As an ever greater proportion of consumer spending shifts online, cracking the code to making delivery profitable becomes more crucial.

The need to balance high customer expectations with courier costs and maintaining a competitive advantage, while not sacrificing the bottom line, makes achieving this difficult.

Retailers need to get a handle on how to minimise the costs associated with delivery, especially given the current erosion on margins thanks to the weakness of sterling triggered by the Brexit vote.

So, how should you go about making the last mile profitable?

Customer behaviour

It all starts with customer behaviour, suggests Patrick Wall, boss of supply chain software specialist MetaPack.

“Some customers are inherently unprofitable,” he asserts, explaining that if customers are serial returners who do not have a high spend, retailers will find it impossible to make money serving them online.

“The important thing here is customer retention. What you don’t want is customers who are looking for the cheapest option and have no idea how your delivery proposition works.

“The smart people are the retailers investing in delivery and returns to make sure customers are satisfied. That means customers are loyal because they can rely on you, they know how everything works and fewer things going wrong.”

Ensuring that the delivery process runs smoothly is a key part of keeping costs down. As soon as a parcel is mislaid or a customer is unsatisfied with the speed of delivery or its trackability, costs shoot up.

“Lots of retailers have gone for speed because a few have done that and others have just copied them. But I am not sure that you have to follow the market”

Emile Naus, Bearing Point

According to Manhattan Associates managing director Craig Summers, customers not being home is the biggest cost to the last mile. “Even if a parcel is left with a neighbour, it adds a minute or two to the driver’s schedule,” he says.

Bearing Point director Emile Naus also highlights customer behaviour as a key part of keeping costs down.

“Retailers often over-deliver on customer expectation,” he says. “They need to think about what the customer really wants and needs and think about the end-to-end process. That will allow them to strip out costs.

“I think lots of retailers have gone for speed because a few have done that and others have just copied them. But I am not sure that you have to follow the market.

“There seems to be an emotional reticence to pay for delivery. We see this both in business-to-consumer deliveries but also business-to-business.

“It’s always been the case – if there is a quick, precise option which costs more, and a standard free option, 60-80% of people choose the free option.”

Retail Week Connect research found that the majority of shoppers would choose standard delivery, taking three days or more, over next-day delivery (69.3% vs 30.6%). And two thirds said that they valued free delivery most, while just 34.5% said quick delivery was the most important.

Can you make money from delivery?

The cost of delivery to retailers varies greatly, from £1 – the cost of sending a package via Royal Mail’s delivery network – to £4, the cost of sending a package in a tight time-frame via a more expensive but trackable courier.

Major retailers’ delivery pricing strategies vary. John Lewis’ standard delivery is free of charge for orders over £50 and £3.50 for orders below that value. It offers free click-and-collect for orders over £30 or charges £2 for orders below that value.

Next charges £3.99 for delivery, which comes the next day as standard, while New Look charges the same amount for standard delivery – although a premium next-day service is free of charge on items more than £100 – and Argos has a free delivery option for smaller items.

Meanwhile, Sports Direct charges £4.99 for standard delivery and the same amount for click-and-collect; and Wilko charges £4 for standard delivery, upping that to £8 for heavy items. Its click-and-collect proposition is free, however.

“Looking at the prices retailers charge for delivery and taking into account the fact that they offer free returns, it’s clear that most simply try to cover their costs”

Etailers Asos and Boohoo charge £3 and £3.99 for standard delivery on orders under £20 and £25 respectively. However, as users are unable to try on the clothing sold by those etailers, most orders exceed those low minimums.

Almost every retailer offers free returns despite the cost involved, because paying for returns dissuades customers from ordering in the first place. Research by Retail Week Connect found that for 77% of consumers, free returns was the most important element of a retailer’s returns service.

Looking at the prices retailers charge for delivery and taking into account the fact that they offer free returns, it’s clear that most simply try to cover their costs and avoid eroding margin as much as they can.

“I think on a general note it is quite challenging to make the last mile profitable,” says Quiz chief commercial officer Sheraz Ramzan.

Naus goes further. “Retailers are almost certainly not making back all their costs,” he says. “By the time you take into account packaging, picking and packing, they are still losing money on standard delivery.”

He believes that more premium delivery options which include next- and same-day options and features such as tracking could go some way to mitigating costs, although it doesn’t actively make retailers more money.

River Island charges £5.99 for next-day, nominated-day and precise deliveries, which offer hour-long time slots, while House of Fraser gives customers the choice between nominated-day and next-day delivery for £6 and next-evening and same-evening for £8.

Naus explains that even with delivery options such as these, he doubts retailers “are making any money” but that they are more likely to be covering their total cost.

The sharing economy

The last-mile process is still very fragmented, with retailers and couriers partnering with each other but rarely with their counterparts within the industry. Doddle boss Tim Robinson believes that this mindset needs to change.

“The way retailers approach last mile is a little way behind the rest of the supply chain,” he says. “That is because it is a relatively new challenge – home delivery is 10 years old.

“But when you look further back in the supply chain, about how we get product from the Far East to Europe, for example, there is a huge amount of sharing. You don’t see a container ship with just Tesco products on it.

“Ten years ago, shipping companies would not have shared. But they had to learn the hard way through the recession. They woke up and now they vessel-share on pretty much every route, despite being competitors.”

“Retailers approach delivery as a war rather than an opportunity for collaboration”

By contrast, there is very little sharing on the last mile. Parcel carriers have their own fleets and tech, and retailers approach delivery as a war rather than an opportunity for collaboration.

Each time a retailer innovates – by offering a speedier or more accurate delivery service, for instance – it raises the bar for the rest of the industry, but is also laden with further costs.

One example of a retailer looking to share the burden is John Lewis. The department store retailer is partnering with Clipper on Click Link, a joint venture which sees the retailers share a delivery fleet. Mint Velvet and Matchesfashion are two of the retailers currently on board.

Those smaller brands are able to access John Lewis’ economies of scale and logistics technology, while John Lewis is able to share the cost.

“The sector really needs to make progress on sharing,” Robinson states. “If it does then there is a very good chance that final mile can become more effective.”

Morrisons and Debenhams are also collaborating with other retailers and have partnered with Doddle on shared click-and-collect facilities. Consumers go to the click-and-collect or customer service desk at either retailer and are able to pick up parcels from a raft of other retailers. This both drives footfall and contributes capital.

Asda also collaborates with other retailers under its ToYou banner. In-store automatic lockers allow shoppers to quickly pick up and return packages from any retailer in an Asda shop.

Leveraging store estates

There are several ways to leverage an existing store estate to achieve greater supply chain efficiencies, but retailers need to consider potential headaches here.

One is by packing click-and-collect orders into boxes already headed for stores rather than shipping them individually, which is a method that Quiz employs.

“As an omnichannel brand we use our store estate for free click-and-collect,” says Ramzan. “That for us is quite efficient as we can put click-and-collect orders into boxes bound for store.”

Quiz

Quiz leverages its store estate to keep delivery costs low

While delivery of click-and-collect parcels to store is a good way to ensure that costs are kept down, shipping from store to home is more difficult.

“Shipping from store is more expensive than you might imagine,” Wall says. “It means that somebody in-store needs to pick it up, package it and hand it to someone to deliver.

“Picking and packing in-store is not efficient because it’s not customer service assistants’ primary role. It’s a role where you have to have a lot of volume to make it efficient.

Argos do it well but they are a special case. They hold all their stock in-store and have a very efficient picking process – their stores are essentially mini-warehouses. Most stores aren’t designed like that.”

Technological gains

Robinson argues that the bar for technological advances is currently being set by major carriers. “Hermes and DPD are investing significantly in tech to avoid misdeliveries and failures,” he says.

“DPD have their Predict and Precise technology, which is pretty smart and has set the bar. And Hermes is not far behind in terms of building similar apps and platforms that give them greater certainty around that delivery. But Royal Mail needs to catch up.”

He argues that while this technology costs money to implement, having a platform which allows customers to redirect a parcel that is already en route and which notifies customers of exact windows takes away service costs, which can balloon when a customer is dissatisfied or not at their address.

“The concept of a mobile warehouse is gaining momentum. This means a fulfiller can load non-committed inventory into delivery trucks, allowing drivers to upsell during the journey or installation process”

Phil Roe, DHL

Meanwhile, DHL supply chain boss Phil Roe says that as the public becomes more accepting of autonomous technologies, drones and driverless vehicles will help achieve last-mile efficiencies. 

He adds that big data will become increasingly influential in maximising the top line, which will drive economies of scale.

“Retailers can predict what else a customer might want, even if they didn’t order it,” he says. “And the concept of a mobile warehouse is gaining momentum. This means a fulfiller can load non-committed inventory into delivery trucks, allowing drivers to upsell during the journey or installation process.”

While retailers may not be making any money from the last mile, the majority are taking measures to preserve their margins.

However, last-mile dynamics evolve fast, spurred on by new technologies and the race for a competitive edge.

If retailers are able to take advantage of these new developments, they may be able to tip the balance in their favour.