Investors have risked billions on Webvan, Urbanfetch, and other same-day transporters. The economics, though, show they won’t deliver for long. Photographs Photographs by Brad Wilson The content business business models LastMile to 40 Nowhere Flaws & Fallacies in Internet Home-Delivery Schemes by Tim Laseter, Pat Houston, Anne Chung, Silas Byrne, Martha Turner, and Anand Devendran Tim Laseter Pat Houston Silas Byrne Anand Devendran ([email protected]) is ([email protected]), a prin- ([email protected]) is an ([email protected]) is a partner in Booz-Allen & cipal in Booz-Allen & Hamilton’s associate in Booz-Allen & a consultant in Booz-Allen & Hamilton’s Operations Practice Cleveland office and a member Hamilton’s New York office Hamilton’s New York office and serves on the firm’s of the Consumer and Health focusing on operational and focusing on operational and e-business core team. He is Group, focuses on strategic organizational issues across a growth strategies across a wide the author of Balanced Sourcing: supply-chain transformation, broad range of industries. range of industries. Cooperation and Competition in particularly as related to Supplier Relationships (Jossey- e-business issues. Martha Turner Bass, 1998). ([email protected]) is an Anne Chung associate in Booz-Allen & ([email protected]), a Hamilton’s New York office Cleveland-based principal of focusing on operations and Booz-Allen & Hamilton, focuses supply-chain management on e-business and supply-chain issues in a variety of industries, strategy as a member of the with particular emphasis on e- firm's Operations Practice. business. Amazon.com’s launch in July 1995 ushered in online sales potential; high cost of delivery; a selection– content an era with a fundamentally new value proposition to the variety trade-off; and existing, entrenched competition. consumer: easy access to convenient ordering with seem- Before presenting our supporting evidence, we will ingly infinite selection. Rather than dropping by the local first briefly profile the new dot-com competitors for the business business models Barnes & Noble superstore and physically sifting through last mile. (Save this scorecard; the game may be a no- the 150,000 titles, Amazon’s online shopper browses hitter.) more than 4 million titles from a personal computer. Amazon also simplifies the selection process through its Overview of the Players search engines and databases loaded with information on Most of the major e-tailers offering same-day delivery millions of consumers. Over the past few years, a host of tend to focus on a mix of two broad product categories, “category killers” replicated Amazon’s “limitless shelf immediate gratification/impulse items (e.g., videos, space” model in categories from music, to toys, to home music, books, magazines, snacks) and routine necessities furnishings — while Amazon in turn extended its brand like grocery and household items, for which many con- to such categories, and others, as well. sumers seek to minimize shopping time and effort. (See Unfortunately, the online advantage is undermined Exhibit 1.) All offer thousands of items, but order sizes by a benefit only bricks-and-mortar retailers can offer: the vary dramatically. Not surprisingly, the companies 42 ability to walk out of a local store with product in hand. focused on instant gratification/impulse items tend to As a result, a new breed of Internet service has emerged: have the smallest orders. retailers, such as Webvan, Kozmo.com, Urbanfetch, and All offer extended delivery hours and 24/7 ordering Pink Dot, that offer same-day delivery. These new e-tail- — not surprising in the wired world. Distribution/ ers have staked out the “last mile” delivery to consumers fulfillment centers range from simple 4,500-square-foot as their basis of competition. By combining the conven- spaces filled with rack shelving, to highly automated, ience of online ordering with nearly instant gratification, multimillion-dollar, 300,000-square-foot facilities. Deliv- they offer a new — and potentially superior — value ery vehicles range from bikes, to scooters, to small cars, to proposition. No one doubts that competition will be vans — often sporting striking colors and images to mar- fierce. As George Shaheen, CEO of Webvan Group Inc., ket the brand. Although most offer free delivery, some puts it, “One or two companies will legitimately earn the price their offerings to discourage small orders. Also, to right to cross into a person’s home. We intend to be one ensure that consumers receive truly free delivery, some, at of those. I don’t believe there will be a multiplicity of least for the time being, discourage tipping. companies doing this successfully.” Although each company offers a slightly different issue 20 Unlike Mr. Shaheen, we believe the last mile may business proposition, all offer the convenience of online lead to the gallows rather than to the promised land. Our ordering and same-day delivery, thus addressing the time- analysis of the race for Internet-ordered home-delivery lag problem encountered in the category-killer e-tailing services uncovered four fundamental challenges: limited model pioneered by Amazon. These local deliverers hope strategy+business Exhibit 1: Local-Deliverer Overviews Company Kozmo Pink Dot SameDay Urbanfetch Webvan Started 1997 1987 1999 1999 1996 Atlanta, Boston, Los Angeles, Atlanta*, Chicago*, New York, Atlanta, Chicago*, Chicago, Houston, Orange County Dallas*, Memphis*, London Dallas*, Denver*, Los Angeles, New York*, Newark*, Coverage New York, Portland, Los Angeles, Philadelphia*, San Francisco, San Francisco, Sacramento, San *announced Seattle, San Jose, Seattle*, Francisco, Seattle*, expansion Washington, D.C. Washington, D.C.* Washington, D.C.* Offering: Videos/DVDs Games/Toys Music Electronics Books/Magazines Snacks/Food Grocery Items content Health & Body Household Items Gifts business business models Stocked Items 15,000+ ~2,000 Not Published 50,000 15,000+ Average $15 Not Published Not Published $40-50 $90 Order Size Hours 10 AM to 1 AM 6 AM to 3 AM 6 AM to 3 AM 24 Hours a Day 7 AM to 10 PM of Delivery All offer delivery 7 days a week, 365 days a year, and 24/7 ordering 4 Distribution 1 Distribution Center 13 Distribution 12 Fulfillment 1 Distribution Center Fulfillment Centers with an of 336,000 sq.ft. Centers in 6 Locations Plus “Several” Average Size of Plus 12 Small Centers markets (4,500 sq.ft.) Fulfillment Centers 100,000 sq.ft. Transfer Hubs (SF) Under an Hour: Same Day Under an Hour: 30-Minute Window Delivery Under 30 Can Specify (within 2 Hours) Can Specify Specified by Response Time Minutes Delivery Time & Next Day Delivery Time the Shopper 43 Delivery Van, Car, Scooter, Blue VW Bug Van, Scooter, Beige-and- Not Published Method Bicycle, and Foot with Pink Dots Bicycle, and Foot White Van Free> $50 Order Delivery $2.95 Flat, No Free, $10 Free> $50 Order Free $6.95< $50 Order Minimum Order Minimum Order $4.95< $50 Order Charge (Within Zone) Tipping Optional Optional No Tipping No Tipping No Tipping Policy that gaining control of the last mile will ensure success. home-delivery business. We’re not so sure — for a variety of reasons. To start, we ran a few numbers. Forrester Research Inc., the most frequently cited forecaster of online sales, Limited Online Sales suggests the U.S. online-consumer market will exceed Given the well-publicized reports about the explosive $184 billion by 2004 — whopping growth over last year’s growth of online shopping, our assertion of limited sales $20 billion to $30 billion estimate. (No one has exact fig- may seem unbelievable. We draw this conclusion by ures; the government only recently began tracking this examining how online sales should affect the volume of new phenomenon.) But according to Forrester, only 60 Exhibit 2: Internet Sales-Density Analysis Circle Size Relative to Revenue $1,400 $1,200 $1,000 Boston ‘04 Denver ‘04 $800 Chicago New York ‘04 ‘04 Washington, D.C. ‘04 $600 content $400 Cleveland ‘04 Los Angeles ‘04 Boston ‘99 Chicago ‘99 Internet Sales of Physical Product per User of Physical Product Internet Sales business business models $200 New York ‘99 Cleveland ‘99 Washington, D.C. ‘99 Denver ‘99 Los Angeles ‘99 $0 100 1,000 10,000 100,000 Internet Users per Square Mile $15,000,000 Sales per Square Mile $5,000,000 Sales per Square Mile $1,000,000 Sales per Square Mile percent of the 1999 total required physical delivery of $500,000 Sales per Square Mile $100,000 Sales per Square Mile goods. Digitally delivered goods, such as airline and event tickets, online brokerage and banking services, plus “researched goods” like automobiles, which have a sepa- 44 rate delivery network, accounted for the other 40 percent. key cities, population and median income data from the The physically delivered categories contribute much U.S. Census Bureau, and the one constant: the land area of the future growth and account for $132 billion of of the cities. (See Exhibit 2.) Forrester’s 2004 forecast. To put this in perspective, that’s For those not familiar with the consultant’s perennial 2.3 times the $57 billion that consumers currently spend favorite information graphic — the bubble chart — annually on catalog purchases. That is enormous growth Exhibit 2 warrants more explanation. The horizontal axis in a short period of time. But we worry that even that indicates the number of Internet users per square mile in much home-delivery volume will not provide enough each city on a logarithmic scale. (Note that the logarith- sales density to alter fundamental delivery economics. mic scale represents a tenfold increase in user density for For further perspective we built a forecast model that each increment along the scale, rather than the more typ- highlights the two key drivers of local delivery economics: ical increase of a fixed linear amount.) sales concentration and population density.