DEEPER DIVES: How Do Last Mile Providers Keep Raising Money

Good Morning,

First, as always, thank you for joining.

Another 10% increase in subscribers. Amazing.

New Readers - Below you’ll find links to submit questions for me to write about, or access all previous editions of the newsletter.

With peak season in full swing, the questions around delivery and getting product to customers don’t stop coming.

The title of this week’s newsletter was the latest question submitted to the AMA. I’ve addressed some of these ideas before, but now I’m going to do it in the most visual and transparent way I ever have.

Let’s get into some of the best lessons you can learn about delivery execution to either delight more customers or improve your profitability as a service provider.

One last thing …

I’d love to finish 2024 wicked strong with newsletter. If you know anyone that you think would benefit from what I share here, I would ask you to consider forwarding this week’s release to them so that they can sign up here to receive it each week themselves!

Here’s what this issue brings:

• This is going to be everything you need to understand about last mile. Pricing, capacity, reliability … it’s also based on this model. By understanding this concept, you’ll be able to tell if you are paying (or charging) the right amount for your service. You’ll also understand how ‘alternative’ go to market providers are trying to make their less efficient models work.
  

• Dollar General quietly launched an ultra-fast delivery service from their stores. I’m sharing my thoughts on why they did it and if it has any hope of actually making a difference
  

• I’m onto my next open source exploration, getting into Metabase to help more people get more from the data they are already recording. A quick overview.

The Keys To The Castle: This Is The Best Way To Understand Last Mile Delivery

There’s one constraint that every service provider has. From Amazon to Bob’s Start-up, it doesn’t matter, the same constraint drives everyone’s performance.

Time.

Time is the variable that completely constrains your operations.

What you have for infrastructure, the promises you make to customers, your tech stack and your processes dictate how those 3 buckets look, but this model applies to everyone.

Before getting into the explanation, let me answer the question that headline this newsletter.

How are last mile providers continuing to raise money despite the fact that so many of them are struggling?

There’s a few reasons that this is happening.

1. The continued growth of eCommerce and direct-to-home expectations

2. A misguided understanding of TAM when it comes to logistics

3. Doubling down to protect already invested capital

The main driver behind the activity is really a combination of 1 and 2.

With billions of packages already being delivered each day, and the continued growth of eCommerce, it’s “easy” to make the math work on paper.

“I would only need to capture X% of …”

This type of thinking can allow even though most savvy of investor think that there’s too big of a pie to not be able to cut a piece for themselves.

It’s wildly flawed however.

It neglects the realities of what it takes to be an attractive option to shippers (retailers / brands).

It neglects the fact that last mile is operationally intense, and requires high quality execution 24/7/365 to truly be profitable.

And it ignores the fact that the market (like bulk transportation) has been highly commoditized and grown on low cost or free.

I’ve shared some thoughts before related to diseconomies of scale before.

While true that as your volume and density increases you benefit from economies of scale, logistics (especially last mile logistics) has a very short runway before you hit a reset and actually fall into the “diseconomies of scale” part of the graph.

This happens because you need to expand.

In order to say yes to more customers and take on more volume, you need to increase your service area and/or capacity.

As you add these resources to support some of your volume, they are often unprofitable at the start because no one is able to grow in a way that always covers your total cost.

Until you build up enough volume (i.e. sign enough customers) for those new areas again, you lose money.

This is why you see stories about low-cost deliveries from Asia still finding a home, despite the fact that doing a delivery for $1 per pack is absurd.

It’s because that provider is living in loss or they are just over a break even point and are filling the capacity to either make some money or to offset their current losses in any way they can.

(For those of you that might challenge my position that doing these deliveries is absurd even they have already covered their costs and are making some money - that’s a deeper discussion that I’m happy to have if you are a service provider and need help getting away from this addiction)

How Does Understanding My Model Help Explain What’s Happening?

Knowing that everything is about time, what you need to understand is how that time gets allocated.

There’s only one brand that generates revenue, the delivery.

To be successful in last mile, there’s only one thing you need to do.

Maximize your transactions per hour.

That’s it.

The most revenue generating activity you can do my hour, they more revenue you drive and (hopefully) the better your profitability.

The caveat there on profitability is because quality of revenue matters. Most people make the mistake of thinking that all deliveries are the same.

They aren’t.

And the biggest danger of them all is not accepted the fact that while not all deliveries are the same when you talk QoR (quality of revenue), they ARE THE SAME when it comes to eating up your capacity.

This is why things like ounce based pricing is bullshit.

Outside of the higher in the chain benefits lighter product has when it comes to flying, there’s almost no real benefit to cost for lighter items in an eCommerce world.

What matters more of course are the dimensions. And this is why people have made a lazy association with weight. The idea is that the lighter something is, the smaller it will be.

While “true”, the fact is that something at 9 ounces versus 1.2 pounds of doesn’t have enough of a difference in the dimensions to matter.

Three Buckets

After 20 years of doing this, the easiest way I’ve found to think about this is to lump your time into 3 major buckets

• Admin time

• Drive time

• Delivery time

In the chart above, I’ve given you the components of how these buckets generally break out.

It’s not complicated.

But each activity matters and seconds count.

The key takeaway is this - What every you can do to shift time from the red or the yellow and into the green increases revenue

Here’s another big trap.

The drive time looks like your biggest opportunity to improve since it’s the single biggest piece of the pie (in parcel delivery anyways - B2B is often very different).

So people go out and they try to build or buy the next best route optimization engine believing that it will dramatically improve their capacity.

Wrong.

See, driving takes what it takes. And the reason why that’s so large in the above model is because that’s representative of an Amazon route. That amount of time driving should be more understood as “time in movement”. This is not only about getting to and from the market but all of those micro-legs between each revenue generating transaction (i.e. customer deliveries).

Even with Amazon’s wild density and 31 second handbrake to handbrake delivery time, that’s still how much time is associated with moving.

Note: The above is not an exact model for all buckets for an Amazon route - breaks, loading times and paperwork are examples. This model also doesn’t not show the breakout of enough customers as it was for the concept and explanation only

There are two things you can do to improve the optimization of your yellow

• Don’t over promise when it comes to specific delivery times or windows

• Increase your density

Deliveries

The green is where your attention should be.

Clustering your customers and building dense pockets of activity is how any model will drive the most revenue.

You ideally want to do all of your business when you are in a smaller geography and limit any additional time moving in and out of different zones.

This is exactly why there aren’t specific delivery times and windows offered with most eCommerce checkout. Each time you make that promise, you are immediately taking on the responsibility about putting a truck into a certain area at a certain time - which may or may not be the most optimal.

(I can pretty much guarantee you that unless you are dealing with Amazon, FedEx or UPS levels of volume, you likely don’t have enough density to effectively make this type of promise).

From each cluster, you then have your customers.

Now, the delivery times in this example are much too high for parcel, but it helped make the numbers easier to highlight where you need to focus.

Ideally you want to have the same standard delivery time for your customers. This is because you have a tight and well defined process that dictates exactly what you do (and more importantly, don’t do).

With this in hand, you are able to maximize your ROI for each revenue generating activity.

Using the example above, you can see that most of the customers are a 3 minute delivery. Ideally think I would be able to do 11 customer deliveries in the allocated time, just shy of 12 actually (and in this case, you would want to understand what you need to change in your process to capture the 12th).

But, because you have some customers that take 5 minutes, and a real dog of a customer that takes 10, you are actually only able to achieve 8 revenue generating transactions.

This could be because those customers are ordering larger items. It could be that they live in gated communities or hard to access apartment buildings or maybe you allowed for signature capture.

Whatever the reasons, they are taking up more of your capacity and it’s ESSENTIAL that your charges reflect this. All deliveries are not the same.

Market Investments

Most of the investment you are seeing into last mile are going into ‘alternative’ delivery models.

This means that they aren’t necessarily traditional operations that are sending out fully capacitized fleets every day.

That’s the Amazon / UPS / FedEx model.

You do see some that operate this way and have received investment. These regional carriers typically are trying to capture volume by offering a lower price. The offset for them is to try to have a lower cost than the majors in order to make this work.

They achieve this by having a more limited geography, possibly only taking certain types of parcel, or paying workers the bare minimum they can.

Gig networks or even more capacitized models that leverage worker owned vehicles further try to offset costs and reduce time in movement by not having a requirement for drivers to return to a depot at the end of the day. This additional time then gives them the potential to move that into revenue generating transactions.

And of course, if anyone can not pay breaks - they try to do this too.

The ongoing raises and investments you are seeing the market is simply because of people trying to survive long enough to capture enough density to make it (in some way).

This market reality is part of what spurred my article related to OnTrac a few weeks back and why I stated that 2025 will be the year of reckoning.

There isn’t enough volume going around.

Not enough anyway to support all kinds of networks trying to service geographies that are much too broad.

It’s a nasty cycle too. Because as you end up having to limit your scope or coverage, you become less attractive to shippers, making it harder to sign new business (which is why rates keep dropping).

Dollar General Is Looking To Use Delivery To Create Customer Intimacy, But Will It Be Enough?

A surprising bit of information came out of the Dollar General earnings call last week.

They’ve launched a pilot, partnering with a third party to offer delivery through our DG app from approximately 75 stores.

This is in addition to the fact that they still have their partnership with DoorDash that allows customers to buy DG items from within the DoorDash app and be fulfilled from any of the 16,000 Dollar General stores.

So why would they launch a same day delivery service?

There’s two major things that they seem to be looking to get from this (outside of the assumption of driving top lines sales).

1. Personalized shopping experience

2. Contribute to the Dollar General Media Network by leveraging digital tools for enhanced customer engagement

Basically, every major retailers is realizing just how important customer intimacy is. The days of only playing the transactional shopping game are quickly coming to an end.

They know that if you want to sell more, you have to be part of the customer’s world in a much more integrated way.

That you have to offer them value, that you need to make things more convenient and that you need to be able to do it in just a click.

And of course, advertising.

Everyone knows the benefits that companies like Google, Meta and Amazon get from their ad revenue.

Walmart has also been on a tear over the last few years promoting their retail media network. Instacart hasn’t hidden their aspirations in this area either.

This type of ad revenue is wildly profitable. These retailers basically are reselling some of the attention that they have been able to get from you to others, who’ve been less successful.

All with the goal that those retailers sell more stuff and companies like Walmart make money from them selling you their stuff.

The Dollar General delivery pilot has an interesting opportunity to enhance other gig platforms.

The CEO went out of his way to not mention who is doing the work, but in my mind there really is only a few options.

• Uber

• Roadie

• OneRail

This is because of the fact that they don’t have anywhere near enough volume to do same day delivery with anyone that would need a commitment. From the previous article, you know exactly why that would be a problem.

Having one of these platforms that already has tons of drivers signed up and available is the only way they would have gotten interest and been able to launch in September.

The one credit I would give to DG if this is the case, is something I have been sharing for a while when it comes to these gig platforms - and that’s need additional volume into the network that is NOT on-demand.

Even with it being same day delivery, it would allow for the execution of 2 to 3 waves of pick-up and delivery sets throughout a day. All of this product would need to be shipped from their stores, and stay within a small geography of each location.

I’m watching this space to see what more information comes from it as they expand.

What’s also interesting is that it ISN’T being done by DoorDash (an announcement of a deeper partnership would have been welcome). This leads me to believe that DoorDash is also realizing that they need to keep more control of the customer and have them on their app and that doing only the deliveries while retailers control the hearts and minds isn’t a viable strategy.

Driving More Insights From Your Data Is How To Drive Better Results

I’ve been doing a ton of data work the last few months.

One of the biggest challenges that I’ve had (especially working with smaller business from start-ups to mid size) is finding a solid BI solution.

There are a lot of things out there, but those big logos that you’ve probably heard about can get expensive.

Or, they end up being limited in what they can do.

I’m a massive supporter of open source softare.

I’ve shared before that whenever I can, I don’t use mainstream products for my work (I only log into Windows for very specific tasks!).

Building out some dashboards for a client I’m supporting, I started looking for more options that could better support a rapidly growing dataset.

Metabase is my next adventure.

Metabase is an open-source business intelligence and analytics tool designed to make data exploration and visualization accessible to everyone, regardless of their technical background.

It offers a wide array of visualization options, from classic pie charts and bar graphs to more complex visualizations.

And while I do work with SQL, what’s cool is that Metabase's query builder allows you to ask complex questions about your data without writing a single line of code.

Is it going to be enough for what I want to use it for?

I’m not sure.

But, I’m going to find out.

I’m sure I’ll share a more detailed breakdown in the future, but as readers of the newsletter, you know that I like to help people get exposure to the tools that exist out there that can help you do more with less.

That’s it for this week. Thanks for being here.