Ron Johnson, the former head of Apple’s retail division, once said “E-commerce today is primarily logistics and convenience” And yes it is! Giants like Amazon or Alibaba have played a major role in facilitating convenience to consumers while other players like PayPal or Stripe enabled quick and easy payment transactions to be made. But the real convenience for people when shopping online is that that they don’t have to drive to a store, look around, and wait in line. And this value – this convenience – is only possible because of enormous operations spearheaded by logistic and freight companies at the end of the supply chain.
In Silicon Valley, we hear a lot about software “eating the world” and industries that own everything are being disrupted by startups that don’t own anything tangible: taxis, hotels, banks, and even telecommunication firms. Does this apply to shipping and logistic companies too?
UPS and FedEx remain as two dominate companies facilitating shipping and continue to take advantage of their quasi-duopoly. But is it possible for emerging startups like Uber or Postmates to unbundle these incumbents’ services and move beyond serving local to a more global economy? It’s certainly not going to be an easy task for these startups.
To better understand how complex this issue is, let’s take a look at the current landscape, featuring incumbents like FedEx and UPS (which I’ve labeled as “Goliath”) and disruptive startups such as Uber and Shyp (the industry’s “Davids”).
|Who||Uber, Lyft, Shyp, Postmates||FedEx, UPS|
|Average Age||Less than 4 years old||76 years old|
|Average Assets||$0||$68.5 billion|
|Geography||Local, last mile||Global, everywhere|
|Volume||Uber facilitates around 1 million rides per day globally, Postmates about 7,000 deliveries and Lyft is doing about 83,000 rides a day||FedEx is processing 10.7 million packages daily in the U.S. while UPS is processing about 15.3 million packages per day|
|Key advantages||Low capital expenditure, virality, innovative lure, data and technology driven||Very high cost barrier to entry, strong network, customers’ trust, operational experience|
So what does this mean? Two profiles have emerged: The first is that the startup that connects supply and demand, has strong growth and leverages assets from other parties. The second profile is your typical “old school” company that sells products, grows slowly but steadily over decades, and invests into owning physical assets.
The last mile opportunity
At a local level, startups can take a shot at challenging the leaders because they can offer a more convenient experience thanks to strong connections with their users. Postmates offers you a way to get in touch with a local carrier through your smartphone and lets you plan when you want your package picked up. Shyp takes advantage of wholesale rates to figure out the best price for your shipping. Because they have you register, install an application, and can track your actions, these outsiders know more about you than any big carrier does. For instance, Uber knows all your usual trips – where you like to go, such as the office, your favorite restaurant, the gym, or the shopping mall, and they know when you go.
With the rise of e-commerce in the last few years, Goliaths such as UPS and FedEx have had to become more efficient than they were already. These companies spend their money on infrastructure, such as physical locations, trucks, and full-time employees. They have a competitive advantage over Uber, Postmates, Shyp, and the like because over the years they have perfected the art of efficiency and established very strong operational expertise. This results in tight margins and stable market shares.
Another area where Davids can outsmart the Goliaths is with local businesses. There is a rising tide of food and grocery delivery services but other businesses like retailers are using faster and more flexible alternative services offered by those new challengers. Postmates, for example, has already partnered with Starbucks and Apple to deliver their products locally, and Whole Foods has done something similar with Instacart.
Not at a global scale
Incumbents like UPS and FedEx hold the advantage when it comes to global operations. Even though Uber operates in 58 countries and has done 140 million rides in 2014, it is still unable to help you ship packages across an ocean. Goliaths own planes, airports hubs, and have cities within cities. These tangible assets are very expensive to acquire and maintain but they are mandatory to execute those operations at scale.
I recently bought an iPad that shipped from Hong Kong and got to San Francisco in less than 48 hours. This is the reason why the carrier can charge a premium and make higher margins on international shipping. FedEx earned an average of $59 per package shipped internationally in 2014 compared to $17 on the domestic market because, and only because, of its investments made in operations. This is why the business model of not owning anything is limiting for a global-scale set of services.
The last mile at the local level is definitely an area that is going to be challenged and it makes it interesting for any firm selling and shipping products. Innovators will come up with new models to serve customers at lower costs while established players could explore new ways of cooperating. Goliaths should see those challengers as partners to expand their reach, and maybe even as potential acquisition targets to help lower margin businesses. This will also mean that you will be able to enjoy getting your local products faster and cheaper.
For the global business, Goliaths won’t be easily disrupted because it does require a lot of investment, but other players like Amazon or Google will be interesting to follow because of their strong financial capabilities and interests in ecommerce. In fact, recent rumors circulated that Amazon was thinking of launching its own delivery service using an Uber-like model based on an independent contractor workforce.
The delivery world is drastically changing thanks to innovations in technology, but whether or not you’re having something delivered locally or internationally, the future is now when anyone will be able to serve anything to anyone thanks to the connected revolution happening in our pockets: our smartphones.
Article photo courtesy of Postmates and FedEx