Uber has disrupted the taxi industry. Can anyone copy the Uber model and disrupt the freight market? That question is generating a great deal of discussion among logistics executives, with the “last mile” freight market generating the most buzz.
Transporting goods long distances can be done far more cost efficiently than the delivery of the last few miles when goods arrive in congested metropolitan areas. Last-mile delivery has taken on added urgency as traditional retailers have embraced omni-channel capabilities as a way to compete with ecommerce giants like Amazon. Omni-channel fulfillment, which spans a variety of delivery flow paths – store to home, delivery from warehouse, etc. - is all about last mile.
Uber has definitely created buzz. The company has grown incredibly quickly and has a very high valuation. Founded in 2009, it is reported that the company may now be worth $50 billion.
Uber’s secret? In is easy to use, often cheaper than taxis, and is generally a more pleasant experience than a taxi ride. If you live in a metro area in the U.S., it may be hard to believe that there are people that don’t know about Uber. But Uber has not fully penetrated smaller towns in the U.S., and while Uber is a global company, it is not as widely available in other regions of the world as it is in North America.
So for non-Uber users a quick tutorial is in order. Uber is the tech company that developed an easy to use app that can be downloaded to smartphones. Using this app a person can order a ride. Uber is designed to leverage “the sharing economy.” In logistics we call this a “non-asset based model.” Both of these terms mean that Uber does not own any vehicles. Rather Uber drivers use their own vehicles to taxi passengers to their destination.
Carriers who own logistics assets and make last mile deliveries, like FedEx ngIf: ticker FDX +0.43% ngIf: show_card end ngIf: ticker and UPS, are not competing based upon an Uber style business model. Nor is Amazon, which steeply subsidizes their deliveries, but still makes money based upon retail sales and other nonlogistics business lines.
Dick Metzler the Chief Marketing Officer at uShip, a sharing economy-based company that makes deliveries of vehicles, furniture and other bulky goods to consumers, is emphatic that the Uber model will not work for “on demand” parcel or food delivered in 1-2 hours.
“More volume just makes it worse.” Metzler’s work history includes time at FedEx Freight , DHL Express EXPR +2.66% and APL Logistics, so he has a strong understanding of freight industry economics. “What works is route density; short miles between stops. One to two hour deliveries destroys the ability of a carrier to consolidate a route. There is lots of dead venture capital dollars chasing the wrong stuff. If you back off to one day deliveries, there is at least some prospect at getting to delivery density. But consumers don’t want one day. And they want free deliveries.”
In contrast, Dave Mount, a partner in Kleiner Perkins’ Green Growth Fund, believes there could be an Uber type play in last mile. Kleiner Perkins, incidentally, is an investor in uShip and that investment is “doing well.” According to Mount, “you would need participation of existing local fleets to create the necessary density. If a plumber or service technician is already going to a certain neighborhood – why not pick up omni-channel order for delivery” and make some extra money.
But Mount agrees that ecommerce built on retailers doing “same day free shipments as a cost of doing business” has very “challenging economics.” Plus, the return rates for ecommerce are high, putting even more pressure on margins. “Building Uber on top of ecommerce will only work in the long term if ecommerce retailers are making enough profit per transaction to comfortably subsidize delivery cost.”
Metzler adds, “venture capital dollars are shielding [consumers] from the real costs of delivery. The chickens will come home to roost.”
A key question is whether Uber fully commits to last mile deliveries. Uber is exploring this market. They have launched a service called UberRUSH in San Francisco, Chicago, and New York. UberRUSH integrates with ecommerce markets like Shopify and Clover so deliveries can be booked at the time of purchase.
“Uber has critical mass,” Metzler points out. “They have a shot at profitable parcel deliveries if delivered on a same day basis. It is also an advantage that this would be incremental to their core business.”
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In contrast, Metzler says, the “food delivery companies are choking. Instacart ngIf: ticker reshaped its relationships with restaurants. Sidecar went belly up.” These companies also used the parcel and passenger model, but they lacked critical mass.
In conclusion, making money by investing in Uber type last mile companies won’t be easy. What about applying an Uber style business model to other freight markets? That, it appears, is the more relevant question.