Last-mile Delivery Industry Review
Last-mile Delivery Industry Review
What is last-mile delivery and why is it so important?
Last-mile delivery refers to the final step of the delivery process in which goods are transported from a transportation hub to the end consumer. It is a critical aspect of the supply chain and e-commerce industry, as it directly impacts the customer experience. In recent years, the last mile delivery industry has undergone significant changes and is expected to continue to evolve in the future.
One of the biggest challenges in last-mile delivery is its impact on overall costs. According to a study by McKinsey & Company, last-mile delivery can account for as much as 53% of the total cost of a delivery. This is due to a number of factors, including traffic congestion, limited delivery options, and the need for specialized equipment and personnel. Despite these challenges, the market for last-mile delivery is growing.
Novel business models and raising customer expectations
The e-commerce boom has led to an increase in demand for last-mile delivery services, with more and more consumers turning to online shopping and the rise of urbanization is changing the last mile delivery industry. As more people move into cities, the demand for last mile delivery services in urban areas has increased. This has led to the development of new delivery models such as micro-fulfilment centers and dark stores, which are specifically designed to meet the unique needs of urban consumers.
These increase in demand and density started a movement called "last-mile delivery consolidation" where multiple individual deliveries are combined into a single trip, in order to improve efficiency and reduce the costs. This is more and more being done by outsourcing the delivery to a wide range of smaller, local delivery companies that are specialized in specific areas to increase capillarity. This enables large companies to provide more reliable and efficient delivery services, and also allows them to reduce costs by sharing resources.
Additionally, as e-commerce continues to grow, there is increasing pressure to offer more convenient delivery options such as next-day+, same-day, and even instant delivery. These standards were built by bad habits in the industry that made customers addicted to cheap (or even free) delivery services at high-speed; an expectation that blurs customer’s willingness to pay for such services, increasing the pressure on e-commerces and delivery providers even more.
Segmenting a fragmented market
Industry by delivery model
One way to segment last-mile delivery is by the speed at which orders are delivered to customers. In this post, I'll take a look at three key delivery modes: next-day+, same-day, and instant.
• Next-day+: This is the most traditional delivery mode and is characterized by the fact that orders are delivered to customers within one to three days after they are placed. This mode is still widely used and is suitable for customers who are not in a rush to receive their orders.
• Same-day: As the name suggests, orders are delivered to customers on the same day they are placed. This is a more recent development and is becoming increasingly popular as customers demand faster delivery times. Same-day delivery is particularly useful for customers who want to receive their orders quickly, for example, in case of urgent need.
• Instant: With this model orders are delivered to customers within minutes of being placed. This is the newest delivery mode and it's still in its early stages of development. It's mainly used for the delivery of perishable goods and for emergency services.
Industry by size
Last-mile delivery market can be segmented by the size of the companies providing the service. Each size category presents its own unique set of challenges and opportunities. The market is highly fragmented, with many different players, and it's important to understand the specific characteristics of each size category in order to succeed in this space.
• Large companies: Well-established companies that have a strong presence in the market and are able to invest in the necessary resources to provide a wide range of services. They have the advantage of economies of scale, which allows them to provide a high level of service at a lower cost. They also have the ability to access to financing and the ability to invest in new technologies. According to a recent report, large companies account for around 70% of the total last-mile delivery market, and there are about 50 large companies worldwide that dominate the market.
• Medium-sized companies: These are companies that are not as well-established as large companies but are still able to provide a wide range of services. They often have a specific niche or market they focus on, and they have the ability to offer specialized services. They can also leverage technology and data to optimize their operations and improve their services. The medium-sized companies account for around 20% of the last-mile delivery market worldwide.
• Small companies: These are companies that are just starting out in the market and they often focus on a specific geographic area. They often have to be creative in order to compete with larger companies and to find new ways to grow their business. They have the advantage of being more flexible and agile and have the ability to adapt to changing market conditions more quickly. The small companies account for around 10% of the last-mile delivery market.
On top of all these, sub-hiring practices, where large companies hire medium and small companies to perform last-mile delivery on their behalf, is a common practice in this market, and it's important to consider this when analyzing the market. A recent study shows that on average large companies sub-hire around 40% of their last-mile delivery to medium and small companies.
Industry by software strategy
Another way to segment the market is by looking at the software strategy that companies use to manage their operations.
• In-house software: These companies have developed their own software solutions to handle tasks such as route optimization, tracking, and customer communication. This approach can provide these companies with a high level of control and customization, but it also requires a significant investment in development and maintenance.
• Third-party software: Relying on software solutions developed by other companies to handle tasks such as route optimization, tracking, and customer communication. This approach can save these companies money in terms of development and maintenance but it also means that they might have less control and customization.
• No software: Some other companies manage their operations manually or with simple tools such as spreadsheets or pen and paper. This approach is the simplest and cheapest, but it also limits the companies' ability to optimize their operations and make data-driven decisions.
Despite the presence of many third-party software players in the market, the long-tail is still there which is estimated to be around 83%, represented by large companies that developed their legacy systems in-house and small and medium-sized companies that often do not have the resources to invest in advanced software solutions. This might be due to a lack of awareness of the benefits of software solutions among small and medium-sized companies, or the cost may be a barrier for them. Moreover, many of the third-party software solutions are designed for larger companies and may not be tailored to the specific needs of small and medium-sized companies.
The state of software
This wide variety of operating models lead to the emergence of a long-tail of last-mile delivery software providers, largely due to the fact that these solutions are tailored to the specific needs of small and medium-sized businesses. These businesses often have different needs and constraints than larger companies, and may not have the same resources or capabilities to invest in expensive enterprise-level software.
Additionally, the small businesses are hesitant to adopt new technologies, especially if they are not familiar with them, or if they feel that it is too expensive or too complex. As a result, a large number of software providers have emerged to fill this gap, offering simpler, more affordable, and more user-friendly solutions that are designed specifically for small and medium-sized businesses.
However, despite the availability of such software, many small delivery businesses still don't use them. This could be due to a lack of awareness of the benefits of such software, or a lack of understanding of how it can help them streamline their operations. Additionally, the cost of software can be a barrier for some small delivery businesses, even though there are many providers with low-costs solutions.
Despite the challenges posed by increasing costs and customer expectations, the last-mile delivery market is projected to continue to grow as consumers demand more convenient and efficient delivery options. The e-commerce boom has led to an increase in demand for last-mile delivery services, with more and more consumers turning to online shopping and urbanization changing the industry. The industry is adapting to these changes through the emergence of new business models such as micro-fulfilment centers and dark stores, consolidation through last-mile delivery consolidation, and the rise of a long-tail of small and medium-sized companies that are specialized in specific areas to increase capillarity. As e-commerce continues to grow, there is increasing pressure to offer more convenient delivery options such as next-day, same-day, and even instant delivery, creating a dynamic and ever-evolving landscape for last-mile delivery companies.