Why delivery and logistics startups are failing.
By Joel Ritch
Commerce launched an unprecedented demand by consumers for merchandise not seen in the shipping and logistics industry prior. The attitudes of, and behaviors by, consumers on the other end of a package have changed dramatically. On top of all of that, established shipping and logistics companies traditionally are not at the front of the pack leading with innovation, which means there has been a lot of room for improvement.
Investors have put more than $730 million into delivery startups from early 2014 through the first half of 2015, making last-mile delivery a highly contested battleground, with dozens of startups vying to win the game. So with all of the room left by traditional companies and the injection of funding, why can’t tech startups disrupt the logistics industry?
The crucial last-mile of delivery accounts for the majority of a shipment’s cost and complexity, and is fraught with inefficiencies. Complexity is the No. 1 reason delivery and logistics startups are failing. Startup companies have underestimated the resources needed to build a successful logistics-driven business from the ground up.
There are plenty of companies in the space, early-stage and long-standing businesses, but comparatively, even the companies that are doing well and gaining traction still have a ways to go. Shipping and logistics is not an easy task. Above and beyond the complexity issue, there are additional barriers to startups disrupting the logistics market.
More Than Technology
Shipping and logistics, like other, more traditional industries, continue to be impacted by technology. With technology leading the charge in the disruption of the industry, startup technology companies have seen an increase in both interest and funding. As a result, these companies are having a positive influence on the industry.
Many of the technology startups have brought innovations and solutions to market that have improved efficiencies and optimized processes, not to mention safety advancements.
Let’s also look at the other side of the technology coin. Experts within the shipping and transportation industry have noticed an increasing trend toward the “Uber-ization” of shipping with mobile application technology advances. While these are helping companies organize and track the daily log of a driver’s day on the road and enabling the delivery process to be tracked every step of the way, these experts have expressed caution in technology’s inability to handle the complexities of delivering the packages beyond just pick up at location A and drop off at location B.
In a recent Material Handling & Logistics article, C.H. Robinson CEO John Wiehoff says, “The commoditization of freight is a lot different than the Uber model of passenger pick-ups, due to all the exceptions and requirements involved in freight carriage.” Startup companies, entrepreneurs and investors are starting to realize a lot more goes into a successful logistics company than technology alone.
Sure, technology is the foundation of the on-demand evolution. However, without proven logistics experience to balance the technology, solutions end up being half-baked and don’t really mean a startup can handle the demand in terms of organization, scheduling and conducting deliveries, on its own.
Density and Rate Are Key Factors
According to an October article in This is Money, a U.K. online publication, the online director for popular grocer Sainsbury, Robbie Feather, said “supermarkets had ‘destroyed’ the value in grocery deliveries by undercharging.” In the same article, Dan Murphy, a global retail consultant for firm Kurt Salmon, put the dilemma perfectly: “You are selling tenners for a fiver, but you’re convinced that if only you can sell enough, at some point it will become profitable.”
Let’s tie those statements to density and rate of a delivery to show why these two factors are so important:
1. Rate – There is no such thing as bad freight, just bad rate. Emerging startups in the U.S. are offering services and cost structures that are below a sustainable model. Undercharging is what Robbie Feather called it for the U.K. grocery stores. The rates these startup businesses have to charge to make the option attractive for consumers are ultimately hurting their businesses. All the undercharging makes it almost impossible to maintain low density or an average volume of deliveries. Which brings me to the next point.
2. Density – Startups looking to enter the logistics and delivery market have entered certain sectors, grocery and food delivery for example. However, these segments will never create the density of deliveries that are needed to sustain the business. Some segments of delivery just aren’t as profitable as others. Because the rate needs to be so low (selling tenner for a fiver) to attract consumers, the business has to deliver more packages or make more deliveries to make it worthwhile for the drivers and, of course, to sustain the overall business.
If we look beyond the complexity issues with logistics, to things like traffic, technology, and the rate of freight, startup companies have a lot to overcome and figure out.
Startups and their investors believe (or believed) companies would succeed once they grew to enormous scale, but entrepreneurs and investors are beginning to find that the economics of making a delivery service work are far from easy.
Take WebVan, for example, a last-mile grocery delivery service known as the biggest dot-com bust. According to The Wall Street Journal, the online grocery company went through more than $800 million in capital, went public, filed for bankruptcy and ultimately ceased operation. So what went wrong? The problem wasn’t in the technology (which may have been ahead of what the Internet could handle in the early 2000s), it was the space WebVan was entering and the execution. A lot of things have to go right for this business model to be successful. All of today’s ideas could survive in the market, the question is how much money is out there to invest in startup companies until one figures it out.
While today’s emerging startups have some capital and smart technological innovations, they don’t have the infrastructure, the industry experience and the ability to scale fast enough to disrupt the traditional competitors.
The growing on-demand delivery segment is where traditional logistics companies can excel because complexity abounds here. The established companies in this space already have the critical infrastructure, including qualified drivers, efficient vehicles and safety programs in place. Not to mention an essential understanding of the complexities and moving parts that startup, non-industry players just don’t have. This combination is a non-starter for these startups to really be able to disrupt the market.
Joel Ritch is a 30-year industry veteran and the CEO of Progistics Distribution, a last mile distribution and logistics company.