the delivery back, but not the pricing that went with it.
Good points…great perspective!
That’s a good point. Store shoppers don’t consider the real value of their own contribution to the delivery process. If they understood the cost of their experience (time and effort), they would be less concerned about delivery charges.
Due to the growing demand for faster delivery times and the rise of urban logistics solutions, the costs associated with last-mile delivery are likely to continue to fluctuate. In order to manage these costs, retailers may need to invest in innovative technologies such as drones and autonomous vehicles. In addition, partnerships with local delivery services may help stabilize costs while meeting customer expectations for prompt delivery.
The delivery process can be streamlined and costs reduced by partnering with local delivery services or a third-party logistics provider. It is also possible for retailers to collaborate with other businesses in order to share delivery routes and resources, thereby increasing efficiency. Furthermore, utilizing technology to optimize delivery routes and schedules can further reduce last-mile expenses.
Fast, easy delivery is now the new norm for retailers as consumers expect every brand/store to offer “Amazon” like service. Fulfillment, shipping/delivery and return management have all been a burdeon on profitability, but retailers need to think out of the box to maximize the consumer engagement moment. Too often, retailers see services as an added value, instead, they should consider them another opportunity to build a relationship and save the sale/upsell engagement. Box inserts, surprise and delight gifting/offers and even product upgrades can lead to repeat business. Short-term I do see the need to install a minimum order value to secure costly services, but long-term, brands need to consider their packaging, delivery service, delivery marketing and even returns as additional shopping points. Utilizing subscription/loyalty programs is also another way to improve profitability. Providing free delivery with a premium annual membership creates instant loyalty and off-sets margin impact.
In their haste to push the convenience of online shopping at consumers retailers are failing to invest in stores, which generate10X higher profit margins and reduce product returns by 3X. While delivery works well for replenishment orders or low risk items, shoppers want to see and touch a product before buying. Plus getting out of the house and off of social media is becoming an essential part of everyone’s mental wellbeing these days. It’s time retailers stopped overspending on last mile delivery by circling back to the fundamentals of brick and mortar, and saving a boatload of money on last mile delivery in the process.
Many consumers have been “Amazonized.” They have been trained to expect similar service from other retailers. This comes from Amazon (and any other brand the customer feels delivers outstanding service), which has become a benchmark for the experience a customer expects. Many years ago, Amazon came up with the idea of charging a membership for a guaranteed two-day delivery. Two days turned into one – and for some purchases, same day. Their membership fees have also gone up quite a bit. That fee, combined with building some of the shipping into the price of the merchandise and gaining control over the delivery process, has (apparently) worked for Amazon. The costs of the “last mile” must be integrated into the cost of the product, just as the cost of theft and returns is built into the product. Consumers are price sensitive, but 50% (according to my annual consumer research) are willing to spend more if they know they will receive good service. It’s a balance retailers will have to discover based on knowing their customers.
Last-mile costs are rising, but pushing the burden onto customers isn’t a long-term fix. Retailers that rethink logistics, optimize inventory placement, and use technology effectively will be the ones that maintain profitability.
Smarter routing, reducing split shipments, and investing in localized hubs can make a real impact. The focus should be on building a more efficient, resilient fulfillment model, not just offsetting costs.
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The problem is that the price the customer pays does not fully reflect the price of fulfillment. The other problem is consumers expect faster delivery but very few retailers, bar Amazon, have the scale do so this in a cost effective fashion. This problem has only gotten worse as costs have escalated and expectations have become heightened!
One wonders if the delivery expectations have any value to the shopper.
I truly don’t understand why this is a new story. And consumer expectations for rapid delivery were stoked by Amazon and, if I’m honest, people like us, who kept claiming consumers wanted faster and faster delivery. I tried, I was a lone voice saying “people want it when they want it” that morphed into “please don’t leave product at my doorstep at 4 am. Seriously.”
I feel badly, but if it can be made to work by creating minimum order values it will be in line with how the entire supply chain works (am I the only one old enough to remember the term EOQs?). Has that analysis been done? Why not?
this is not a time to raise prices. Consumers are hurting enough
What will the consumer do if given the choice of fast delivery at a premium or efficient delivery?
44% of online grocery shoppers in our latest study, just out a few weeks ago, indicated they would pay an additional fee for guaranteed two hour delivery. So for almost one out of two of these shoppers, it is worth a premium.
Why would they stabilize? We have a tight labor market, and fuel costs about as low as they are likely to go….so, no, I don’t see relief (and really, when was the last time costs went down for a sustained period of time?) It’s possible a recession lies ahead, and that could lower costs…but it would likely lower revenues as well.
The problem, of course, is the (continued) failure to properly account for shipping costs in the profit equation, treating them as some kind of vague overhead; and that many do so makes it hard to justfy raising prices, lest one seem uncompetitive. (The “free” – there’s that four letter word again – return issue is perhaps even worse, so let’s leave that First Mile issue for another day.) So what to do? Perhaps rationalize what you charge for shipping, and hope it will spur a vitruous circle of others doing the same.
Retail pricing was established in the ancient practice of customers doing all the work. Driving to the store. In effect, doing all the picking and packing. Paying at the register. Self delivering to their house. Not a drop of sweat or a nickel of expense for the retailer after they set the inventory in their stores. Mail order or early ecomm orders came with delivery charges. Along comes Amazon and they embed the word “free” into customer thinking and expectations. It wasn’t free of course, but the charge for Prime status might be one of the best values in retail. My Prime fee for 2025 is probably paid for by now. My deliveries for the balance of the year are indeed free.
I love the convenience of shopping on-line for products that aren’t available locally. It’s access + convenience. And if it takes 2 weeks and a $10 shipping charge, so be it. I’m not just paying for the shipping. I’m paying for the access + the convenience + the shipping. I think that’s a pretty good deal.
Not quite ancient: delivery was once commonplace, from the corner grocer to the downtown department store (recall those sepia-tinted photos of delivery vans lined up down the street…and into the next state?) And how could it not be when no one has a car, few had a carriage, and everyone worked 25 hours a day? When stores opened suburban branches, they kept the downtown pricing, but handed over the drayage to the customer…free money! What killed it, I think, was discounters, and other trouble makers, who saw no need to stay with the old formulas. Now people want the delivery back, but not the pricing that went with it.
Good points…great perspective!
That’s a good point. Store shoppers don’t consider the real value of their own contribution to the delivery process. If they understood the cost of their experience (time and effort), they would be less concerned about delivery charges.
Due to the growing demand for faster delivery times and the rise of urban logistics solutions, the costs associated with last-mile delivery are likely to continue to fluctuate. In order to manage these costs, retailers may need to invest in innovative technologies such as drones and autonomous vehicles. In addition, partnerships with local delivery services may help stabilize costs while meeting customer expectations for prompt delivery.
The delivery process can be streamlined and costs reduced by partnering with local delivery services or a third-party logistics provider. It is also possible for retailers to collaborate with other businesses in order to share delivery routes and resources, thereby increasing efficiency. Furthermore, utilizing technology to optimize delivery routes and schedules can further reduce last-mile expenses.
Fast, easy delivery is now the new norm for retailers as consumers expect every brand/store to offer “Amazon” like service. Fulfillment, shipping/delivery and return management have all been a burdeon on profitability, but retailers need to think out of the box to maximize the consumer engagement moment. Too often, retailers see services as an added value, instead, they should consider them another opportunity to build a relationship and save the sale/upsell engagement. Box inserts, surprise and delight gifting/offers and even product upgrades can lead to repeat business. Short-term I do see the need to install a minimum order value to secure costly services, but long-term, brands need to consider their packaging, delivery service, delivery marketing and even returns as additional shopping points. Utilizing subscription/loyalty programs is also another way to improve profitability. Providing free delivery with a premium annual membership creates instant loyalty and off-sets margin impact.
In their haste to push the convenience of online shopping at consumers retailers are failing to invest in stores, which generate10X higher profit margins and reduce product returns by 3X. While delivery works well for replenishment orders or low risk items, shoppers want to see and touch a product before buying. Plus getting out of the house and off of social media is becoming an essential part of everyone’s mental wellbeing these days. It’s time retailers stopped overspending on last mile delivery by circling back to the fundamentals of brick and mortar, and saving a boatload of money on last mile delivery in the process.
Many consumers have been “Amazonized.” They have been trained to expect similar service from other retailers. This comes from Amazon (and any other brand the customer feels delivers outstanding service), which has become a benchmark for the experience a customer expects. Many years ago, Amazon came up with the idea of charging a membership for a guaranteed two-day delivery. Two days turned into one – and for some purchases, same day. Their membership fees have also gone up quite a bit. That fee, combined with building some of the shipping into the price of the merchandise and gaining control over the delivery process, has (apparently) worked for Amazon. The costs of the “last mile” must be integrated into the cost of the product, just as the cost of theft and returns is built into the product. Consumers are price sensitive, but 50% (according to my annual consumer research) are willing to spend more if they know they will receive good service. It’s a balance retailers will have to discover based on knowing their customers.
Last-mile costs are rising, but pushing the burden onto customers isn’t a long-term fix. Retailers that rethink logistics, optimize inventory placement, and use technology effectively will be the ones that maintain profitability.
Smarter routing, reducing split shipments, and investing in localized hubs can make a real impact. The focus should be on building a more efficient, resilient fulfillment model, not just offsetting costs.