E-commerce has boomed globally over the last decade fuelled by increased internet penetration and availability of cheap smartphones. There are around 1.66 billion digital buyers worldwide and this number is projected to grow to 2.14 billion by 2021. More recently Asia-Pacific region has witnessed break-neck eCom growth due to declining mobile data costs, digital/ on-delivery payment options, discounts and changing lifestyles. It shouldn’t come as a surprise that Indonesia and India are the fastest growing online retail market, followed by Mexico and China; while traditional e-com markets continue to stabilize.
In 2017, China had the highest eCom contribution to total retail sales (23.1%), followed by UK (19.1%), South Korea (16%), Denmark (12.6%) and US (9%). These numbers are expected to continue to grow. Advent of online shopping has thrown several opportunities and challenges to different participants in the retail ecosystem. For example, traditional/ hyper-local businesses are using quick door deliveries or at-home-services as a key differentiator, online retailers are considering on-demand deliveries or services as a promising lucrative market segment, omni-channel retailers merging their online and physical capabilities are looking to provide seamless customer experience including same day deliveries. Irrespective of the kind of retail one may be involved in, same-hour to same-day door deliveries, while serving as an effective product/ customer experience touchpoint, if not done right, can shave off a significant portion of product/service gross margins (in short-term) and customer/revenue-base (in long-term).
In this installment of the multi-part article on breaking down same-hour to same-day deliveries, we deal with the question if it is necessary for businesses to deliver their products at all. We suggest a simple generic method to decide whether to provide a delivery service or not, based on the gross margin of your products, average order value and cost of delivery. Although this article talks about products deliveries, businesses that provide services can also adopt a similar approach by adjusting the costs to the service costs that they incur.
Gross Margin of your products
On an average, retail products are sold at about 25 – 35% gross margin. Different product categories have different gross margins, groceries being one among the least, whereas apparels and accessories have higher margins averaging around 45-50%. A free delivery would add to your operating cost: manpower cost, downtime for your in-store personnel if you are using them to do the deliveries, vehicle expenses and fuel expenses (more about this later). If your business accepts returns, you will have to consider that cost as well. If your product has the gross margin to cover these costs and still give you a considerable net profit, then by all means delivery is a good option to lure more customers and act as a key differentiator vis-à-vis your competitor.
But what if you are a supermarket providing a wide variation of products with varying gross margins? In such business case, a more accurate way to approach the delivery question is by understanding its dependency on average ticket size of purchases.
The average order value
Grocery items like stationery may have high percentage of gross margins but the actual margin on a box of pencil is too small to send a person to deliver it, the opposite is true for high end jewelry. When selling multiple product categories with different gross margins, one needs to consider the average gross margin per order. A quick review of past data should enable one to calculate average order value. If average order value and average gross margin per order is greater than your delivery costs and other customer experience related benefits, then should definitely go ahead with a door-delivery option.
In other cases where such data is not readily available (e.g. new businesses), the best way is to put a minimum order value; although this might not be profitable for each delivery but it would eventually even out the expenses across all categories.
Minimum order value
Consider the average gross profit margin across different product categories; say it is 20%, and the cost of delivery is about $5 per order, it is not worthwhile if you provide free delivery for any order below $25 – and this is considering you make zero profits. Let’s say you want to make atleast 10 % profit per order, then the minimum order value would be $50. Sign-boards at local supermarkets with ‘Free delivery above $XX’ is attributable to such thinking. It also serves as good tactic to increase average order value. Promotions run by several food delivery companies such as ‘One plus one free on items of $XX’ are based on this thinking.
At the core of all of this lies the cost of delivery. Its time we made more sense of it.
Cost of delivery
At the most basic level, cost of delivery is a function of pick and pack cost, work-force cost, vehicle cost and fuel cost. Pick & pack costs is dependent on how streamlined and controlled processing operations are. Work-force costs have several dependencies including if internal/ contract/ outsourced personnel are used to make deliveries – all of which are dependent on total time spent on delivery operations, among other considerations. Time spent includes loading, transit, unloading, delivery, return times besides waiting/ idle times. Multi-tasking internal work-force for delivery will need to factor in time lost on other core activities. Vehicle can be owned or rented and contributes differently to delivery costs. Fuel costs are dependent on transit distance and times. Besides all these considerations, productivity issues and leakages also impact operational costs.
As can be seen, running delivery operations is complex. Real-time events like new orders/jobs, returns, delays, etc. add to the complexity. One option is to go with a suitable 3PL (3rd party logistics) partner – we will deal with this question in a later piece. Making own deliveries has the advantage of staying in control of entire fulfilment cycle and having the ability to impact a critical customer touchpoint through service differentiation. If delivery costs can be made to make better business and operational sense, by driving efficiencies (with respect to material and time resources) and productivity (with respect to human resources), then performing door deliveries/ services would indeed be a great business model option. Product/ service delivery planning and execution when done in an optimized way can save costs (even when using one’s own personnel) and drive revenues. Of late, there are deep technology solutions like LOOP that help you do this efficiently (to know more about our last mile delivery solution click here.)
All said and done, while deciding to go for home-delivery or not, it is important to think not just in terms of day-to-day operational complexity, but also long-term business strategy. Making door deliveries may reduce margins but contribute disproportionately in scaling up revenues and ability to compete with competitors. Indirect benefits could include reduced costs to acquire new customers, keeping old ones and driving repeat business – these also need to be considered while making this decision. Cost of delivery and operational complexity can be better managed leveraging new-age technology tools.
 Source: Statista.com