April 2000

As e-tailers grapple with the reality of delivering to individual purchasers, an alternative consolidation scenario could have some appeal. Gavin Chappell of the Andersen Consulting Supply Chain Practice considers the "last mile" conundrum in that light

With the arrival of the e-revolution, the greatest growth in Web-based, consumer-orientated products has been in categories such as CDs, books and videos. However, with the expansion of "e-tailing" into almost every other product area food, consumer electronics, white goods and apparel among others a simple but fundamental problem arises in the order fulfilment cycle. How do you guarantee getting your product at an acceptable cost into your customer"s hands when it won"t fit through the letterbox?

Research from the US shows 82 per cent of online purchasing decisions are affected by shipping costs, with 62 per cent of consumers indicating that it has a major bearing on their decision over whether to buy or not. Given that shipping costs are an integral part of the price paid, it is likely that under increasing pressure to reduce costs, e-tailers may have to absorb them and "eat" margin just to keep hard-won customers.

There are however, new models emerging which suggest that organisations could take a more differentiated approach to e-fulfilment, both to increase flexibility to the customer and to protect margins. The framework for this new e-fulfilment strategy is based around the physical size of the product and the level of value-added services that the product could attract in the eyes of the consumer.

For large white goods for example, the physical size and the value the customer places on additional add-on services (such as connecting new and removing the old appliance) mean that customers are more likely to pay for the cost of a dedicated delivery. At the other end of the spectrum, a large number of popular "Web-friendly products" such as music, books, video and so on could ultimately be transmitted to the consumer electronically. In these categories, electronic delivery will obviously be the most cost-effective solution.

It is in the mid-ground, however, where a new "consumer collect" channel could emerge. Take groceries for example. Product margins are already very slim, and a food delivery service could increasingly be viewed as a commodity as each of the major grocery retailers brings online its own home-delivery offering. Charging the customer for delivery is unlikely to be competitively viable in the long term, and unless the retailer can either recoup the cost by adding it to the product price, or take a further reduction in margin, an alternative collection channel may emerge as a more cost-effective model of distribution.

Traditional e-fulfilment strategies have focused on a customised-distribution, "home delivery" solution where the product is taken in a dedicated vehicle (operated by the retailer or a third party) and placed directly in the customer"s hands. Analysis of current consumer and socio-demographic trends, however identifies that for most products, custom distribution is not a cost-effective or appropriate fulfilment strategy.

Modern life, flexible working patterns and the growth in single-person households are reducing the likelihood of a responsible person being at home during a delivery window. The key to making a cost-effective delivery to a consumer"s home or place of work is ensuring that the consumer is there when the delivery vehicle arrives. Inability to specify a delivery time window and peak demand delivery patterns will inevitably increase kilometres run per delivery, and adversely affect load utilisation.

Equally, as the traditional customer base changes and the Internet penetrates down into the next echelon of consumers, "value for money" rather than convenience and flexibility is going to become an increasingly important element in the buying decision. Concern over whether consumers will continue to pay a premium for Internet-based products, serviced through a relatively expensive delivery channel, have recently caused the stock price of a number of leading US "e-tailers" to take sharp declines.

Perhaps the most compelling argument against custom distribution lies in the underlying economic reality arising from the fact that much of Europe is relatively sparsely populated. In the UK (one of Europe"s most densely populated countries), the transport element of home delivery costs somewhere between 5 per cent and 10 per cent of sales per drop. This is driven by the sparse drop density (for any one retailer) and the high costs of transport, which are only likely to rise to cover the cost of appeasing environmental concerns.

So is the future a "consumer collect" approach? Whilst many organisations are investigating e-delivery, along with mass distribution and custom distribution, there appears to be a vast market for a consumer collect channel which is as yet untapped. Could this channel be the road to profitability for many of today"s "e-tailers" and does this channel open up new revenue streams for some surprising new players in the "e-world"?

Not surprisingly, exploration of such channels has already started in the US, where organisations such as Payless.com allow their customers to pick up online orders at any of the Payless ShoeSource stores. Consumer-collect networks are made up of a large number of local collection points where consumers can physically collect products they have ordered on the Internet at home or at work. Customer orders are picked, packed and despatched to the collection points, potentially through a third-party service provider. The consumer would either select a convenient collection point or have the "e-tailer" automatically suggest local collection points at the time of order capture.

This customer-collect channel option provides consumers with extended flexibility at a lower cost than the traditional custom delivery option. They are not tied to a fixed delivery window and have the added benefit of knowing their product is safe and secure, and that they have a convenient mechanism of returning any product (should they need to). In addition, it is likely that such a distribution channel will be significantly cheaper than custom delivery because of the higher drop densities and the overall perception of better "value for money".

Obvious candidates for operating "consumer collect" points are organisations such as the oil companies and convenience store chains. However, other more unlikely organisations could offer such services fast food restaurants, video store networks or even the national post offices, through their counter networks. Depending on the commercial arrangements agreed with the "e-tailer", a nominal flat fee could be charged for the provision of such services.

The biggest benefit for operating companies however is likely to come from maintaining and increasing footfall through the existing outlet. This increased stream of potential impulse-purchasing (high-margin) consumers would certainly provide additional opportunities to sell more products and services.

For the "e-tailer" the collect channel could potentially provide a cost-effective route to market for a large number of non-letterbox size categories. As the delivery will be made to a limited number of drops, the transport economics suddenly become much more attractive even more so if a consolidator is used. Since the final leg (last mile) of the distribution chain is being done by the consumer, by going to the collection point, the true cost is hidden. In addition, since consumers are collecting on their own behalf, the impact of many demographic and social issues associated with working patterns is minimised, saving the cost of failed deliveries. As well as bringing financial advantages, using a "consumer collect" point also provides the "e-tailer" with a guarantee that the product will be handled appropriately. This is a significant issue where product quality is important (such as with temperature-controlled food or fashion garments).

Leaving aside information-based products that can be delivered to customers electronically, it therefore looks as though two alternative scenarios are emerging for delivering mid-range items bought on the Internet home delivery or consumer collect.

Which of these two scenarios will prevail is not yet clear, but whoever takes charge of this "e-space" will need to keep both feet firmly on the ground to make their vision profitable.