The Last Mile Paradox
Claude Germain
Chief Operating Officer,
Grocery Gateway,
Nicholas Seiersen
Principal, KPMG Consulting LP.
The traditional Retail Store is under attack. And the Internet and
Consumer Direct Players are the ones on the offensive.
Compromise and Paradox
The traditional Retail selling channel is a paradox in many ways.
While it is one of the most inefficient means of delivering goods to
home – it is also one of the most
efficient. Take the grocery supply
chain for example. There is excessive material handling here – by the
time a good has reached your home
it has been touched over 15 times
as it goes from manufacturer to distribution center to retail to the
consumer. In addition, there is
inventory everywhere. The average
grocery store carries 15,000 items
yet most consumers purchase the
same 200 items over and over
again, so many items do not move.
Finally, the cost of the retail channel itself is significant with a large
labor and real estate component.
It’s inefficient. On the other hand,
the retailer depends on the consumer to do most of the work. The
consumer has to get in his car,
drive to the store, park while not
bending any fenders, do his own
picking, packing and bagging and
then drive home. That’s efficient.
It’s efficient for retail, but galling
and inconvenient for the 2/3 of
consumers who dislike grocery
shopping and think of it as a chore.
This is the compromise made to
reduce the cost of shopping.
Explode the Compromise
Enter the internet and the revived
concept of Consumer Direct.
Consumer Direct is the notion of
disintermediating retail for those
consumers who are predisposed
for convenience. Collapse the supply chain by shipping goods direct
to the home. Bypass retail and presto – you have created a whole new
channel around the residential supply chain. This economics of this
model are essentially a tradeoff
against traditional retail: you give
up the store costs but pick up the
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costs of picking, bagging, loading
and delivery that the consumer did
for free. So is born the new model.
What about the Paradox?
The aspects of retail that made it so
compelling are lost in Consumer
Direct – customer density with
stores nearby, ability to look & feel
at the merchandise, instant gratification. But they are replaced with a
new customer value proposition.
Core consumers are predominantly
women with families - the definitive
time starved family. The psycho
graphic segment includes two income families with children and city
dwellers who do not have a car.
Competitive pricing and a broad
selection may be the entry ticket,
but convenience and service / flawless execution are the differentiators. And they drive everything.
The core capabilities in this new
industry, not surprisingly, are driven by logistics execution and
information technology and support the customer value proposition around convenience and service. Whole new capabilities must be
built and at speed: a residential
delivery network has to be built, an
expertise in single item picking and
packing at high volumes and an
information technology integration
skill to blend the whole package
together. If at any point in the execution the consumer is forced to go
to the store, the value proposition
falls down. Case in point: I order a
book online and I’m not there to
receive it, I receive a note saying I
can pick it up a my closest post office outlet and live by post office
hours.
And Now For Something
Completely Different
What convenience is that? The
consumer direct model can offer
7*24 access with 90’ delivery windows. That is where the Internet
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comes in… Touted as a brave new
channel that will capture consumers’ hearts and wallets to the tune
of $10 Billion last year in the US
alone, the track record remains patchy. When the dust settled after the
1999 Christmas Season, Resource
Marketing spent 20 hours on each
of the top 50 B-to-C sites, and evaluated 88 criteria. The findings are
frightening – on 25% of the sites,
the researchers were unable to
place an order, then 20% of the deliveries were late or never arrived,
and on 36% of the sites customer
service was busy or unhelpful. Is it
really surprising that 88% of shoppers abandon before they buy? Its
interesting to note that the more
successful sites were generally
pure e-tailers like Garden.com,
Cooking.com, Fogdog and Amazon.
The worst were often “clicks &
bricks” like Walmart, Disneystore
and Toys'rus.
Notwithstanding, the leading e-tailers are now well beyond sloughing
data entry onto their customers –
they are building an on-line experience. Amazon.com and to a certain extent, the Canadian nemesis
Chapters, have built an online
shopping experience beyond “better than in the store.” It is far easier
to find what you are looking for, and
the store can tell you what other
products (books) that other people
who had bought the same product
have subsequently bought. They
also can tell you what is “hot” at a
certain company, or in a certain
industry, geography, socio-economic class, etc. But Fedex loses
money on each home delivery.
Truth be told, retail may be under
attack but no consumer direct
player has yet to show how to do it
economically. The fuel for this
attack is the capital market, and
now that this may be drying out,
consumer direct players will be forced to show earlier profitability.
How Does This Work?
Profitability can be achieved. It
requires scale, military precision in
execution and a healthy dash of
customer service. It is absolutely
imperative to have in stock positions for the entire range offered. In
the case of Grocery Gateway, the
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Retail is dead, The Internet and UPS will kill it.
The early pundits cried “Wolf” when they looked at the “traditional retailer.”
● They think they have a great store experience – research shows that 50% of people
in stores hate shopping.2/3 do not like shopping for groceries.
● They think consumers just have to “touch & feel” before they buy – in fact this damages
the goods and then no one will buy them. This is true to a certain extent for apparel,
fresh fruit, and even consumer durables (just check the great prices on display models
on final sale).
● They think consumers “must have it now” – yet no one will take the last item on the
shelf, the time spent going to the store, shopping and coming back is a premium when
“quality time” is in such short supply for most of us, and the cold chain for fresh and
frozen goods is a very delicate balance that most shoppers rupture in perfect ignorance.
● Most consumers will forego instant gratification for dependable supply without inconvenience, with the probable exception of products that are purchased for immediate
consumption – ice cream cones, emergency medication or spares, etc.
The retail industry is alive and very well, Thank you.
product range offered includes grocery, perishables, beer and wine,
health and beauty aids, books and
videos, Starbucks coffee,… The instore stock outs of up to 30% will
not cut it, you cannot make the
item substitution on behalf of your
customer. Therefore the supply
chain must be tightly coupled to
information about sales, inventories, inbound supply, specials, forecasts, customer ordering patterns,
etc. Deliveries must be on time, and
must be offered within small delivery time windows. The operation
must have very high picking accuracies, and must have quick order
to delivery cycle times and it must
be low cost.
The economics of the Consumer
Direct industry are daunting at first.
High assets, high labor intensity,
compressed order to deliver cycle
time, high dependence on unproven systems - they leave little
wiggle room. On paper the cost of
driving an order in the grocery
industry to the home is similar to
the cost of delivering that order to
a retail store, about $20-$24 per
order. In practice, no one has done
it but many players are trending
there. On the sales side, there’s no
doubt that big volumes help. High
average baskets and high delivery
density are absolutely core to the
economics of the Direct to
Consumer (DTC) model. That’s why
grocery is good. Frequent purchases (that also build loyalty), and
high basket values means there is
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enough money in the traditional
supply chain to release and pay for
the tasks that were performed by
the consumer. Some dot com retailers will have to change their business model to survive because
either their average basket is too
small (Kozmo) or the product is too
much of a commodity for there to
be meaningful barriers to switching
(e.g. any pet internet retailer) and
they have to “buy” their customer
time and time again driving up customer acquisition costs. On the
cost side volume also helps. A successful DTC operation will be very
labor intensive in single item picks
(not cases, and rarely multiple
eaches picked for the same order).
Since squeezing costs is a critical
success factor automation will help
but, for this to be economically
viable, there must be enough volume. Large and automated facilities
is the key to reducing picking and
packing labor and managing inventory. It helps to think of this as high
speed manufacturing. These operations are very process driven, and
must be balanced with the delivery
end to ensure short delivery cycles
and good productivity. Volume also
improves route density which is critical for delivery economics, and
allows for an improvement in gross
margin on the buy side Grocery
Gateway uses specially engineered
trucks, very similar to United
Parcel Service (UPS) trucks, with
three temperature zones. Deliveries
are typically 5-6 totes, delivered
into the home on a trolley.
Palletized loads are not well adapted to this type of delivery.
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Speed to launch, speed to hit breakeven volumes, speed to adapt to
competition. Grocery Gateway’s
newest 280,000 sq. ft. facility was
designed, built and started-up in 9
months. The team brought together
included experts in high speed
manufacturing and in mail-order,
industrial engineers, system integrators and top-notch project
managers. The crux of the design is
a 3*3 matrix with ABC movers on
one axis and the three temperature
zones on the other axis.
How the models differ
Traditional brick and mortar
Consumer direct
Push
Transaction environment
They invite you to their stores
Distribution culture
Locations as assets
Stable
Vertically integrated
Information poor
Mass marketing
Pallet/FTL efficiencies
IT as enabler and inward
Pull
Service environment
You invite them to your home
High speed manufacturing culture
Customers as assets
Dynamic
Virtually integrated
Information rich
Mass custmization
Single item picking
It as centerpiece and outward
Technology to the Rescue
The convergence of technologies
will further enable the model, help
to lower costs and increase loyalty:
For instance, we are only now
seeing truly sophisticated transportation management systems
geared to residential deliveries,
single item picking software, consumer personalization software. But
buyer beware – none of these systems are ready for plug and play.
That’s why most Direct to
Consumer players are investing
heavily in information integration
skills in order to tie these disparate
systems together seamlessly.
Grocery Gateway has spent signifi-
cantly to integrate, scale and stabilize a software and systems environment that includes an in-house
web ordering system, automated
routing, warehouse management
and control systems (WMS, W&H
conveyors, and RTS).
With Capital Drying-up, There
The early players are trying to lay
down first mover infrastructure.
The economics today are similar to
the early days of the telecom boom,
and building a residential delivery
capability is much like laying telephone cable. It is very asset intensive and costly, but once it’s in it’s
hard to replicate.
Will be a Shakeout Sooner
Rather than Later
Who remains standing to carry it
out – converted bricks and mortar
players or standalone and deep
pocketed consumer direct players
– remains to be seen. What is clear
is that they will have to have speed.
Oddly enough, the response of traditional retailers has been muted to
date, probably because this is still a
small segment (e.g. in grocery retail
projected to be 5% in 5 years), is it
an asset intensive business in noncore areas for their management
today, there are complicated logistical challenges that could damage
This is the story of how Grocery Gateway is building an unbeatable consumer experience in the tough grocery
business, from the moment they log on until they are enjoying the products at the dinner table.
Mrs. Smith was born to shop, but for groceries? No way. Its 7.44 pm, Mrs. Smith has logged on for her week’s worth of
grocery shopping. She picks up her normal shopping list, deletes the wipes and eggs she still has plenty of, adds dish
washer powder, then turns to the specials to select a roast for the dinner party on Saturday and to look for ideas for little
Jack’s 6th birthday party. She also sees that now she can buy shampoo and pet food at the same time, so she adds a bag
of dog food (“better than carrying it home!”) At 7.52 pm, she has finished her shopping cart and she checks out. The total
is $163.52, and she is offered delivery tonight between 10pm and 11pm (she is a regular customer, and it’s a quiet night
in the warehouse), or tomorrow anytime from 4pm to 9pm. She lives in a high density area, so there is always a delivery truck in her area. She chooses 5.30-6:00 pm tomorrow. She clicks to accept and the order is placed. Then the gears
start rolling behind the scenes. Her order is part of the work ready when the morning picking team arrives at 6 a.m. It has
first been automatically routed and then broken down into picking directives by the warehouse management system. At
8:00 a.m. the warehouse management system releases her order to the picking floor. Her order is part of a wave of 100
orders which will get picked within one hour – that’s one order every 36 seconds. Her products are picked into 6 different totes in four different temperature controlled areas of the warehouse including chilled and frozen.. Pickers using
sophisticated technology to ensure accuracy and speed carefully pick and pack her order as her totes come within their
pick zone. Once her order is complete it will then be conveyored to the loading dock where it is directed to the right
vehicle and will get scanned and loaded into a truck that will be serving 26 other Grocery Gateway customers, 2 of them
on her street, and 5 others in the same development. The trucks and the totes are custom designed for this application
and keep the products at the right temperature. The driving shift arrives for work at 2:30 p.m. Fred, one of the drivers,
starts the engine of his truck at 2:38 pm and drives off on his delivery route. At 5.33 pm, the grocery Gateway truck stops
in front of Mrs. Smith’s home. Fred unloads his trolley and loads up the 6 totes with Mrs. Smith’s order. He takes off his
shoes and takes it into the kitchen and unloads the totes onto the counter. Along the way he asks how Mrs. Smith’s order
last week was and wishes Jack a Happy Birthday. Mrs. Smith chooses to pay with Interac and Fred processes her card
with the wireless payment terminal. At 5.41 pm, Fred gets into his truck and drives 5 houses up the street for his next delivery.
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established brand and banner
names, the economics remain
unproven, and their established
cultures are unsuited for startups.
bBut retailers have huge assets to
bring to the table: established and
trusted brand names, huge customer bases, product/purchasing
expertise, to name but three.
Ultimately there may well be a merging of both.
A few more questions to Claude Germain
What are the limits of your business model?
Our business model is very focused in order to drive to cost position in
a specific niche. There are two core capabilities within our business
model. Broken case picking and direct delivery. Our aim is to have the
low cost position. On broken case picking, we have optimized our facility only for broken case and for pick per SKU profile of close to 1:1.
This is the profile of e-commerce orders. We are not well suited to handle case picking, or store fulfillment of broken case where the pick per
SKU is higher than 1:1. Our niche is e-commerce fulfillment. That being
said, we absolutely have cost position over any other broken case facility I have seen given our focus and resulting specialized set up. That
also means that we tend to carry consumer SKU s and not commercial
or institutional SKUs. As an example, that means that all of our SKU s
fit into shipping totes and that we rarely sell master cartons. Now, on
direct delivery, we have optimized around small order drop off. Our
average totes per order are 4-5. Larger drop offs that could benefit from
being palletized do not fit our model. Indeed, our trucks are customer
designed and resemble UPS trucks - but with three temperature zones.
To which customer segment is your business model most
relevant?
We tend to define our segment as more of a psychographic rather than
demographic. We serve customers who are predisposed to convenience. They are mostly two income earners with kids, but can also be
downtown dwellers who don't have a car as an example. We cater in
other words to the 2/3 of shoppers who dislike grocery shopping as a
chore (and offer up 7/24 access, 90 min delivery windows etc).
Nevertheless, these customers are still value conscious, so we still price
at retail and offer up a full complement of products - essentially what
you would find in a large grocery store (core grocery including all perishables, beer and wine, health and beauty aid, best selling books and
videos, Starbucks coffee etc.
What are the operating conditions for start up?
We try not to be on the bleeding edge and have therefore incorporated into our facility design many facets from other industries. We are
very much a blend from high speed manufacturing, mail order and courier hub. Whereas the lexicon is similar to a grocery DC, that is where
the similarities with the grocery industry end. As for our technology, I
hate to admit it, but we had to over invest in in-house systems integration talent. Nothing we received from vendors was remotely plug and
play, and required a tremendous focus and leaning curve to integrate,
scale and stabilize. Our technological components include web order
processing (inhouse), automated routing (Descartes), each picknig focused Warehouse MAnagement System (WMS), Warehouse Control
Systems (W&H Conveyors) and Picking SubSystems (RTS).
What are the methodologies for start up?
Our newest plant is 280,000 sqft and will have cost us $15M Cdn.
From design to start up will have taken 9 mos. We hired out experts in
high speed manufacturing and in mail order, and combined them with
our inhouse industrial engineers and system integration team .We then
recruited for top notch project management skills. Our approach was
like a consulting company at first. We clearly determined what we wanted to execute against, from a throughput, cost position and capability
perspective. We then studied business models out there and took pieces
that seem to fit. We then segmented our design into 9 - a 3x3 matrix
that has A,B,C movers on one axis and 3 temperature zones on the
other. We then tried to fit the best design and technology into each and
played with integration issues to arrive at a balanced blend that would
meet out objectives. We then started going to tender and executed
against basic startup methodologies.
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