THE PENNSYLVANIA STATE UNIVERSITY SCHREYER HONORS COLLEGE

DEPARTMENT OF SUPPLY CHAIN AND INFORMATION SYSTEMS

MEETING EVER-CHANGING CUSTOMER DEMAND: COULD “RIDE SHARING” DISRUPT TRADITIONAL SHIPMENT OF CONSUMER ITEMS ACROSS THE US

KARIM LAHLOU Fall 2019

A thesis submitted in partial fulfillment of the requirements for a baccalaureate degree in Supply Chain and Information Systems with honors in Supply Chain and Information Systems

Reviewed and approved* by the following:

Robert A. Novack Associate Professor of Supply Chain Management Thesis Supervisor

John Spychalski Professor Emeritus of Supply Chain Management Honors Adviser

* Signatures are on file in the Schreyer Honors College. i

ABSTRACT

The objective of this thesis is to examine traditional methods of transporting commonly consumed consumer packaged goods, and assess how new methods of transporting these goods could disrupt the market, and help meet increasingly difficult customer demand.

The final analysis of this research is reached through exploring how businesses have traditionally delivered to customers, how and why customer demands have continued to change, and what product segments have the most opportunity to be captured and dominated by new types of services. For example, GoPuff, founded in 2013, is an app-based delivery service in ninety-plus locations across the U.S. that delivers groceries to customers 24/7. This analysis proceeds to examine several product segments like “groceries”, and determines whether or not specialized delivery services could be scalable enough to significantly disrupt the traditional consumer packaged goods (CPG) delivery market, and provide better, faster service to customers.

This thesis serves as a reference for students and business professionals to understand how goods have been delivered to customers in the past, and how that might change going forward. Customer demand drives innovation, and customers wanting to receive orders the day they are placed is putting a lot of pressure on companies across the U.S.. It also creates opportunities for new companies and services to be created in order to meet these ever-changing demands.

This research shows that although the e-commerce market has already changed the way customers shop in a very short period of time, more change is coming. The transportation of ii goods to customers is a complex process that is constantly being impacted by customer demand and technology. Companies that are at the forefront of technology and have a great understanding of customer demand and expectations will ultimately be the most successful. The

CPG and grocery industries are being dramatically affected by same-day deliveries, so these companies will have to prepare for change in order to remain competitive. Same-day delivery to customers will eventually be available to almost all Americans, but how it will work, who will provide it, and when it will happen remain in question.

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TABLE OF CONTENTS

LIST OF FIGURES ...... iii

LIST OF TABLES ...... iv

ACKNOWLEDGEMENTS ...... v

Chapter 1: Introduction and Methods of Delivery ...... 1

Introduction...... 1 Crowd Sourced Delivery ...... 2 “The Convenience Store Online” ...... 3 Drones & Autonomous Ground Vehicles (AGVs) ...... 4

Chapter 2: Market Opportunity Matrix ...... 7

Matrix Overview ...... 7 Home Essentials ...... 12 Pet Food ...... 13 Medicine/Personal Care ...... 15 Food and Drink ...... 16

Chapter 3: Scalability ...... 19

Overview ...... 19 Webvan ...... 20 Kozmo.com ...... 21 GoPuff ...... 22 Mergers & Acquisitions ...... 23

Chapter 4: Future Considerations ...... 27

Product Offerings...... 27 Branding ...... 29 Logistics ...... 29 Safety & Regulations...... 31

Chapter 5: Conclusion...... 34

BIBLIOGRAPHY ...... 36

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LIST OF FIGURES

Figure 1: McKinsey Delivery Models ...... 4

Figure 2: Market Opportunity Matrix ...... 7

Figure 3: Most Popular Product Per State ...... 8

Figure 4: Most Popular Categories ...... 9

Figure 5: Annual Expenses for Dogs and Cats ...... 14

Figure 6: Grocery Shopping Online Study ...... 17

Figure 7: Top U.S. Retail Sales Sectors ...... 17

Figure 8: Crowdsourced Delivery Competitors ...... 19

Figure 9: CPG Industry Growth Leaders ...... 23

Figure 10: Top CPG E-Commerce Categories ...... 28

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ACKNOWLEDGEMENTS

I would like to begin by thanking my thesis advisor, Dr. Robert Novack. I met Dr.

Novack as a high school student on a campus tour, and he not only convinced me that Penn State and Supply Chain and Information Systems were the right choices for me, but continued to be very supportive throughout my college experience. I have had a terrific, unforgettable four years at Penn State, academically, professionally, and socially. For that, I would like to thank my professors during my time here, my managers from my various internships, my peers in the

Schreyer Honors College and Supply Chain and Information Systems programs, and the great friends that I have met here at Penn State.

Finally, I would like to thank my parents, brother, and extended family, who have not only supported me, but shown interest in my studies, and have always been there for me when I needed them to be. I am truly grateful for all of the help that I received over the years, and am proud to have completed this thesis in such great company. 1

Chapter 1: Introduction and Methods of Delivery

Introduction

When shopping with my parents as a child, the following scenario always baffled me, and is probably one of the reasons I decided to major in Supply Chain:

My family and I are at the store, I am looking for something specific, the new Madden game, an action figure, etc. After thoroughly searching for several minutes, I finally cave and decide to ask someone who works in the store, “do you have this thing I’m looking for?” and when they regretfully tell me that they do not, I follow up with “well do you have any in the back?”. Again, they would usually say no, and tell me that a truck would be making a delivery the next day. I always wondered, why can’t the truck get here faster, why do they have all of these things in the store except for the one that I want?

In recent years, the shopping experience has completely changed largely due to companies like Amazon significantly altering consumer expectations. Obviously, e-commerce has changed the game, and the “last mile” is a key piece of delivering to customers that has companies spending millions of dollars to perfect. While conducting a study on the last mile,

McKinsey was told by an SVP of a logistics company that “Same-day delivery is a game changer because it combines the immediate product availability of retail with the convenience of ordering from home” (Haussmann, 2014). It is clear that there is a demand that needs to be met, the question is, what is the best way to do it? 2 As we all know, food delivery is where this all started - pizzas have been delivered to homes across America for decades. Now we have UberEats, DoorDash, , and many other app-based food delivery services that use the crowdsourcing model. So, what’s next?

Finding the right set of product segments that these companies can capitalize on. In other words, where are the biggest opportunities to continue scaling new methods of last mile delivery so that it can eventually become useful across many industries, and serve millions of additional customers in the United States and abroad.

The remainder of this thesis is structured starting with an overview of the methods of delivery that could have the biggest impact on last mile delivery. A combination of these methods is likely to be the solution, which will be discussed in more depth below. Then, the market opportunity matrix will be presented and explained. This matrix will show product segments that companies should begin targeting immediately, and focus most of their efforts on in the coming years. Finally, the scalability of these services, and which methods are most effective for expanding same-day last mile delivery across the country will be discussed.

Crowd Sourced Delivery

According to , “Crowdsourced delivery, also known as crowdsourced shipping, is an emerging method of fulfillment that leverages networks of local, non-professional couriers to deliver packages to customers' doors. While most common in meal and grocery delivery, this model seems to be springing up everywhere as traditional retailers look for ways to cut costs and maximize supply chain efficiency” (Dolan, 2018). Crowdsourced delivery is basically Uber for shipping products, and it would be a great way for companies around the US 3 to minimize their shipping costs in the last mile, and quickly meet ever-rising customer demand.

Roadie, as stated on their website, was the first crowdsourced delivery service. Since

2015, they have delivered goods in over 11,000 cities, a larger same-day delivery footprint than

Amazon (The On-The-Way Delivery Service, 2019). Roadie has recently secured a $37 million investment from Home Depot, and has worked with UPS Strategic Enterprise fund. Similarly, across the industry, venture capital firms such as Sequoia and Kleiner Perkins have invested over

$9 billion into alternative delivery services in the past decade (Roadie Inc., 2019). Clearly, people are taking these new methods of delivery seriously, and they provide real value for getting goods to customers.

“The Convenience Store Online”

Convenience stores make up over eleven percent of the total U.S. retail and food sales, and had an overall sales figure of over $600 billion in 2017. There are over 154,000 convenience stores in the U.S., and more than half the U.S. population goes to a convenience store every day

(Ladd, 2018). Knowing this, it is shocking that a service like GoPuff has only existed for a few years.

According to GoPuff’s website, they are the first digital convenience retailer. They are open 24/7 in mature markets, and offer over 2,500 products in forty locations across the United

State and are quickly expanding (Convenience Store Delivery App, 2019). An article by Forbes states that GoPuff’s average delivery time is fifteen to twenty-five minutes. Although the company is quickly growing, forty locations is very small in the grand scheme of things, and 4 having this service (or something similar) across America would benefit millions of customers for years to come. Large retailers such as Wal-Mart or Amazon also provide similar same day delivery services.

Drones & Autonomous Ground Vehicles (AGVs)

Behind every great idea is usually some sort of technology. Companies are constantly looking at new technologies in order to stay ahead of the competition and make things more convenient for their customers. In a McKinsey study on the future of the last mile, they predict that autonomous vehicles will eventually deliver eighty percent of parcels. AGVs and drones seem to be the most reliable and tested methods of autonomous delivery. Below is Figure 1, depicting McKinsey’s predicted delivery models and how/where they will be used.

Figure 1: McKinsey Delivery Models

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The biggest advantage for drones is their versatility and maneuverability; they can get to places most others cannot, relatively quickly. That is why the figure above has drones providing delivery services in rural areas. Considering that seventy-five percent of Americans live in cities of 50,000 or less people, and do not have access to services that GoPuff currently provides, drones could significantly help expand same day delivery across the country. A big disadvantage is that there would be a weight restriction, even a very large drone would only be able to carry a package up to about thirty pounds, but a standard drone’s weight restriction would be about eleven pounds (Joerss, 2016). Considering that people are not accustomed to seeing drones flying around with packages, the smaller the better, at least for now. In addition to acceptance from the general public, serious government regulation will need to go through in order for this type of service to be feasible.

McKinsey’s optimism for AGVs is clearly trustworthy, as the service is being tested very successfully by Kroger in Scottsdale, Arizona. Late in 2018, Kroger partnered with robotics and artificial intelligence company Nuro, and announced the launch of the R1, an unmanned delivery service vehicle. According to Nuro’s president, “Nuro envisions a world without errands, where everything is on-demand and can be delivered affordably. Operating a delivery service using our custom unmanned vehicles is an important first step toward that goal” (Nuro and Kroger, 2018).

Kroger has completed over 1,000 successful deliveries in their test market of Scottsdale, and currently, twenty-nine states allow autonomous vehicles on public roads, meaning there is a huge potential for future expansion (Masters, 2019).

Crowdsourced delivery, online convenience/retail, and new technologies are not 6 standalone services. For example, GoPuff, Wal-Mart, or Roadie could invest in technology and use drones to deliver products. However, understanding each one of these methods of delivery on its own is important for understanding the big picture of the last mile, and how it can be impacted most significantly going forward.

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Chapter 2: Market Opportunity Matrix

Matrix Overview

Below, in Figure 2, is a matrix showing which product segments are most opportune for companies providing same-day delivery services, and how easily companies can begin providing services within that segment. The segments are, “Food and Drink, Medicine and Personal Care,

Pet Goods, and Home Essentials.

Figure 2: Market Opportunity Matrix Before elaborating on each product segment individually, it is important to understand what the matrix means, and why these segments were selected in the first place. First,

“Opportunity for growth” basically means how much/how quickly a company can generate sales in this space. For example, since GoPuff started five years ago, they have rapidly expanded into 8 over one hundred markets, primarily in the Food and Drink segment. “Ease of Implementation” refers to the difficulty, or lack thereof, of the logistics involved with delivering the products in that segment. Many products require certifications or are under heavy regulation in terms of what conditions they can be shipped under. Most of the products in the segment above do not have very complex delivery requirements, which is why none of them fall very low on the “Ease of

Implementation” axis. In terms of justifying each product segment, Earny, an app that helps users save money by comparing prices from various retailers, conducted a study on 100 million of its users to determine the most purchased item in every U.S. state. Twenty-four of the fifty products fit into one of the four product segments discussed above; they were: Snow broom and ice scraper, puppy pads, gaming chair rocker, Indian healing clay, storm proof auto cover, diet coke, chocolate bars, oil diffuser, electric toothbrush, Duraflame fire log, toilet paper, aromatherapy oils, pressure cooker, flu symptom pellets, essential water, cat food, glue, carpet cleaner, exercise mats, hair extensions, air hockey, Stevia, smart light bulbs, garden tool set, and turmeric pain relief (Yang, 2018). Several of the other products purchased were electronics or phone accessories.

Figure 3: Most Popular Product Per State 9 Although electronics is a very popular consumer product segment, the need/desire to have these products delivered same day is not as strong as the categories discussed in this thesis.

Above, in Figure 3, is a map aggregating the results of Earny’s study.

To further support these product segments, Investopedia lists “food, clothing, electronics, jewelry, personal hygiene and household cleaning products, furniture, books and magazines, and tools and other outdoor equipment” as the categories making up consumer goods. Additionally, the article states that consumer goods make up almost one third of consumer spending annually, the largest category being food at about twenty-five percent (Davis, 2019). Another justification for the product segments is Figure 4 below from Statista, detailing the most popular Amazon product categories in 2019.

Figure 4: Most Popular Amazon Categories

10 Again, “Electronics” is a popular category, leading the way at forty-four percent.

“Personal Care, Pet Supplies, and Food” (highlighted in red above) are all also popular, but not nearly as much as the top categories (Clement, 2019). This further supports the argument that there is more opportunity in the other categories. Clearly, people are willing to purchase their electronics from Amazon and wait a few days for them. However, if someone is at work and needs groceries for dinner that can be ordered during their lunch break and delivered to their door by the time they get home that evening, same day is the way to go. Similarly, pet food, batteries, shampoo, or any of the products that fit into the four main categories of this thesis all have tremendous potential for companies to provide same day service and make life easier for their customers.

Finally, the categories available on GoPuff and Roadie were very influential in determining the key product segments. These two companies are making waves and growing exponentially in the delivery space, they clearly have a lot of research behind their efforts that allow them to understand what customers want and provide the best value possible.

GoPuff’s main business comes from “Food and Drink”. They have it broken up into several categories such as “Drinks, Munchies (chips, popcorn, candy, etc.), Pints on Pints (ice cream), Frozen (premade meals like DiGiorno or chicken tenders) and Breakfast, and Eats

(Lunchables, yogurt, etc.). In addition to food, GoPuff’s other categories are: Home Essentials

(solo cups, paper towels, batteries, soap, dish detergent, etc.), Personal Care (shampoo, deodorant, toothpaste, etc.), Over the Counter, Pet, and Smoke Shop (Convenience Store

Delivery App, 2019).

Roadie starts with three macro categories which are: enterprise, small business, and personal. Enterprise is basically a “buy online, deliver from store” model. The categories listed 11 under enterprise are: Auto Parts and Tires, Grocery, Home Improvement, Airline Luggage, and

Omni Channel Retail. Roadie is also partnered with the Home Depot for express delivery in this category. Although these categories are a bit more unique, there is clearly some overlap with

GoPuff, Amazon, and the most popular items purchased in each state. Roadie’s “Personal” category is meant for sending products to someone. The website describes this category as “from cupcakes to couches” state that basically any product that is legal can be shipped, even oversized items. This category could be leveraged in an entirely different space: returns. Although it is great to get things delivered same day or next day, not being satisfied with the product and not having an easy way to return it can be even worse than not having the option to receive it quickly. Finally, Roadie has the “Small Business” category. The subcategories for Small

Business are: Artisan Foods, Automotive, E-Commerce, Fine Art, Heavy Equipment, Home

Décor, and Pharmacy (The On-The-Way Delivery Service, 2019). This category also has potential to have tremendous impact outside of the consumer realm that this thesis is focused on.

Businesses, large and small, are always trying to find a way to cut costs and be more efficient.

Transportation is a commonly overlooked aspect of the supply chain. People just expect things to get delivered, but it just does not work that way. Quick, cheap, and convenient delivery services like Roadie are not widely available today, but could help many businesses significantly lower their costs and get their products faster. 12

Home Essentials

Of the four market segments within the matrix, “Home Goods” has the highest ease of implementation, and second highest opportunity for growth. To further break down this category, the products listed on GoPuff will serve as examples, which are as follows: Paper and Plastic,

Cleaning, Office Supplies, Soap, Laundry, Air Fresheners, Party, and Electronics (Convenience

Store Delivery App, 2019). Most of these categories are self-explanatory, but Party and

Electronics may not be as clear. Party includes things like solo cups, ping pong balls, lighters, and plastic plates/silverware. Although the previous section states that electronics is not part of the matrix, GoPuff’s products within Electronics definitely fit within the home essentials category. Electronics that would not fit within the category are large/expensive items like TVs, video games, computers, etc. The products listed under GoPuff’s Electronics subcategory include

USB cables, wireless earbuds, batteries, small/portable Bluetooth speakers, flash drives, etc.

With the exception of a drone priced at $49.99, nothing within Electronics is too large or expensive to make this category inconvenient for same day delivery. This is the case for all of the subcategories within Home Essentials on GoPuff, and the reason that this category is a great candidate for growth within the same-day delivery space. These are products that people could easily get at Wal-Mart or Target during their weekly shopping trip, but if they could place an order from work and have their products delivered that day, it would save them time and make their lives a lot easier. For example, if someone’s child plays Xbox and their controller runs out of batteries, which happens often, and there aren’t any left around the house, but no stores are open, it would be extremely helpful to have a service that can deliver those to the home within 13 hours, or even under an hour. The implementation of a Home Essentials category would be very easy for a company to execute, since virtually none of the products require serious temperature control or are under any form of strict regulations in terms of delivery. Additionally, with an established company like GoPuff already providing the service, there exists a solid foundation to base and build the business model.

Pet Food

Pet Goods has the highest opportunity for growth, and second highest ease of implementation of the product segments in the matrix. According to Investopedia, the average

American household with an income of $63,000 spends 1.4 percent of their discretionary income on “hobbies, toys, pets, and playground equipment” which is one of the top-ten discretionary spending categories (Davis, 2019). A majority of the money spent within this category goes to pet food and veterinary care. Although 1.4 percent may not seem high, consumer spending makes up about seventy percent of the U.S. economy, and, considering that the U.S. GDP is almost $20 trillion, billions of dollars are being spent on pets each year. According to the

American Pet Products Association, the exact amount spent on pets in 2018 was $72.56 billion.

Dogs and cats are the overwhelming front runners, with 63.4 million and 42.7 million households owning a dog or cat respectively. The next closet pet is a freshwater fish with 11.5 million households owning a fish (Pet Industry Market Size & Ownership Statistics, 2019).

Figure 5 below details some of the basic annual expenses for dog and cat owners based on the

2019 APPA National Pet Owners Survey. 14

Figure 5: Annual Expenses for Dogs and Cats

GoPuff offers many options for dogs and cats, and a few limited options for hamsters, gerbils, guinea pigs, and fish. The reason this category is not as easy to implement as Home

Essentials is that because many of the products are food, they might require more attention/care or temperature control during shipping. The reason Pet Goods has the highest opportunity for growth is that in addition to the billions of dollars spent on pets in the United States, millions of

Americans do truly see their pets as part of the family. Therefore, shopping for pets is likely done at the same time as shopping for the rest of the family. Food and Drink delivery is obviously very popular and has existed for years, but the delivery of pet food has not. An article by Forbes on pet retail describes that about thirty-five percent of pet owners are millennials, and it is well known that millennials do a lot of . The article later states that over half of millennials buy gifts for their pets at least once a month (Danziger, 2018). Knowing that millennials income and spending is increasing and with overall spending on pets is in the billions of dollars, Americans’ passion for their pets, and that not many companies currently offer quick, 15 convenient, and affordable delivery services for Pet Goods, it is clear that this product segment has a lot of potential for growth.

Medicine/Personal Care

The Medicine and Personal Care category has the third highest opportunity for growth, and is slightly harder to implement than Food and Drink, making it last in ease of implementation. Although it is last for ease of implementation, this category is still very promising, and the implementation would not necessarily by difficult, just not as simple as the other categories. GoPuff has this category split into two: Over the Counter, and Personal Care.

Over the Counter is broken down into five subcategories which are: Puff MD (Benadryl,

Tylenol, eye drops, TUMS, Sudafed, etc.), Feminine Care, Sexual Health, Pain & First Aid, and

Wellness (Vitamins, recovery drinks, etc.). Personal Care is also broken down into five subcategories which are: Hair and Shower, Skin & Beauty, Sex Toys, Oral Care, and Baby. For the most part, many of these products, like shampoo, toothpaste, Tylenol, and many more, are also bought during people’s normal shopping routines. What makes this a bit more complicated is the medicine side of things. Clearly, it is possible to ship over the counter medicine and

GoPuff is doing it. Where the issue comes in is with prescriptions. If companies are truly trying to be the convenience store online, their customers should have the option to have a prescription delivered, just like if they were going into CVS or Walgreens. There are many DEA and FDA regulations involved with shipping pharmaceuticals, as well as certifications such as the Goods

Distribution Practices, that a new company might not be able to meet (UPS Staff Writer, 2018).

If a new company, or a company that does not have experience shipping pharmaceuticals were to 16 enter this space, it would be essential for them to do their homework and be prepared to meet all of the requirements involved with these types of shipments. Again, this is the main complication that makes Medicine and Personal Care a more difficult category to implement. However, with the correct preparation and effort, it could definitely be done. Additionally, this category could be broken out into two separate areas: Over the counter and Personal Care, and Pharmaceuticals.

This would make is much easy for a company to begin delivering the types of items already available on GoPuff, and have a separate operation in order to provide customers with the option to have their prescriptions delivered as well.

Food and Drink

Food and Drink is last in terms of opportunity for growth, and second to last in terms of ease of implementation. Overall, this category is not difficult to execute deliveries. However, it would be difficult to make an impactful entry with all of the competition already present in the market. Other than mail, food is probably the oldest and most common item delivered to people’s doors. From the days of the milkman, to classic , to present day, with companies like UberEats, GrubHub, and GoPuff taking the world by storm, it is quite obvious that food and drink delivery is always in high demand. As previously stated, GoPuff has several categories that make up food and drink, ranging from ice cream (called “Pints on Pints”) to snacks like chips or candy, to breakfast food. The key here is to avoid prepared food, and focus on what the rest of the categories in the matrix do, which is provide a convenient service to make routine shopping easier for customers. From Figure 4, Statista’s survey shows that fifteen percent of respondents to the question “what have you purchased on Amazon in the past year? Select all 17 that apply” selected grocery and gourmet food. Figure 6 below shows results from an additional

Statista study on grocery shopping.

Figure 6: Grocery Shopping Online Study With an overall market share of five percent, three percent of people already online shopping once a week, and fifty-five percent of North Americans likely to try online grocery shopping, this category is very promising.

Figure 7: Top U.S. Retail Sales Sectors 18

Figure 7, above, shows that online shopping has entered the top-five retail sales sectors in the United States for the first time (Rooney, 2019). Clearly, online sales are still growing, and becoming more common each year. With the growth of online shopping comes the need for more online delivery options. The cost and logistics of last mile delivery is a challenge that many companies are constantly struggling with, but it also leaves the opportunity open for new types of services to be created. Companies that focus their efforts on Food and Drink, Medicine and

Personal Care, Pet Goods, and Home Essentials can begin to create a massive change in how customers shop for their weekly/monthly needs, and eventually provide online access to convenience and grocery store goods for all Americans. There are many ways to deliver same day, and many different types of products that can be shipped, but what is the best business strategy to scale these services nationwide? This will be the topic of discussion in the next chapter.

19 Chapter 3: Scalability

Overview

As has been established, delivering quickly and efficiently to needy customers is very difficult and expensive. In order to expand same day services across the U.S., many logistical factors must be considered such as: which locations to begin delivering to first, what products should be offered, which method of delivery should be used, etc. In addition to the logistics, the overall business strategy is critical for expanding delivery services across the country. This includes factors such as: growth through investments, mergers and acquisitions, and assessing the competition’s presence in the industry. Figure 8 below features details from a Business

Insider Intelligence report on several competitors in the crowdsourced delivery space (Dolan,

2018).

Figure 8: Crowdsourced Delivery Competitors Not featured are GoPuff or Roadie, but those two, in addition to the companies listed in 20 the figure above are all companies that have been started later than 2010, have a customer service focus, and have rapidly expanded into several U.S. cities not long after launching their business. There are also companies that have attempted to enter this space, and failed, such as

Webvan and Kozmo.com…

Webvan

According to a case study conducted by Ground Floor Partners (GFP), a small business consulting firm, Webvan’s attempt to create a same-day delivery service is “generally considered to be one of the biggest failures ever”. After securing many investors such as Yahoo and CBS, raising a total of $1.2 billion of capital, brothers Tom and Louis Border started the company in

1999, and shut down in June 2001 (Clarke, 2018). There were many issues that the company was facing that led to their demise. Webvan’s average order size never surpassed $81, and GFP states that they would have needed an average order size of at least $103 to survive at the time. Their daily expenses were about $1.8 million, while daily sales only averaged $489,000. Nobody on the executive team had retail grocery experience, so they did not know that grocery store profit margins are extremely low (around one to two percent), and did not pay attention to seemingly obvious things such as: many people like to hand pick fruits/vegetables, many grocery purchases are made on impulse, many shoppers buy in bulk or use coupons to save money, and many people run other errands (such as picking up prescriptions) while grocery shopping (Clarke,

2018). Additionally, Webvan required orders to be placed twenty-four hours in advance, and customers had to select a thirty-minute window for drop-off, taking away from the convenience factor of the service, which is what is supposed to make it appealing in the first place. Finally, 21 and arguably the worst mistake, Webvan spend $1 billion to build twenty-six distribution centers across the country. In addition to all of the logistical issues they faced with running the DCs, not a single one operated over thirty-five percent capacity (Clarke, 2018). Webvan clearly had a great idea, but were inexperienced and irresponsible with their money. The amount of companies providing similar services today shows that Webvan was ahead of its time, and provides key insights for new companies to consider when entering this space.

Kozmo.com

The downfall of Kozmo.com was very similar to that of Webvan. The Wall Street Journal

Writes “The Web courier went belly up in 2001, less than four years after it introduced its service promising to deliver to customers' doorsteps just about anything they wanted in about an hour. Kozmo raised more than $250 million in financing from venture-capital firms, and from heavyweights including Starbucks and Amazon.com, en route to a planned initial public offering before falling under the weight of an overly ambitious expansion” (Bensinger, 2012). The article goes on to describe mistakes that the company made, such as allowing customers to order single items such as a pack of gum or a DVD, and not charging delivery fees initially. Once they realized that delivery fees were key, they were charging $2 per order and implemented a $5 delivery minimum. However, their revenue for 1999 was $3.5 million, with a total loss of $29 million. In addition to incorrectly handling the logistics, Kozmo spent money unwisely in other areas, such as excessive expenses for their delivery employees. For example, “the $9-per-hour paycheck, plus $1 for each delivery, as well as health insurance, 401(k)s and pricey Columbia brand jackets, gloves and pants to help withstand the winters” (Bensinger, 2012). The 22 successful delivery companies of today, like GoPuff, have clearly not made the same mistakes as

Webvan or Kozmo (expanding too quickly, not charging delivery fees, not considering customer wants/needs, investing too heavily in the wrong areas, etc.). However, to expand their current services and available products from select locations to the entire country, they will need to proceed with caution, and likely leverage pre-existing infrastructure or technology in order to expand successfully.

GoPuff

GoPuff is growing quickly. So quickly, in fact, that according to the Philadelphia

Business Journal, “the company has a $4 million investment plan comprising a new headquarters, ten warehouses across Pennsylvania and over 500 new jobs” (Hilario, 2018). This is a great example of organic business growth. The company, established in 2013, has strongly established itself in most parts of the opportunity matrix discussed in this thesis. They started with only fifty products, and now have over 2000 brands available. They hit about 276,00 downloads on iTunes and Google play in May 2019, and are the twenty-fifth most popular iPhone app in food and drink (Kaiserman, 2019). They are slowly but surely expanding their offerings, by adding services such as GoBooze and GoBeer. Due to their rapid and successful growth, they have been able to do things such as the current expansion and new headquarters project, in part thanks to “a funding proposal from the Department of Community and Economic

Development for a $400,000 Pennsylvania First grant with phased distribution contingent on job creation, according to officials” (Hilario, 2018). The article adds that Amazon , their

Whole Foods grocery delivery service, has also entered the Philadelphia market, in addition to 23 several other similar companies. This healthy competition is great for a relatively new and rapidly expanding service, as it will force competitors to provide fair prices, and excellent service, not just to make a profit, but to remain competitive within the market over the long term.

Mergers & Acquisitions

Mergers and acquisitions are constant, and great way for companies to boost growth, acquire new capabilities, and enter new markets. Specifically, within the CPG industry, M&A activity is high, and changing the way companies think. There were sixty M&A deals done among the top-fifty CPG companies in 2017, putting M&A activity at a fifteen-year high for the industry (Cheng, 2018). According to a study conducted by the Boston Consulting Group and

IRI, “emerging channels such as discounters and e-commerce continued to grow, changing dynamics within the CPG retail environment. At the same time, growth materially shifted to smaller companies (under $1 billion) and private-label brands, which together captured approximately $20 billion in sales from midsize and large players” (Edelstein, 2019).

Figure 9: CPG Industry Growth Leaders 24 Figure 9, above, shows a list of top CPG companies growth-wise, and how their acquisitions over the past five years have greatly impacted that growth.

BCG’s report elaborates on General Mills, a great example of the impact an acquisition can have: “for example, when General Mills bought organic pasta and snack brand Annie’s, it not only boosted growth through Annie's existing distribution and sales strategy—sales rose from $212 million in 2014, the year the deal closed, to $363 million in 2017—but also acquired advanced digital capabilities, an enhanced test-and-learn mentality, and more robust sourcing and procurement skills” (Edelstein, 2019). In an industry like CPG with so much competition, acquisitions can make all the difference in who is on top. Given that all of the product segments within the market opportunity matrix fall within CPG, companies looking to expand same day delivery services should seriously consider M&A as a growth strategy. Or, at the very least, some sort of partnership. Amazon has had this realization, leading them to purchase Whole

Foods in 2017. Although Amazon does not (yet) have a huge share of the grocery market, this

$13.7 billion acquisition has made waves. According to Forbes, “Walmart is offering unlimited grocery delivery for $98 a year. Kroger is testing a service that delivers meals and groceries to customers in as little as thirty minutes. Deliveries cost $5.95 each, with the first order free.

Customers are required to download the Kroger Rush app to order products. And the industry continues to struggle to make Last Mile deliveries profitable” (Banker, 2019). Additionally, prior to being acquired, Whole Foods had a relatively successful partnership with home-delivery company, . By the end of 2019, this partnership will be completely severed. This shows the power of Amazon, but also the impact of home delivery services. Since gaining major exposure from partnering with Whole Foods, Instacart has been able to expand and provide its services in partnership with Safeway, Publix, Kroger, Aldi’s, and Costco, all serious contenders 25 in the grocery space (Banker, 2019). Although not all mergers or partnerships would have to be a blockbuster purchase of the magnitude of Amazon and Whole Foods, there are many companies that could benefit from merging or acquiring with another. In 2018, Forbes wrote an article suggesting that Rite-Aid acquire GoPuff, stating, “acquiring a small company like GoPuff that has disruptive potential provides Rite Aid with a low-risk, low-cost acquisition capable of generating significant ROI (Ladd, 2018). GoPuff has certainly grown since the article was written, but the general point of a larger retailer acquiring a smaller, yet high growth potential company remains. A full-scale merger is not required either. As previously mentioned, Roadie has several partnerships, including Walmart, Delta Airlines, and The Home Depot. According to their website, “Roadie has used these partnerships to strengthen its foothold in 224 metro areas across the country. The company’s same-day delivery footprint now reaches eighty-nine percent of U.S. households… Since its 2015 launch, Roadie has grown to over 120,000 drivers and has delivered to more than 11,000 cities and towns nationwide — a larger footprint than Amazon

Prime Now” (Roadie Secures $37 Million, 2019). If Roadie can grow this quickly from solely outside investments and a few partnerships, the impact that a full merger could have seems huge.

In an AT Kearney report on M&A activity, they state, “the interfaces between digital, e- commerce, and supply chain are strong; as corporations have come to realize, the digital revolution is affecting both the top and bottom-line sides of their business, with strong implications for customer experience along the way… beyond competencies, the ability to create or curate experiences has become a key differentiator in CPG and retail, and companies are using

M&As to take control of a greater part of the consumer journey and to widen their interface with customers” (El-Rayes, 2019). Companies leveraging each other’s capabilities, technologies, ideas, and geographical footprints can take these same-day home delivery services to the next 26 level. Ideally, this next level is that all Americans have access to at least one of these convenient services at an affordable cost.

27 Chapter 4: Future Considerations

Last year, online sales grew by nearly thirty-five percent in the CPG industry (Swan,

2019). Groceries has had a huge impact on this growth, and according to the Food Marketing

Institute, “nearly half of US consumers are purchasing groceries online, marking an enormous increase from just a few years ago, and online grocery sales will make up twenty percent of all grocery sales, becoming a $100b market by 2022” (Nielsen, 2019). This growth, combined with the rising purchasing power of millennials, and the chase to perfect last-mile deliveries provides massive opportunities for companies in the transportation space to grow their business in the coming years. As noted, there are several technologies and business strategies, along with specific product segments that companies should focus their immediate attention on in order to successfully execute same-day deliveries on a larger scale. However, there are many other considerations that need to be made for the long-term when going into the same-day delivery space.

Product Offerings

First of all, there are many other types of products besides those detailed in the market opportunity matrix above. Food and drink, medicine and personal care, pet goods, and home essentials are filled with thousands of products that customers buy during their regular grocery trips. However, there are thousands of other products that customers could benefit from having delivered to them same-day. A perfect example of this is GoPuff, starting with fifty products to now over 2,000 brands, expanding into areas like beer and liquor. There are many companies, like , already embracing the “any product anywhere” mentality. According to Fortune, 28 Postmates “has added 1,000 more cities to its service, bringing the total number of cities in its universe to 3,500 across fifty states. With the expansion, Postmates says it’s available to more than seventy percent of U.S. households up from twenty-six percent in mid 2018” (Abril, 2019).

Companies must consider the products available, and which will be most worthy of investing in having available from a logistics and profitability perspective. Looking back at Figure 4, which showed what was most commonly purchased on Amazon, larger/more expensive electronics, baby products, clothing, cell phone accessories, automobile parts and accessories, and sports/outdoor products are all categories with potential. Figure 9 below shows the top-five categories for CPG E-commerce based on a study done by Information Resources Inc.

Figure 10: Top CPG E-Commerce Categories

29 Branding

In addition to what is offered, the branding of those products available is another factor that is causing waves within the CPG industry. In a study done by McKinsey, they found that

“millennials are almost four times more likely than baby boomers to avoid buying products from

‘the big food companies”. Further, “more than 4,000 ‘small brands’ have received $9.8 billion of venture funding over the past ten years—$7.2 billion of it in the past four years alone” (Kelly,

2018). This has translated into a two percent loss in market share by the largest food and beverage companies in the brick and mortar channel since 2013, equal to about $2 billion in sales

(eMarketer, 2018). These brands are causing serious issues for the big players in the CPG industry such as Proctor & Gamble, but also need to be seriously considered by companies like

GoPuff or Postmates, as ultimately they need to have products available that the end consumers want.

Logistics

Once companies know what they want to offer, they must have a strong logistical operation in place to be able to successfully make same day deliveries. This not only includes distribution centers and vehicle fleets, but also hours of operation, how orders are placed, and real time view of inventories. Hours of operation has always been a challenge for delivery companies. People get paranoid if they are not home to receive their package, as theft can be a serious issue, but many deliveries are made during the day while people are at work. Besides theft, if groceries are being delivered, the customer has to be home to accept the delivery since they would need to properly refrigerate and store their food, or any product sensitive to 30 temperature for that matter. GoPuff delivers 24/7 in certain areas, and at least until 4 a.m. in others, but not many other companies do. Automation will eventually make flexibility of delivery times much easier, but for now, what is the right answer? DHL has been testing night deliveries in certain German cities, offering services from 6-8 p.m. and 8-10 p.m. (Haussmann,

2014). The downside for this option is that customers have to place the order before a certain time, and guarantee that they will be home during the delivery window. This takes away from the convenience factor of on-demand delivery, as customers would more likely appreciate the ability to deliver at any time, and have their products brought to them within a short period of placing the order.

In terms of how the orders are placed, the platform needs to be highly sophisticated, and likely connected to the inventory management system at the store or distribution center in order to function properly. This ties in with real time view of inventories. First, customers will likely use smartphone apps to place orders. The app must be easy to navigate, visually appealing, and provide the customer with detailed options in terms of what is available for delivery. This can be complicated, especially for groceries, as in-store inventory management in many stores is not the most accurate. According to James Tenser, principal with retail consulting firm VSN Strategies,

“’When a shopper orders online or on mobile, they see a catalog of items theoretically carried in the store, but they don’t see any visibility to the actual goods that are available in the moment,’ which often results in order complications such as item substitutions, delayed delivery or cancelled orders—or, ultimately, an unsatisfactory customer shopping experience” (Taylor,

2018.) This, in addition to the fact that “the out-of-stock rate for years has hovered at an average of eight percent, according a report by Food Marketing Institute (FMI) and Grocery 31 Manufacturers Association (GMA)” means that companies providing these services will have to pay particular attention to their inventory management and how it affects the customer.

Safety & Regulations

Another consideration is the safety and regulations associated with the logistics of same- day delivery services. David Fiorenza, economics instructor at Villanova University's School of

Business stated that “Growth among these types of services will "force" cities to enforce more regulations to ensure safety… if on-demand delivery services do not evolve into a more bicycle- type of service, Fiorenza said, cities will see more issues with traffic, double parking, illegal parking in fire lanes and handicapped spaces, straining police departments to look for those infractions (Hilario, 2018). Bicycles could help with same day delivery services in densely populated, high-traffic areas such as New York City, but the future of same day is bound to come with an increase in technology such as autonomous vehicles or drones.

As previously stated, Kroger’s experimentation with an AGV for grocery deliver has worked well on a small scale, and twenty-nine states currently allow autonomous vehicles on public roads. However, scaling this type of service across the entire U.S. will prove to be much more difficult. First, different types of vehicles likely have very different requirements and regulations. For example, a self-driving Tesla which requires the presence of a human driver vs. an AGV made to deliver small packages. McKinsey’s report on last-mile delivery states that “in order for AGVs to reach economic viability, human control has to be limited to an absolute minimum. However, even in field trials, AGVs are currently still required to operate under human supervision. A number of pilots have been launched in recent years or are currently being 32 prepared in major automotive and parcel delivery markets, but so far only US authorities have clearly stated their desire to permit broad public use of AGVs” (Joerss, 2016). The positive sign is that the U.S. is generally more open to this type of technology. This is partly thanks to the large players in the automotive industry, who have recognized the potential, and are pushing hard for the future of autonomous vehicles. The area of concern is that delivery companies that want to expand their same-day services need to invest in their own technologies, or partner with a company that already has the capabilities (like Nuro) and is ahead of the curve in terms of keeping up with regulations. Public sentiment also plays a major factor in how these technologies develop. The general public must be comfortable and willing to use these types of services if they are going to be successful, which per McKinsey’s report, is already starting to happen. “Well above forty percent of consumers claim that they would definitely or likely use

AGVs with lockers. This is a close second to crowdsourcing, which almost fifty percent of respondents indicated that they would or would likely use, and ahead of parcel boxes1. Among younger customers (aged 18 to 34), AGVs are even more popular, with well above fifty percent stating that they would definitely or likely use this delivery option – the highest score in this age cohort. Drones are admittedly a different matter altogether, as they fly over people’s heads and will thus be more disconcerting to the public and constitute a bigger change from the norm than

AGVs. However, sixty percent of customers indicate that they are either indifferent to (twenty- five percent) or even prefer drones (thirty-five percent)” (Joerss, 2016). Again, the millennial effect is seen, as younger generations are more open to different types of technologies.

Additionally, the speed at which technology is created and improved gets faster every year, and the public has likely grown even more used to autonomous vehicles and drones over the past three years, as the report is from 2016. 33 Because of a commercial ban placed by the Federal Aviation Administration (FAA), many companies had to test drones outside of the U.S. until 2016. However, “the FAA issued regulations in 2016 that limit but allow the use of commercial drones for deliveries. Current regulations require a licensed pilot keep the drone within sight, and the flight cannot be conducted from a moving vehicle. In addition, the weight of the drone and package must be under 55 pounds” (Drone Delivery, 2019). Further, “Despite FAA regulations, there are several companies testing drone delivery systems in the United States. Amazon is testing drones under its Prime Air brand and has stated that eighty-six percent of their packages weigh less than five pounds. UPS is testing drones that could launch from a traditional delivery vehicle, allowing drivers to deliver more packages and save on fuel costs. The UPS plan would be particularly effective in rural locations, where there is unlikely to be a distribution warehouse from which to launch drones” (Drone Delivery, 2019). This shows the impact that drones could have in the coming years. Even with strict regulations and limited testing, companies are finding ways to maximize the effectiveness of drone delivery. Not only can they provide efficient and convenient services to customers, but also, after initial investment, drones could significantly reduce the cost of deliveries, especially for smaller orders. “Delivery drones could greatly reduce costs and time for last-mile deliveries. While typical UPS and FedEx ground delivery may cost upwards of $6 for delivery from a local distribution warehouse, drone delivery could be as cheap as five cents per mile with delivery in about thirty minutes” (Drone Delivery, 2019). This could allow companies to charge less for delivery fees, but still greatly increase their profit margins. With increased investment, public acceptance, and relaxed regulations, drones will likely play a major role in the future of the same day delivery space. 34

Chapter 5: Conclusion

In conclusion, customer expectations are rapidly changing. With these changing expectations, come changing requirements for retailers in terms of how and when customers can receive their products. E-commerce has had a paradigm-shift impact on the CPG industry, most notably changing with the growth and popularity of Amazon. This has trickled into many different product segments, and forced companies to rethink how they deliver products ordered online to customers.

The promises of express, two-day, and finally same-day delivery options have required old companies to change their ways, and inspired entrepreneurs to create new companies all together. Amazon has purchased Whole Foods and is starting to get serious about grocery delivery, GoPuff has seen tremendous growth in just a few short years, and delivers thousands of different CPG products to customers at almost any time of day, and Roadie is leveraging available space in cars all over the highway to deliver goods to people. All of these companies, and many others, are eventually going to have to leverage new technologies to expand their services nationwide at a reasonable cost. Whether it is drones, AGVs, or something else not yet invented, automation will have to come into play in order to increase the capabilities of delivery companies.

Although many companies may want to offer “anything, anywhere, at any time”, entering the market focused on specific products is more strategic and leads to eventual success. For example, Amazon started with books. Delivering same-day requires companies to know what 35 customers want. The areas that are likely most profitable, and easiest to execute same-day deliveries in now are: Food and Beverage, Medicine and Personal Care, Pet Goods, and Home

Essentials. Companies that establish themselves in some or all of these areas will be able to capitalize on positive consumer spending habit trends, and build a foundation for a long-lasting, well trusted delivery service for consumer goods.

Companies looking to expand their reach for same day delivery can and are using many different strategies. Mergers and acquisitions have proven to be very successful over the past few years. Partnerships help companies leverage each other while not taking on the complexity of a full merger, and investing in technology and securing investments from venture capitalists have helped many companies build from the ground up. No matter how these companies choose to move forward, they must consider what products they offer, the brands available, the logistical aspects of carrying out their services, and any safety and regulation issues associated with their deliveries.

It could be ten, fifty, or one hundred years from now, but the current state of shopping will be completely different than it is in 2019. As same-day delivery networks develop, and e- commerce becomes more sophisticated and convenient for customers, people may eventually stop going to stores all together, completely changing shopping and supply chain as we know it.

36

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ACADEMIC VITA