An Industry Analysis Example Looking at Last Mile Delivery

Last Mile Delivery Services

Last mile delivery is the final leg of a delivery from the warehouse to the customer. Last mile delivery is also referred to as white glove delivery, a term that is intended to convey the level of service the customer can expect when receiving their merchandise. The following is an industry analysis of last mile delivery service providers in the retail furniture industry.

 

Market Structure

               a)     Number of firms

i)       Key players locally: Macy’s, Rothman’s, Pier One, Weekends Only, Mattress Firm, Illinois Wholesale Furniture, Ashley Furniture, Carol House

(1)   Each retail establishment has their own independent delivery service provider

(a)   Contracted 3^rd Party Logistics Provider (also referred to as “last mile delivery” or “white-glove delivery service”)

(i)     Delivery team works for provider as employee, or

(ii)  Delivery team sub-contracted through provider, limits liability for 3^rd party

(b)   In-house delivery team works directly for retailer, not sub-contracted through 3^rd party logistics provider

b)      Industry concentration

i)       Very competitive for 3^rd party last mile providers

(1)   Often retailer under contract with a 3^rd party delivery service

(a)   Request for Bid – auction format, awarded to lowest bidder

(i)     Changing provider can be costly mistake as result of learning curve, lack of experience, unfamiliar with retailer expectations

(2)   Numerous large and small furniture retailers with numerous 3^rd party logistics providers and in-house delivery teams

(3)   Transportation and Material Moving industry experienced 2% unemployment reduction March 2015-March 2016 (8.1 in 2015 to 6.2 in 2016, BLS.gov)

(a)   Suggests industry is growing, while not certain what percent applies to delivery service industry in specific

c)      Technological and cost conditions

i)       Minimal impact from technological change/advancements

(1)   Routing Software

(2)   Warehouse Management Systems (cross-docking operations, inventory)

(3)   Marginal advancements in fuel efficiency

ii)     Cost fluctuates with cost of fuel, insurance changes/requirements (vehicle and unemployment), regulations, and wages – overall cost is increasing

d)      Demand conditions

i)       Influenced by furniture sales- when furniture sales are up delivery needs are up, when furniture sales are down delivery services are down.

(1)   Other contributing factors

(a)   Recession slows big ticket purchases

(b)   Higher interest rates slow sales on credit

ii)     Seasonal/cyclical demand

(1)   Holidays

(2)   Major sales (July 4^th, Christmas, Presidents Day, etc.)

e)      Ease of entry and exit.

i)       Moderately difficult to enter the market

(1)   Barriers:

(a)   CDL license

(b)   expensive insurance

(c)   lease/purchase truck

(d)   Finding personnel that can drive truck, willing to move large bulky furniture in home, and be personal with customers

(e)   Customer expectations (speed of delivery, quality of furniture, color/texture, furniture damage free)

(f)    While trying to overcome these expenses at entry, need to offer low competitive price

ii)     Easy to exit industry

(1)   Retailer provides warehousing of furniture (no overhead to 3^rd party)

(2)   Assets can be sold (trucks and equipment)

Conduct

a)      Pricing

i)       Per BLS.gov Delivery Services industry has seen -1.3 Mar 15- Mar 16 growth

(1)   Reflects a decline in fuel costs

(a)   Not as significant as gas (-20.9 2016 vs 2015) due to contractual obligations/terms (fixed expenses and fuel pegs can be to 3^rd party detriment)

(2)   Not certain of correlation -- Furniture and Bedding has seen -1.2 growth for same period

ii)     In specific, delivery fee approximately $50-$150 (pending distance, units, number of deliveries)

iii)   Flat rate based on region/geographic coverage

(1)   Out of St. Louis to Springfield, IL (covering 60 mile radius) - $800

(2)   Out of St. Louis to Springfield, MO (covering 60 mile radius) - $1500

(a)   Benefit to 3^rd party (profitable if few deliveries), costly for retailer

b)      Advertising

i)       Because of structure of business, advertising not significant factor unless 3^rd party not under contract with retailer, or if it is seeking to expand business or work with other retailers, which would be result of sales calls and word of mouth.

 

c)      R&D

i)       Negligible – last mile delivery service is labor intensive and minimal advancements would come from R & D with the exception of software and cross-docking operational improvements

d)      Merger activity

i)       Due to specialized nature and difference between shipping furniture from factory to warehouse and from warehouse to customer there is minimal (if any as I could not confirm activity) horizontal or vertical activity. Horizontal mergers would be most likely, to expand upon geographic coverage.

ii)     Many 3^rd party delivery service providers are small, often family owned, and focused on a particular region/area- very fragmented industry with niche skills.

(1)   Side Note: for the sake of improving efficiencies, it would be ideal for a 3^rd party delivery service provider to collaborate with multiple furniture retailers (to ensure trucks at capacity every day), however this is unlikely due to the differing retailer expectations of level of service provided to the customer in conjunction with brand awareness expectations.

Performance

a)      Profitability:

i)       Low profit margins

(1)   Higher end retailers will pay more to 3^rd party service provider to ensure higher level of customer service/satisfaction

(2)   Lower end retailers will pay less, providing substandard service, but reduced profit margins for 3^rd party provider

(3)   Service plays a role pending speed and customer service level – faster, higher customer service garners greater profit margins.

ii)     Pending price structure of retailer (fee/free delivery) – higher priced furniture to absorb cost of delivery vs. lower priced furniture with delivery fee, or combination adjusted seasonally.

iii)   Delivery is expense, negative impact on net profits – worse when returns and exchanges are taken into consideration

b)      Social welfare

i)       3^rd party service provider only provides benefit to end user/consumer

ii)     Transportation industry has negative impact on environment (pollution, inefficient gas/oil consumption, rubber for tires, etc.)

iii)   Indirect social benefit comes from the movement/manufacturing of the furniture – benefiting those that are involved in the process through employment earnings.

 

Sources

1.       http://www.inboundlogistics.com/cms/article/polishing-the-furniture-supply-chain/ (4/25/16)

2.       http://broadriverfurniture.com/wp-content/uploads/FT_Top100_2015.pdf (4/23/16)

3.       http://www.statista.com/statistics/241708/sales-of-the-leading-10-specialty-furniture-stores-in-the-us/ (4/25/16)

4.       http://www.areadevelopment.com/specialPub/ldw09/LastMileDelivery-supplyChain-trucking004.shtml (4/25/16)

5.       http://www.bls.gov/news.release/pdf/cpi.pdf (4/26/16)

6.       http://www.bls.gov/news.release/pdf/empsit.pdf (4/26/16)