The Challenge of “Last Mile” Delivery

One of the latest buzzwords I’ve been hearing is the concept of “last mile delivery”. The term was originally used in the Telecommunications field but has found a home in supply chain management. The “last mile” is typically the most expensive part of the package delivery process. The last mile refers to the transportation of goods from a hub or port to the final destination. The hub is often a UPS (NYSE:UPS) or FedEx (NYSE:FDX) warehouse, where the package is then loaded onto a truck and taken to its final destination.

The elephant in the room here is obviously Amazon ( NASDAQ:AMZN). How to get those Amazon boxes to the final destination, in the most cost efficient and safe manner, is a dilemma that effects quite a few companies. Amazon has taken some steps recently to attempt to reduce the costs of the last mile. The purchase of Whole Foods gives them over 400 new “hubs” to store merchandise and deliver the last mile. The company has also made arrangements with Kohl’s (NYSE:KSS) that allows consumers to drop off packages for return at a Kohl’s location and Kohl’s will ship them back to Amazon.  I haven’t studied the economics of that deal but I would assume that the increased store traffic is the win for the department chain.

Amazon also has a small fleet of their own delivery trucks as well as some independent operators delivering packages locally for them. The obvious question here is how will UPS and Fedex remain a necessity for these last mile delivery trips. It would be reasonable to think that they need to offer something in the warehousing and storage space in order to keep some of the business. I think it’s a foregone conclusion at this point that the volume of packages that they carry for Amazon will continue to decrease. The margins on the packages that they deliver are already painfully thin.

What about Walmart? Walmart (NYSE: WMT) would seem to have an advantage given their existing physical locations that serve as hubs. They have been piloting a program where employees can deliver packages to customers on their way home from work. The battle over whether or not they get paid a regular wage for doing this is clearly a last mile delivery issue to be resolved.

The last mile delivery cost impacts much more than just the package delivery. Food delivery is also an area where restaurants can distinguish themselves from competitors. Competition in the restaurant area is fierce and an effective delivery service would put less of an emphasis on getting foot traffic in the door. GrubHub (NYSE:GRUB) is a company that provides delivery service for smaller restaurants and has allowed these smaller entities to keep up with larger nationwide chains like Domino’s (NYSE:DPZ).

Becoming the most efficient last mile delivery operator will take creativity and collaboration. Amazon and Walmart seem to understand that fairly well. I wonder what everyone else is going to do.

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