Is the logistics challenge for online retailers any easier today than it was in the 1990s? The first wave of online retailers faced a huge shortfall between what consumers were willing to pay for home delivery and its actual cost – also known as “the last mile challenge”. This profitability gap drove most online pioneers out of business. Bookseller-turned-everything-retailer, Amazon, only survived thanks to a well-timed capital raising of $2.2 billion at the peak of the dotcom investor mania.
Fast-forward to 2016 and online retailers still face the same profitability gap. While fulfilment is more efficient, free shipping is now ubiquitous. Amazon’s net deficit on shipping was $5.02 billion in 2015 and this issue continues to drive the company’s low overall profitability of less than one cent on every dollar of sales.
The typical online retailer’s situation is shown in the chart below. Most players are becoming incrementally more efficient (lower cost), but a step change is needed to close the gap and achieve acceptable levels of profitability. The growth of online retail – now around 7% of total retail sales and doubling every six years – makes this last mile challenge more than just an irritant.
Drones and driverless cars are making headlines as the most likely innovations to solve the last mile challenge. Yet conventional wisdom tells us these solutions come with insurmountable obstacles. Safety concerns in built-up areas are just one reason some experts doubt they’ll play a central role in fulfillment.
I’m not so sure. Historically, business has countless examples of innovations that were mocked or a source of amusement when they first emerged but gradually evolved into a product we now take for granted. Steve Sasson invented the digital camera in 1975. The early prototype weighed almost four kilograms and the image was first recorded onto a cassette tape, taking around 30 seconds to produce an image of 0.01 megapixels.
Sasson worked for Kodak, at the time the dominant player in photography, and few of his colleagues saw the potential of his invention. What Sasson foresaw, and almost all of his colleagues missed, was that this strange-looking device had the potential to evolve and to one day do a better job of capturing our memories than using film.
Disruption is a long-term process and the key consideration is whether an innovation meets a fundamental customer need. Automated delivery systems such as driverless cars and drones certainly meet a huge customer need: the desire for low-cost home delivery.
I bet a wave of improvements and refinements to automated delivery will beat the last mile challenge and that drones and driverless cars will one day be a big part of the solution to online retail’s profitability gap.