Fixing North America’s e-commerce problems

January 16, 2014  |  Chris Sorensen for Maclean's  |  Comments

Why robots, drones and driverless cars are the future of retail

Canada Post’s plan to dump door-to-door delivery of letter mail has been sharply criticized for making five million more households trudge, through rain and snow, to community mailboxes in local parks and cul-de-sac entrances. But if the money-losing crown corporation is successful in reinventing itself as the parcel-carrier of choice for online shoppers, all of those hated “superboxes” could suddenly become a key competitive advantage.

Rod Hart, the general manager of parcels and e-commerce, says the plan is to make the new community mailboxes bigger so that smaller packages can be left securely inside, eliminating a major headache for consumers who may not be home when the delivery van arrives. “We’re really reshaping the company to deal with a lot less mail, and to be set up to be as efficient as possible for parcels,” Hart says.

It’s just one of several ideas being thrown around as retailers and shippers race to find a solution to the so-called “last mile” problem that some believe is holding back Canada’s $20-billion e-commerce industry. Despite how effortlessly companies such as Amazon, Target and Home Depot have made it to browse and buy online, the process of delivering all those goods to consumers remains as cumbersome as ever. Shippers generally operate on the same nine-to-five, Monday-to-Friday work schedule as the people they are trying to reach, which translates into missed delivery notices and, if you’re particularly unlucky, a long drive to a dingy distribution hub on the outskirts of town.

Some, like Walmart and Best Buy, have pushed the idea of having online purchases shipped to and from nearby stores, where they can be picked up. Others, including Amazon, have suggested consumers pick up their purchases from storage lockers scattered throughout the community, not unlike Canada Post’s proposal. But perhaps the best indication of the immensity of the challenge is Amazon’s scheme to muster an army of unmanned drones to deliver its arrow-adorned boxes—a moon shot if there ever was one. Not to be outdone, Google has dispatched the man behind its Android mobile software to build a fleet of robots, leading some to speculate we’ll one day see Google’s driverless cars delivering parcels.

The problem is a surprisingly complex one to solve, and it’s only becoming more complicated as retailers, in a bid to win customers, promise free shipping or same-day shipping on certain items—the latter being described by some in the logistics business as the industry’s white whale. That’s because of the difficult economics involved and the potential for retailers to drive themselves mad trying to figure out a way to surmount them. “The challenge is that consumers want cheap and fast—actually, free and fast,” Hart says. But, unlike the web, with its unlimited shelf space and marginal operating costs, the shipping business is still mired in a world of polyester uniforms, gas-guzzling delivery vans and snarled traffic, threatening to leave retailers’ e-commerce dreams to die on the doorstep of their customers.

The recent holiday season offered a snapshot of how badly things can go wrong. In the U.S., a last-minute flurry of online purchases by shoppers left UPS and FedEx swamped. Many packages did not make it to their destinations before Dec. 25, as promised. While the blame was placed on bad weather in some parts of the country and an unexpected spike in demand brought on by a shorter-than-usual holiday shopping season, that’s cold comfort for all those retailers who are being forced to make amends with angry customers by offering vouchers and gift cards. “For a company like Amazon, which does everything possible to please the customer, if the final leg of the supply chain is broken, you’ve got to wonder what’s going through their minds,” says Marc Wulfraat, the president of MWPVL International, a Montreal-based logistics consulting firm. “I think they want to gain control of this final piece of the supply chain.”

Indeed, the world’s biggest online retailer has already taken some tentative steps in this direction. A few years ago, it rolled out metal storage lockers at 7-Elevens, drugstores and convenience stores in various U.S. cities. Consumers pick a locker to have their items shipped to, and are then emailed a special code that can be used to access it. Other companies offering a similar service include Swapbox and Waterloo’s BufferBox, which was bought by Google last year.

Peter Sheldon, an analyst with Forrester Research, says the locker idea is an attempt to level the playing field with big bricks-and-mortar retailers such as Walmart, which were once thought to be ill-suited for online commerce because of their vast networks of expensive stores. These days, however, all that pricey real estate is becoming a valuable asset. “Retailers used to be able to fill orders only from one web-fulfillment centre, so, if that was in Ontario and the customer was in Vancouver, it could take a long time,” Sheldon says. “Now, a lot of retailers are investing in the capacity to ship from their stores. They’re turning the little staff canteens in the back into a pick-and-pack area.”

It’s not just a U.S. phenomenon. Canadian Tire will roll out a new online site later this year that will focus on shipping to stores. Other Canadian retailers who offer in-store pickup, according to Forrester, are Aldo Shoes, Chapters, Future Shop and Mountain Equipment Co-op. While Canada generally lags the U.S. in online shopping—online sales currently account for about 5.7% of retail sales in Canada compared to 8.4% in the U.S.—Forrester nevertheless predicts that will increase to about 8% of all retail sales by 2018. The research firm says the chief culprits holding back e-commerce in Canada are more expensive shipping (thanks to Canada’s vast territory and sparse population) and retailers’ relatively slow embrace of the opportunities.

As an e-commerce pioneer, Amazon is seeking to maintain its lead by once again attempting to raise the bar when it comes to customer service. “Amazon is trying to compete with same-day delivery,” Sheldon says. To make that possible, it’s continuing to invest billions in building out its sprawling network of 96 warehouses, or fulfillment centres, which are located near major cities around the world, including in Canada. But offering same-day deliveries requires more than locating the merchandise within a few hours’ drive of a customer’s home. “No one has been successfully able to service retail customers from a distribution centre on a same-day basis,” says Wulfraat. He cites the example of Peapod, a U.S. grocery delivery service. It charges customers in Manhattan about US$7 to deliver their groceries from a warehouse a few kilometres away. “You can take the same package, throw it on a UPS truck in Louisville, Ky. (the shipper’s global air hub more than 1,000 km away), and it will get there the next day for $4,” Wulfraat says. Another familiar example comes from the automotive world. “When you go to get your car repaired, the guy comes out and informs you that you’ve got a broken widget, but it will be fixed by noon, even though someone has to get the part from a distribution centre somewhere,” Wulfraat says. “But ever notice how you always feel like you’re getting gouged?”

A similar feeling is likely to be generated by Canada Post’s same-day delivery pilot project, launched last fall. The mail carrier is promising delivery by 9 p.m. for customers in Toronto who make online orders from Wal-Mart, Best Buy, Future Shop and Indigo before certain cut-off times, ranging from 11 a.m. to 12:30 p.m. The price is $13.95 per delivery. “If you really need it the same day, you’re more likely to jump in the car and just get it,” Sheldon says, citing a recent Forrester survey that only about 14 per cent of consumers consider unavailability of same-day shipping to be a deal-breaker when shopping online.

The key to any same-day service is generating sufficient consumer demand. If more people get in the habit of making daily online orders, the price to deliver each package should become more competitive. (Some believe this is why Amazon continues to experiment with the idea of grocery deliveries in American cities.) In the meantime, Canada Post is planning to deploy a range of parcel delivery options, including home delivery, pickup at one of 6,000 postal outlets across the country, and the new, larger-sized community mailboxes. “Our research shows Canadians want more choice in how and when they receive things,” Hart says. So far, Canada Post isn’t considering adding unmanned drones to that list—at least, not for the foreseeable future—but Hart stresses that the mail carrier isn’t among those who are dismissing Amazon’s proposal as crazy talk. “It makes you think about what’s possible,” he says. “It communicates to us that maintaining the status quo simply isn’t going to cut it.”

This storyoriginally appeared in Maclean’s.

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