Delivery companies operating in markets with high labour costs must start planning for the future of the last mile now to ensure long term sustainability, according to new research from McKinsey and Company.

The study, Parcel delivery: The future of last mile, predicts three consumer delivery models are likely to dominate the last mile in the future: autonomous ground vehicles (AGV) with parcel lockers, drones, and bike couriers/droids.

Early adoption of these new autonomous delivery models will concentrate in developed countries, where labour costs are high enough to make the return on investment worthwhile. For developing regions with lower labour costs, the potential cost savings doesn’t warrant the investment in highly automated delivery methods.

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McKinsey predicts AGVs with parcel lockers will replace current forms of regular parcel delivery which could be up to 40 per cent cheaper in countries with high labour cost. “40 per cent saving in delivery costs would translate into a 15 to 20 percentage point increase in profit margin or (more likely given that price is the key decision criterion in this market segment) into a 15 to 20 per cent cut in prices. In an industry with margins ranging between 2 per cent and 5 per cent, this is substantial,” the report said.

McKinsey Last mile report

Companies must have a high volume of parcels to warrant investment in AGVs with parcel lockers. They will need to have an IT infrastructure in place that can handle several thousand AGVs and guide them through daily traffic while regularly optimising the routes, as well as hiring a couple of thousand qualified employees will be needed to supervise the fleet. Recruiting and/or retaining the experts needed will be critical, the report said.

A similar set of skills will be required to enable drones deliveries in rural areas: powerful IT capabilities to control the drones and a team of technicians to supervise them. McKinsey’s forecast states drones could provide a solution for rural deliveries of packages weighing less than 5 kg. This might sound like a small niche, however looking at the German market this category could represent 500 million parcels in 2025, according to the report.

In the world of instant delivery (two hours or less), bike couriers are the preferred method. This is true at least as long as droids do not become significantly faster (30 km/h rather than 5 km/h) or the current operating costs cannot be significantly lowered (two to three times cheaper), the report said.

Traditional delivery options are still the most viable for high-drop-factor B2B and e-grocery delivery. “Big B2B customers with high drop factors — the number of parcels dropped per stop or recipient — and special delivery requirements, such as hanging goods, will favour mostly human delivery as we know it today. The same is true for e-grocery delivery, as people will still want crates to be carried up to their apartments and returns to be handled directly.”

Regulation and public perception are two critical factors shaping the future of the last mile. The report notes, “Public opinion concerning autonomous vehicles, as well as drones, has already started to shift — with 60 per cent of consumers indicating that they are in favour 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.”

Competitive landscape

According to McKinsey, the cost of global parcel delivery, excluding pickup, line-haul, and sorting, amounts to 70 billion, with China, Germany, and the United States accounting for more than 40 per cent of the market. And the market is growing.

The report acknowledges the competitive landscape with at least three groups of companies battling for dominance in the future last mile: incumbents, e-commerce players, and highly dynamic start-ups disrupting the marketplace.

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“Incumbents clearly have the advantage of already having a solid and suitable network in place, enabling them to win in at least the markets served with drones or AGVs with lockers. But will they be quick enough to adapt their IT and HR strategies to keep pace with e-commerce players who are heavily investing in this space? Start-ups have mostly focused on the point-to-point market. But will their agility in adapting new business models be sufficient to fend off the e-commerce players or the incumbents?”

McKinsey predicts crowd sourcing will only play a minor role in the future of the last mile, in part due to the quality and reliability issues of drivers. “However, crowdsourcing still has its raison d’être: business models can be scaled up quickly without major capital investments, eg, in vans, which makes it extremely attractive as a model for market entrants. Furthermore, crowdsourcing may well play a role in managing ultra-peak demand, eg, in the run up to Christmas,” the report says.


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