DEEPER DIVES: In-Home Delivery Is Slow, Full of Risk And Needs Better People

Good Morning,

First, as always, thank you for joining.

Monday is starting off with a bang.

Matthew Zarzycki and me are launching Wake Up And Deliver! at 7:00AM Eastern Time.

It’s a LinkedIn Live Audio show where we talk shop, share our takes on the news, and drop practical advise.

Best part?

Anyone can join us to speak. It’s ALWAYS an open discussion and everyone’s invited.

Totally unscripted, so you never know what will come up.

Here’s what this issue brings:

• The only thing that sounds worse than ultrafast delivery is IN HOME delivery. Why would anyone ever want to take on that type of risk?!? I’ll share insights as to how and why I see this being way more effective than people are thinking about right now
  

• "If you look at demand levels now for the total market, we're below 2019 levels in nominal terms, and in real terms, we're far below 2019 levels.”
  
  A quote from Niraj Shah, Co-Founder, Co-Chairman, President & CEO of Wayfair
  
  I’m going to share with you what I’m watching and why I think Wayfair is in A LOT more trouble than what’s hitting the headlines

Welcome To The Wonderful World Of Walmart. Waking Up With A Week’s Worth Of Groceries

Walmart announced on Friday that its InHome delivery service is expanding. An additional 10 million households are now qualified to use the program.

(If you missed my post, you can see it here)

It got some interesting comments. It also led to some great conversations in the DMs.

In-home delivery is a contentious issue. Not on the technical side. The planning and execution aren’t hard to understand.

What gets people’s back up is the risk.

The idea of a stranger accessing your home to drop off items in your fridge (unsupervised).

I get it.

I’m one of those people.

I never let contractors or service providers access my home if I’m not there.

One thing is clear however, everyone is trying to get more done with their time. While it may feel foreign now, the convenience and certainty will sway the consumers in the middle of the curve.

If you’re feeling uncomfortable with that, think about trying to explain Uber or Lyft to a friend circa 2005 (about 5 years before any of the ridesharing companies started).

Why Would Customers Want It?

The worst thing about grocery delivery (full shop) is the need to be home to receive it.

No one is packing perishables in coolers and dry ice.

And consumers don’t want their food sitting on the doorstep.

Any time you schedule a delivery, you have to commit to being home.

The ONLY benefit that ultrafast models like Instacart have is that you don’t have to sit around all day waiting. Since you can place the order and know you’re getting it shortly after, it’s acceptable to work with for grocery delivery.

Scheduling your groceries days in advance, having to pick a time slot, and hoping that nothing changes isn’t a great customer experience. No one wants to miss a fun outing or stress while managing an unexpected event because it’s “grocery delivery day” and they have to be home.

As long as the charge isn’t seen as unreasonable, or positioned as a significant premium, customers will come around to in-home delivery.

Why Would Walmart Want It?

I post a lot on service models.

About how important it is to master time if you want to be profitable with your operations.

In-home deliveries aren’t drop-and-go.

They take time. Much more time than dropping a brown box on the doorstep and running to your next package.

It seems counter-intuitive for Walmart to be pursuing a strategy to promote a service that impacts a driver’s capacity so much.

But, for them, it has massive potential.

Walmart is the largest grocer in the US. They capture about 24% of the market.

Grocery is the biggest advantage that Walmart has.

Having access to this volume as part of their delivery network could dramatically improve efficiency.

There’s also a very cyclic and habitual pattern to how people buy food. Being able to influence the demand and load level the orders is another big win for network performance.

But, if you are going to inject grocery orders into your broader delivery network, there’s one thing that will kill you.

Failures.

Not being able to make a delivery because a customer isn’t home (or issues on the road caused you to miss your appointment with them) hurts in two ways.

First, the failed delivery means that the perishables (if not the whole order) have to be thrown out.

Once food has left the chain of custody of the store, it typically doesn’t get put back on the shelf.

Second, failed deliveries mean that orders have to be re-picked, re-shipped, and re-delivered. Using multiple capacity slots for one revenue-generating transaction is never good.

What About Delivery Time Windows (Appointments)?

No doubt something some of you are thinking about. Pretty much all routing applications these days support time windows.

So why do in-home delivery when you can just take customer appointments and deliver within the time window they said they wanted?

There’s a few reasons.

Things change, and a customer may end up not being home.

More important however, is the negative impact of time windows on your costs.

Changing just six stops to include a 1h - 1.5h restricted time window altered the required service time from 5h50 minutes to 8h03 minutes - a whopping 38% increase for the same territory and stops.

Adding time windows to the execution requirements will almost always have a negative impact on your productivity metrics.

You can try to get a bunch of different customers to all cooperate and select complimentary time windows OR you do away with time windows altogether.

For what I suspect Walmart is looking to do, trying to get away from time windows and delivery appointments is the right move and provides much more long term value.

Weak Demand Challenges Wayfair. Can Small Orders And Repeat Customers Keep Them Afloat?

Wayfair wanted to be a destination where consumers made some of their most thought-out purchases.

With a massive catalog of options, there’s something for everyone. At least, that was the goal.

Having surged through COVID, the company has had a hard time finding its footing.

Over the last year, the company has focused its efforts on becoming a more profitable organization. Wayfair has implemented cost reduction strategies, including headcount reductions, advertising efficiency, and operational cost savings totaling nearly $2 billion.

The intent is to have a lean operational model, preferring technology and resource efficiency over large headcount growth.

On the surface, it seems to be working.

Key Financial Metrics from Q1 2024

• Net Revenue: $2.7 billion, down 1.6% year over year

• Gross Profit: $819 million (30.0% of total net revenue)

• Net Loss: $248 million

• Adjusted EBITDA: $75 million

• Free Cash Flow: -$193 million

• Active Customers: 22.3 million, up 2.8% year over year

• Orders Delivered: 9.6 million, down 1.0% year over year

Despite the net loss, the improvement in Adjusted EBITDA from -$14 million in Q1 2023 to $75 million in Q1 2024 indicates better operational efficiency and cost management​. Restructuring and cost-saving measures have significantly reduced operating expenses.

There are two big pieces of information however that started to make me uneasy.

I didn’t even know this about Wayfair until I was doing research for this article.

1. Average Order Value: $285, slightly down from $287 in Q1 2023
   

2. Repeat Orders: Repeat customers placed 80.5% of total orders delivered in Q1 2024, compared to 79.1% in Q1 2023 (7.7M of the 9.6M items delivered).

Kate Gulliver (CFO & Chief Administrative Officer, Wayfair) has shared the importance of promotional pricing, funded by suppliers, in driving demand and maintaining competitive everyday prices.

Here’s the problem:

You are a (primarily) online retailer in the home furnishings space with 80% of your business coming from customers that spend under $600 a year across two or more orders.

That customer order profile feels like one that doesn’t support enough of Wayfair’s logistics infrastructure. It has over 22 million square feet of logistics space (from 16 million square feet a few years ago).

In addition, the network Wayfair has put together was designed to be faster than the (traditional) competitors in the space. The network supports two-day delivery to the majority of the US population. There are major facilities in New Jersey, Kentucky, Florida, Georgia, Texas, and Colorado to make this happen.

Finally, customers who are looking to frequently refresh their home decor rather than making one-time, high-investment purchases isn’t what’s going to sustain large format brick-and-mortar stores.

(The Chicago store is a first and a strategic experiment to enhance brand presence and customer experience).

Other online channels are putting massive pressure on Wayfair. Amazon, Walmart, and Target are strong options for a sub $600 a year home decor shopper - not only with their offerings but with the wide marketplace activity they all support as well.

There are also rumors circling that retailers like Shein and Temu are actively looking to get into the home/household goods market.

This would be an absolute disaster for Wayfair if they were able to connect with consumers for furniture the same way they have for apparel and gadgets.

Unless Wayfair can find a new way to connect with consumers and increase the amount of higher-end purchases on their platform, it’s going to be an ugly race to the bottom that won’t support their cost base.

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