So what is really to blame for the demise of so many dot-coms in the last year? The usual reasons given are the tumbling stock market and venture capitals new and very strange demand that the company actually make a profit! But another factor is also becoming clear: poor logistical strategy.
The downfall to starting from scratch
The death watch on the Internets last mile (or physical delivery of product to the customer) model has shown that you shouldnt attempt to start any e-tailing venture from scratch. The ingredients are too expensive and hard to come by, prep time is too long and your funds can run out before youre ready to dish out the goods to your customer. So many e-tailers, perhaps under the misconception that their business venture is unlike any other to come before it, seem compelled to reinvent the wheel. They either commit their venture capital to the development of infrastructure and delivery capacity or to the development of last mile distribution networks.
The Webvan grocery delivery service, for example, committed a large portion of venture capital on large, automated hub-and-spoke distribution centers (DC) and fleets of delivery trucks for servicing large-scale delivery routes. Delivery runs had to be at least 60% to 70% of capacity for the company to break even. Most other Internet grocers committed themselves to the last mile delivery model as well, in a race to capture the lions share of the market. By choosing not to use existing distribution networks offered by carriers such as UPS, FedEx or any other non-institutionalized third-party logistics (3PL) provider, Internet last mile grocers left no room to scale back if projected orders didnt materialize during the first year of operation.
Some last milers ship out individual line items for a single order from different DCs. They then charge a shipping fee that simply doesnt cover their costs but any more would make them non-competitive. There is an alternative strategy to last mile. Outsourcing to a 3PL makes sound business sense for many e-tailers. They gain access to an existing customer base, to infrastructure and to a fleet of delivery vehicles. In addition, 3PLs are able to consolidate orders from disparate DCs into one shipment (owing to supply chain visibility), saving the e-tailer shipping costs.
The quality of delivery service is likely to be higher from a delivery company than from a company that delivers. The most important reason to outsource to a 3PL, though, may be that product quality is likely to be higher and more consistent when e-tailers dedicate all available resources to their core competencies. eLuxury.com is a good example. If the actual product doesnt meet the high expectations of online shoppers, they will simply shop elsewhere.
Dishing out the goods
Last mile distribution network ownership is a very compelling business model. Some consider the last mile model to be the holy grail of Internet business-to-consumer (B2C) distribution strategies. The idea is to develop or buy a large customer base that becomes a captive distribution network into which you can channel a wide variety of goods and services.
E-grocers leaped to grab market share, but they started in the most costly area of their distribution channel, the full-service grocery area. It would have been easier to first support products like videos and dry cleaning. But they thought they had it figured out. If a customer ordered groceries a minimum of three times per month at an average order price of $85, annual revenue from each customer would be $3,060. Only 326 loyal customers could drive $1,000,000 in annual revenue. The rest would be just icing on the cake, so to speak. And, delivery trucks would serve as portable bill-boards, always driving in new business.
Clearly, that plan is dependent on large-on-average orders and repeat customers for solvency. Unfortunately, Internet grocers failed to acquire or maintain a sufficient number of repeat customers to support the huge costs of their last mile distribution network.
But there is another aspect of e-tailing that may save at least some e-grocers: superior customer service. As evidenced by the Internet message boards for wbvn, Webvan has some very loyal customers. Order accuracy, timely shipment and product quality are Webvans forte. And that can lead to better finances. The e-tailer has been able to grow average order lines and average order prices to around $70 to $80 per order, up from initial start-up averages of $45.
Despite what Ive said, the last mile concept is not inherently flawed. Internet last milers actually havent suffered from many distribution shortcomings, and distribution shortcomings have not brought that many B2C e-tailing ventures down either.
eToys is a good example of an e-tailer with a good distribution record that still was not able to stay in business. Though eToys did not have to contend with huge last mile distribution network costs, the company did make a significant investment in infrastructure and delivery capacity to service orders. eToys was able to deliver the fulfillment promises made to analysts for the 2000 holiday season, the first holiday season of the new delivery model. In fact, eToys succeeded in shipping over 99% of holiday deliveries to customers on time. Consumer Reports Online gave eToys top overall marks in online retailing.
eToys leveraged capacity by building infrastructure that would have supported business realized five years down the road. However, in the seasonal toy business, the busy season has to carry the slow season through three quarters. The year 2000 seasonal orders needed to recoup a sufficient portion of the leveraged infrastructure investment. When the required customer volume did not materialize in the 2000 holiday season and the opportunity for further investment was dramatically reduced by a change in business climate, eToys simply could not sustain its business.
Store-bought delivery versus made-from-scratch
Barillaworld is the Internet venture of Barilla Net, a spin-off of Barilla Alimentare S.p.A., a leading manufacturer of pasta and pasta sauces. Barilla Nets goal is to capture the US market share of Italian specialty food consumers and the small businesses such as the restaurants and delis that serve them. Driving Barillas new venture is the escalation in consumer and small business demand for convenience and a broader variety of value-added products typically not available in traditional retail or wholesale channels. Not many authentic Italian specialty food manufacturers have the critical mass or brand name clout to compete in America with Barilla, and Barilla sees a huge market opportunity here.
Barillaworld is leveraging the resources of CS Integrated LLC (CSI), a provider of temperature-controlled supply chain logistics worldwide. csiDirect, CSIs fulfillment program, serves as the B2C and B2B distribution vehicle for manufacturers who, like Barilla, want to ship relatively small volumes to different market segments through the same distribution channel. Barillas perishable products already include deli meats and some dressings, and in the not too distant future, the company plans to introduce other temperature-sensitive food products including entrees and fresh pastas.
Barillaworld will offer customers free shipping, and the site will have a liberal returns policy. csiDirects challenge will be to provide Barilla with cost effective and fluid delivery execution. Currently, Barillaworld customers are ordering through the Barilla Web interface linked with csiDirects order management system.
Barilla and csiDirect believe the e-logistics partnership will offer both companies continually reduced operating costs and new revenue streams. Because Barilla completely outsources logistics, it doesnt have any capital invested in costly infrastructure, delivery capacity or transportation fleets. Further, Barilla can capitalize on csiDirects investment and any of the companys productivity improvements. Barilla can continually target pre-qualified leads through csiDirects expanding delivery routes, and Barillas shipping costs will only go down as csiDirects program expands. On the other hand, through Barillas program, csiDirect will have easy access to a consumer and small business customer base that it can leverage as a new revenue stream. The same customers ordering from Barilla might be interested in the products of other csiDirect customers.
The problem with the field-of-dreams if we build it, they will come business model is that too often not enough of them do come, and e-tailers cant support their investments in last mile distribution networks, infrastructure or delivery capacity. Once consumers and small businesses embrace the Internet ordering concept more fully and e-tailers are able to capture the market share of impulse buyers, ready-made logistics services will compete more frequently with last mile distribution networks. For now, an e-tailer is better off adding logistics services of the ready-made variety to the mix. Starting any e-tailing venture from scratch right now is a risky enough proposition, and if you cant grow large-on-average order prices or high order volumes quickly, then youll be just one more ghost rounding the bases.
Kevin Hume is a director of Consulting Services at eSYNC International, a provider of consulting and systems integration services for the supply chain. Before joining eSYNC, Kevin held management positions at eToys, Answerthink Consulting, RGTI and Tompkins Associates. For years, Kevin has provided distribution consulting services to a variety of Internet organizations. He can be reached at 831-685-3162, kevin.hume@exsync.com or visit www.exsync.com.
