How customer demands are reshaping last-mile delivery

Source: McKinsey&Company

The last mile is seeing disruption from new business models that address customer demand for ever-faster delivery, as well as new technologies such as drones and autonomous ground vehicles.

Last-mile delivery, especially of parcels, has recently received lots of attention in the media and from investors. The cost of global parcel delivery, excluding pickup, line-haul, and sorting, amounts to about €70 billion, with China, Germany, and the United States accounting for more than 40 percent of the market. And not only is the market large, but it’s also highly dynamic, with growth rates in 2015 of between 7 and 10 percent in mature markets (such as Germany and the United States) and more than 100 percent in developing markets. The biggest driver of this growth, not surprisingly, is e-commerce, which has shifted market share from the B2B to the B2C segment.With the rise of e-commerce, consumer preferences have grown increasingly important in the formerly business-oriented parcel-delivery market. Large e-commerce players, as well as various start-ups, have identified last-mile services as a key differentiator. In fact, the variety of delivery options and the perceived quality of the delivery service are major decision-making criteria for online customers and hence directly affect e-commerce players’ success in the marketplace. With this in mind, vendors are working hard to offer the best customer experience possible, especially by improving delivery times. To gain a better understanding of what customers actually prefer, we conducted a survey of more than 4,700 respondents in China, Germany, and the United States. We used conjoint analysis to better understand consumers’ relative preferences for different delivery options, including their willingness to pay (Exhibit 1). Nearly 25 percent of consumers are willing to pay significant premiums for the privilege of same-day or instant delivery. This share is likely to increase, given that younger consumers are more inclined (just over 30 percent) to choose same-day and instant delivery over regular delivery.

Exhibit 1

The speed at which the outlined last-mile-delivery scenarios can be reached will vary, depending on public sentiment, regulation, and labor costs. Early adoption of these new autonomous-delivery models will concentrate in developed countries, where labor costs are high enough to make the return on investment significant. In the developing world, however, labor costs will likely remain low enough to prevent any major technology change from affecting the last mile over the next five to ten years. Regulation will need to undergo substantial change (for example, regarding liability for damages caused by autonomous vehicles), but such challenges will be overcome in the next ten years, driven by the influence of the large automobile companies. At the same time, public opinion concerning autonomous vehicles, as well as drones, has already started to shift—with 60 percent of consumers indicating that they are in favor of, or at least indifferent to, drone delivery. Therefore, there is little to suggest that the transformation will not kick in over the next decade, at least in the developed world.

What does that mean for players in the market? If companies operate in a country with high labor costs, they must start thinking about the future of the last mile now, as they need to lay foundations in HR, IT, and the investment strategy. Those that fail to act soon will forfeit their chance to be among the contenders for the last mile in the long term.

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About the author(s)
Martin Joerss is a senior partner in McKinsey’s Beijing office, Florian Neuhaus is an associate partner in the Munich office, and Jürgen Schröder is a senior partner in the Düsseldorf office.

The authors wish to thank Christoph Klink and Florian Mann for their contributions to this article.