As consultants, we�re often asked where we think certain logistics trends are headed. We have the advantage of viewing the supply chain from multi-dimensional perspectives, so we keep a watchful eye out for changes in processes, strategies and business models. We especially look for possible paradigm shifts and even go so far as to put our own labels on trends in attempts to more clearly describe them. Recently, we�ve been keeping our eyes on the last link in the B2C chain, specifically the household. If we believe the prognostications of Forrester Research and Jupiter Communications (and we do), we�ll soon be hearing more footsteps to residential doormats than at Halloween!
Three significant new trends have risen to exploit the opportunity and meet the challenge of delivering millions of incremental parcel shipments generated by purchasing on the Internet. This article will consider the new models that we call 1) the Replenishment System Model for online grocery shopping and delivery, 2) the Receiver/Locker System Model for convenient access to parcel receptacles and 3) the �Parstal� System Model, which is recognizing the integrated �coopetition� of both postal and commercial parcel delivery systems.
Putting out the welcome mat
Changes in the way people live and work are driving consumers to the Web to shop. Dual income households are now the norm. Longer workdays and commuting times keep entire families away from their homes, leaving little time for ordinary and routine household tasks like shopping for groceries, preparing meals, doing laundry, paying bills, running errands, etc. Free time is carved out only during precious moments at lunch or between meetings at work and after the kids are fed and tucked in.
Enter the Internet! The 24/7 counselor, friend and errand boy always ready to help. A virtual cornucopia overflowing with essentials as well as treats. Through the miracle of mouse and modem, consumers now select their brands of groceries, order eyeglasses and contact lenses, prescription drugs, ice cream, popcorn, videos, CDs, whatever they want. And they can have it all delivered when and where they want it; to their offices, to their parked cars at work, to neighborhood stores or lockers outside their houses.
How will they get all these goods?
Three conventional nationwide delivery models rule the streets of suburbia today: mail delivery provided by the U.S. Postal Service, parcel delivery dominated by United Parcel Service and pizza delivery exemplified by Domino�s.
Required by law to provide universal mail delivery service to every household six days a week, the Postal Service clearly dominates America�s neighborhoods. Yet, the USPS concentrates on its cash-cow, First Class letters, and simply doesn�t give the same handling priority to parcels. The frequency and scheduling of its delivery routes is greatly influenced by inflexible work rules. Parcel rates are competitive at the low end of the weight scale, but are non-negotiable for high-volume discounts and completely lose their advantages for heavier weights.
For all shapes and sizes of parcels on the other hand, UPS is the �800-pound gorilla� in this space. Controlling an estimated 80% market share of all ground parcels delivered in the US, including B2B, UPS is also credited with handling 50% of all e-commerce generated shipments to households. Yet even with all those packages, the Brown Giant appears to make money with residential deliveries only by building volumes at the individual truck level for weekly neighborhood stops and by adding surcharges of $1 to every structure that has a bed in it.
And then there�s Domino�s. Does it really qualify as a delivery company business model? The assertion is only partly tongue-in-cheek. Any organization that can deliver hot meals to households from more than 6,000 locations nationwide for around $10 and make money doing so has got to be taken seriously for its logistics capabilities. Even if it does compensate its drivers mostly through the custom of tipping.
But, can these defending champions deliver what�s to come? No. Certainly not all of it anyway. At least not the way the customer wants it, i.e. how, when and where she wants it, via the �myway highway.� The incumbent systems are entrenched in old business-to-business oriented systems, inflexible to new demands and are push-oriented versus pull. None are designed from the bottom up to meet the needs of this extremely demanding new variety of consignee.
Enter the new business models
Three new classes of delivery models have been designed from the bottom up to meet the ever-increasing demands of consumers who are pulling goods off the Internet all acrossAmerica. Let�s look at the models we refer to as; Replenishers, Receiver/Locker System Operators and �Parstal� System Operators.
Replenishers � The idea of home delivery of perishable goods is hardly a new one. Not too many years ago, it was the only way suburban families took possession of milk. But, the Internet as a 24/7 ordering tool has given rise to a number of re-incarnations of the milkman, most boldly defined by San Francisco-based Webvan. What drives the dream of success for Webvan and similar approaches like Peapod, HomeGrocer, Shoplink, Homeruns and Streamline is the concept of replenishment. Households consume milk and other daily staples as a habit. Therefore, they buy many items often. Perishables must be delivered regularly, quickly and with minimal degradation in temperature. A typical armful of groceries amounts to many dollars spent, several times a week.
Webvan was the first to declare an ambitious 1970�s FedEx-like plan to rapidly cover the nation under one brand. It burst onto the scene in 1999 with the announcement of a $1 billion contract with Bechtel to build 26 distribution centers across the country and hired high-profile George Shaheen away from his top job at Andersen Consulting to lead the conquest. At the same time, Peapod was building a customer base in Chicago, Streamline in Boston and HomeGrocer in Seattle. Each company would build its new residential delivery business on the base of replenishing groceries, and the gravy would come when adding non-grocery items like laundry, video rentals, books and other goods ordered on the Internet.
Receiver/Locker System Operators � Some of the best ideas are those that serve to bridge the gap between parties. Ironically, in a period of Internet induced disintermediation, here�s a case of re-intermediation adding customer value while reducing carrier costs. New locker systems have been designed to receive package deliveries when recipients aren�t home and to accept those dreaded, all too frequent unwanted packages for return.
Notable among them are San Francisco�s zBox, Seattle�s ShopperBox, Chicago�s PaxZone and MentalPhysics and Brivo Systems, both of Arlington, Virginia. ZBox addresses the needs of suburban single-family dwellings, installing secure outdoor receptacles capable of receiving deliveries from USPS, UPS and FedEx alike. Similarly, ShopperBox serves apartments with banks of lockers electronically assigned to individual tenants as the need arises. Carriers may access lockers with unique key codes and make deliveries even when the recipient is not home. Consumer convenience is obvious and carrier benefits are considerable with this model as well. Re-delivery costs for UPS, for example, can run as high as 20% to 30%, according to zBox.
PaxZone operates another version of the receiver/locker system, allowing consumers to designate participating neighborhood retailers to act as receiving agents. PackageNet does this with several grocery chains and 7-11 is test marketing a similar type of offering to receive and hold packages for customers on their way to or from work. Starbuck�s has struck a similar working arrangement with Kozmo, and MailBoxes Etc. has been receiving packages for its customers for years.
Parstal System Operators � For logisticians, the idea of piling on commercial value to extensive postal networks with residential reach is enticing. And while it hasn�t been possible for commercial concerns to buy postal networks, it�s recently become possible for some postal concerns to buy commercial operations. Hence the new breed of �parstal company� led by TPG of Holland�s acquisition of TNT, only to be outdone by Deutsche Post�s insatiable, multi-billion dollar acquisitions of Danzas, AEI, DHL and a score of lesser known express and freight companies. Royal Mail of the UK has made acquisitions in the US, Canada and Europe.
The USPS cannot, of course, make these sorts of acquisitions. At least not until major Postal Reform legislation is passed. However, not to be completely outdone by its former postal allies turned competitors, the USPS may obtain some of the hybrid benefits of �coopetition� by partnering with its traditional parcel competitors and is acting a lot more like a �parstal� system operator all the time.
For several years now, the USPS has been building residential delivery volumes through successful work-sharing drop-ship programs with postal consolidators like CTC, Parcel Direct, Paxis, RMX, etc. Beginning with its alliance with DHL to provide co-branded guaranteed two-day delivery to most worldwide destinations, the USPS next partnered with Airborne Express (Airborne@Home) to handle its drop-shipped residential deliveries, then with Emery in a similar arrangement and finally with FedEx in a yet to be fully defined �coopetitive� alliance. The USPS acts as �gateway to the household.�
Of the big brands, in fact, only UPS continues to go it alone. With 80% share, it probably figures it has nothing to gain, only something to lose. In fact, UPS barely lets any postal commercialization maneuver go unchallenged, the latest example being its protest of the USPS/FedEx deal on Capitol Hill on anti-trust grounds. UPS is clearly not a proponent of �parstal� strategy.
Can we get along without them?
For now and even in the near future, each of these new ideas looks merely like just what it is: a new idea. Judging by the leader, Webvan�s need to crawl around the Bay Area before it walks out of state, and runs across the country, a national home delivery replenishment system for groceries is unlikely to take form in Internet time.
Receiver depots, when leveraged against existing infrastructures, may take hold in pockets throughout America. Yet, when considering the high capital costs of installing a nationwide locker system and the time it will take to change people�s habits to use it, this new model is unlikely to proliferate any time soon either.
But, a commercial, multi-branded system built on the backbone of the USPS� core competencies is a near-term possibility if not likelihood. What if, like at an ATM, when we draw our money from any member bank, we could pick up and drop off our packages at any local post office? Why shouldn�t our Priority Mail ride across the country in a FedEx freighter? And be delivered in a USPS van emblazoned with the logos of DHL, Airborne, Emery and FedEx, like the airlines� OneWorld and Star Alliances?
No, we won�t see the USPS embarking on an acquisition trail like Deutsche Post�s anytime soon, but we are likely to see a new playing field with UPS at one end and the rest at the other.
John Callan is a business strategy consultant based in Weston, Massachusetts. His independent practice is based on his 25-year career as an express industry executive and consultant to public and private sector firms in the postal/parcel space. John can be reached at 781-642-7997 or jgcallan@hotmail.com. Andy Johnson is president of Commercial Studies Institute of Burlingame, California. Andy has 30 years of experience in the express/small parcel industry and is deeply involved with the technology revolution in transportation. He can be reached at 650-692-2014 or andyj92@ricochet.net.
