Published: 5 February 2020
By Senior Lecturer Alan Charlesworth, Faculty of Business, Law and Tourism
At 2.30pm on Sunday afternoon I ordered a book on Amazon. It arrived at my house at 9.30am the next morning. The book cost £3.99 - which included free delivery.
As a customer: tremendous.
As a sustainable business model: impossible.
A low cost of distribution for fast moving consumer goods (FMCG) is based on economies of scale. The unit cost of shipping 100,000 of something in a single container is relatively inexpensive. Such economies are the norm in B2B transactions between manufactures/producers and wholesalers/retailers, with the price paid for the goods including the cost of delivery to a warehouse, store or shop.
However, what is by comparison horrendously expensive, is the so-called last mile of moving the goods from the retailer to the house of the buyer. Which is why, traditionally, the cost of that last mile has always been met by the customer who travelled to the shop and transported their purchases home with them. With online sales, this is not the case.
If the cost of that last mile is taken up by the retailer – as is the case with free delivery – then we have a situation that is simply unsustainable if the free-delivery retailers are to remain in business. In the so-called ‘digital first’ economy, the significant last-mile cost is in the army of non-digital humans involved in the logistics of getting a single parcel from a distribution point to a private address.
"The cost of the so-called last mile has traditionally always been met by the customer who travelled to the shop and transported their purchases home - with online sales, this is not the case."
I teach marketing, not accounts, so my arithmetic is pretty simplistic, but I won’t be too far off. Let’s consider the retail grocery industry.
It’s a very competitive industry, with low prices being paramount in any marketing strategy. The selling prices of individual products are determined using the traditional notion of customers delivering their purchases to their own homes. The selling prices will combine with keen purchasing policies and low shop running costs to give an overall net profit in the single figures. For some low-cost chains, this will be a very low single figure.
Tesco is lauded as having the biggest percentage of its sales being online – around 20%. That means 80% is ‘self-delivered’ by the buyers. That’s fine – they meet the overall cost calculations that bring in a net profit.
But what about the shop-delivered 20%? They have the wages of the order pickers and delivery drivers – and expense of the vans that do that last mile to add to their costs. Effectively, the 80% of customers who carry their own bags home are subsidising the 20% of folk who get free deliveries. Only Tesco will know the real numbers, but I’m going to suggest – as others do also – that they might actually be losing money on every free delivery. As Homer (Simpson, not the Greek philosopher) might say; D’oh.
Even a sky full of delivery drones isn’t going to save free grocery deliveries going the way of Green Shield Stamps (Google it if you’re not of my generation).
Amazon, of course, can sustain such potential losses because the online behemoth (it accounts for around 50% of all online sales in the USA) makes its profits on advertising and data management, not retail sales. It also has no retail outlets to pay for (I’ll not head down the tricky path of how much/how little tax it pays), though look out for Amazon shops coming to a place near you – customers collecting their own orders really is a ‘free delivery’ for the seller. And that includes Amazon.
Alan Charlesworth is a Senior Lecturer and has been involved in what is now referred to as digital marketing as a practitioner, consultant, writer, trainer and educator since 1996. Alan also writes about and consults on the phenomenon commonly known as the Digital Transformation, a subject that transcends marketing into all aspects of business and management. Read more about his teaching and research interests and studying Business and Management at the University of Sunderland.