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The Mind Blowing Economics of Same Day Delivery & Why FedEx Might Be Wrong

By Craig Radford - UPS Account Executive / / April 25th, 2015

The Mind Blowing Economics of Same Day Delivery & Why FedEx Might Be Wrong

Earlier this month Frederick Smith the CEO/President/Founder of FedEx was asked by a young analyst during an earnings call about whether Uber, the California based taxi-app-come-logistics-and-delivery-company posed a competitive threat. Fred's response was awesome.

"There is a great country song called, 'I Was Country Before Country Was Cool',We were Uber before Uber was there, in our Custom Critical. So, Uber is a great company and a great concept. And I think where the shoe fits, there’s certainly some demand for moving a package across town in Uber or Lyft or the taxi services that have been in business for a long time have been able to do that, or some of the local same day businesses.I think there’s just an urban mythology out there that the app somehow changes the basic cost input of the logistics business or changes the circadian patterns or the underlying business situation, and that’s just incorrect. So great company, great concept, but I don’t think it’s likely to be a major player in the logistics business.”

Its clear that FedEx does not stay up nights worrying about Uber or what in general the rise of geo enabled apps could mean for their industry. But should they be?

Consider that Uber with UberCARGO has its sights set on the delivery business and recently changed its slogan from “Everyone's Private Driver” to “Where Lifestyle Meets Logistics.” Furthermore Gabi Holzwarth who is the girlfriend of Travis Kalanick (co-founder of Uber) also has her own hugely successful new age logistics startup called 'Shyp'. Even if FedEx is not, it seems some very smart people are paying attention and making big bets. 

In December of 2014 Uber raised new money at a 41.2 billion dollar private valuation, higher than the market cap of Delta Airlines and close to that of the enterprise/ take over value of FedEx, 53.23 billion. Part of Uber's unicorn valuation is that it is the first to master the network effect in the taxi industry, where with the same user interface that both the passenger and the driver see, they have over 160,000 active drivers/ cars all over the world at their avail without owning a single dollar in assets and all the burdens associated with traditional employees or in FedEx's case unions. However this is not the only disruptive aspect of this new age logistics company. Asset free third party logistics companies have already been doing a less sexy and more manual version of coordinating and transporting goods for money without owing assets for decades, recruiting regional carriers as the supply and regional shippers as the demand and enhancing the customer experience and visibility in between with software. However there is something going on that people are not talking enough about when it comes to app based delivery companies, and it is maybe even more powerful than not owning assets, its about redesigning the last mile of delivery entirely. 

Uber and Deliv (and countless others) are onto the next evolution in logistics. One that is powered by smarter inventory software and the omni channel movement and in many ways can be considered the beginnings of the disruption of internet of things for logistics. In the past it was difficult to build the kind of functionality into a shopping cart where once an order is placed late in the checkout process, the database system recognizes that the item in the shopping cart is currently being held in inventory at a store in an area proximate to where the online shopper is looking to receive delivery. What many people are missing, including FedEx's Fred Smith, is that these geo enabled delivery app companies like Uber and Deliv are signalling a fundamental change in the way supply chains will work for retail final mile delivery. As the CEO of Deliv, Daphne Carmeli explained in a recent Fast Company article, brick and mortar already have one thing that even Amazon does not have, inventory within five miles of 90% of the population. This is a new omni channel revelation for logistics that combined with on demand same day delivery apps does in fact change the economics or as Fred Smith called it, the "input costs" of logistics. While Fred makes reference to Custom Critical as their same day delivery product, this product could not be more different than what Uber and Deliv are trying to do in same day delivery. Custom Critical is so expensive it is really only feasible if you are moving in a machine part because a factory went down and operations cost you 100,000 a hour until its replaced. Custom Critical is often an air service that pretty much charters the next flight out and coordinates an arrival in the destination city. Its not even close. The same day delivery apps are looking at partnering with brick and mortar retailers that already have product within a short drive of the customer, hiring an on demand app based driver to pick up packages and make same day neighbourhood deliveries. They will help transform retail locations into mini distribution centers in order to better survive. The same day costs are even less than that of traditional ground shipping that takes 1-5 days in North America. The average same day Deliv and Uber delivery costs just 5 to 8 dollars. Part of this is that if you wanted to send a package to your neighbour with a normal ground service your package could travel 30 miles to a sorting hub, be sorted through multiple systems over night at a local sorting center and then travel 30 miles back to you. This adds all sorts of costs whereas what UberCargo and Deliv would more or less do is just take the package directly from origin to destination, saving in this case the 60 kms in between that a package delivered with a large courier company may do. Given that many online retailers already eat the cost of ground delivery it is fair to assume that they will eat the cost of this omni channel type same day delivery given it is less expensive and inextricably will become a tool for their survival. Consider the benefits to retailers for turning their assets to cash faster as the cost of inventory sitting in the store is a multiple more expensive to them than inventory sitting in a warehouse. So while people do not know, or readily acknowledge that they want same day delivery when you survey them about it, just wait. Once same day delivery is free and in more markets than the Manhattan's and San Francisco's of the world it will over take ground delivery by retailers as the predominate form of delivery for online shipping for basic needs and items under 40 pounds. The economics of doing this are far superior to both the retailer and the consumer than that of traditional ground shipping with all its warehousing and conveyor belts and trolley systems. While we may have to wait awhile for the drone deliveries expect that same day infrastructure powered by delivery apps and partnered with brick and mortar retailers to be coming in a big way now and over the next three years. - 24/7 Support including Chat 

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