Retailers are doubling down on their expensive last-mile arms race

How soon do you really need that box of instant refill or a new head for your electric toothbrush? How about an hour from now, or maybe even 30 minutes?

By land or drone, the retail industry spends a lot of money on such last-mile delivery times, though the prospect of a return on investment seems murky at best.

The most recent development is from Amazon, the birthplace of two-day and next-day delivery for Prime subscribers. Now the company is planning an ambitious expansion of the reach of its latest delivery option, same-day. For the past three years, Amazon has built a network of smaller warehouses designed to fulfill orders for immediate delivery. According to a recent report in The Wall Street Journal, about 45 smaller sites are up and running, with about 100 more in the pipeline.

Target also hit the headlines recently, saying it plans to invest $100 million over the next three years to expand its next-day delivery capabilities. Unlike Amazon, Target (like its brick-and-mortar competitors) has thousands of stores that it has used as a distribution hub.

Target gets high marks for its click-and-collect operations. The company told analysts in November that online orders now make up a significant portion of Target’s sales (20% in Q3 2022), with stores accounting for about 95% of fulfillment.

Similarly, Walmart told analysts last month that sales of store-delivered deliveries have nearly tripled over the past two years to more than $1 billion a month. More than 3,900 of its U.S. locations offer same-day delivery.

All this is good for the consumer. For retailers, however, the last mile turns out to be the longest and most expensive. A much quoted one study a 2018 survey of retailers found that last-mile delivery costs an average of $10.10 per package, of which the customer pays just $8.08.

Bringg, a delivery solutions provider, recently reported that a survey of 500 US-based supply chain and related managers found that nearly 90% were “struggling with their last-mile delivery activities”.

Ten years ago, Amazon’s Jeff Bezos teased the world in a 60 Minutes interview with an intriguing solution: a fleet of delivery drones that could fly packages to customers’ homes in half an hour. Bezos confidently predicted deliveries would be made by drone by 2018 or thereabouts. Critics called his prediction a stunt.

A research report from Bloomberg a year ago found that, having poured $2 billion into the project with a team of more than 1,000 people, “Amazon is still a long way from launching a drone delivery service.” It was finally launched in January of this year. In its first month, it served fewer than 10 homes, according to a detailed report on TheVerge.com.

Walmart has adapted its own drone program, which offers 20,000 items that can be flown from 36 of its US stores. The company recently reported that it made more than 6,000 drone deliveries last year, carrying favorite items such as cookies, rotisserie chicken, energy drinks and paper towels.

The obstacles to the widespread delivery of consumer goods by drone seem insurmountable to a layman like me. There are cobwebs of regulations from the FAA all the way to your local city hall. There are security issues. What about privacy? Never mind how your neighbors would feel about all the neighborhood buzz.

So, what do consumers think? According to a morning consultation questionnaire, 57% of adults said they had little or no confidence in drones for deliveries. The cost of drone operations is huge at this stage of development.

McKinsey & Co. recently reported that “regulations in most countries and regions stipulate that people can operate and monitor only one drone at a time.” McKinsey estimates that a drone delivery with a single package (typical weight limit is 10 pounds) has a direct operating cost of about $13.50… for a box of cookies?

Will we still be talking about same day delivery in 10 years? Will the skies be thick on Thanksgiving with drones delivering the ingredients we forgot to pick up for dinner? Who knows? What about frozen turkeys falling from the sky?

What I can certainly suggest is that people still love to go shopping. As Kamau Witherspoon, CEO of Target-owned Shipt, recently said, when it comes to retail success, you need a lot of options, one of which is “a phenomenal shopping experience.”