Last-Mile Delivery Costs Rise with Increased Demand for Speed

The growing demand for expedited delivery has heightened competition and costs in the last-mile delivery sector. According to a recent AlixPartners survey, 76% of retail executives reported an increase in per-package delivery costs over the past year. Despite this, 75% noted that home delivery does not contribute to profitability, with 85% identifying cost reduction per order as the top priority. 

“Carriers have experienced meaningful inflation in wages, equipment, repair and maintenance, insurance, fuel, tires, real estate, health-care costs, and more,” said Marc Iampieri, global co-leader of logistics and transportation, and partner and managing director, AlixPartners, in an interview with CNBC. “Those costs are offset by future rate increases. There is also a macro supply-and-demand equation to consider as e-commerce growth outstrips retail growth.” 

In response to rising delivery costs, retailers are diversifying their last-mile delivery strategies. Three-quarters of executives reported using a mix of delivery options rather than relying solely on a single carrier. FedEx has benefited from this shift, with 42% of executives naming it their primary last-mile carrier, up from 27% last year. Conversely, UPS has seen its share as a primary carrier decline from 35% to 25%. 

UPS, facing weaker-than-expected profits and its largest single-day stock loss, acknowledged the trend of balancing carrier use as part of building supply chain resilience. The company also noted that new entrants and low-cost competitors, such as Asian retailers and rivals like Shein and Temu, have influenced customer choices.

Retailers are exploring alternatives like OnTrac, Pandion, and LSO/Lone Star Overnight, as well as platforms such as Uber Eats and DoorDash. Free delivery remains a significant factor for consumers, with 92% of respondents stating it influences their purchasing decisions. However, consumer patience is limited to a maximum of 3.5 days for delivery before they consider shopping elsewhere.

To manage costs, many retailers have increased the minimum order value required for free shipping. About 64% of executives have raised this threshold, and 15% now require both a minimum order value and a membership for free shipping. Additionally, 25% of shoppers prefer to Buy Online, Pick-Up In Store (BOPIS) to avoid shipping costs and expedite receipt of their products.

A report from FarEye, in collaboration with Microsoft, reveals that logistics firms are prioritizing cost and speed in last-mile delivery. Over 50% of firms now offer same-day or next-day delivery, and 80% of supply chain leaders view cost measurement as crucial. FarEye's co-founder, Kushal Nahata, anticipates that autonomous drones will handle 30% of urban deliveries within five years, reducing both delivery times and costs.

Originally published here