International evolution of business models in home delivery retail

Abstract

Free home delivery for immediate vicinity customers is an effective way for small retailers to increase sales and retain local customers against larger retailers that offer better discounts and a wider product range but typically offer only fee based home delivery. However, with the high operating costs of home delivery in developed countries, many home delivery retailers have failed over the years by (a) undercharging home delivery in the hope of higher sales that are not realized or (b) overcharging home delivery and thus losing on potential customers or (c) enlarging their door delivery area to unviable levels over time. Managing unpredictable demand over the day for home delivery through differential pricing of slots and the effective utilization and control of home delivery workers are also critical to control costs and improve service. Though demand for home delivery is high, retailers must fully recover the cost of home delivery on every order. While large orders have sufficient margins, small orders are unviable to home deliver unless delivery fees adequately cover the cost of delivery. Delivery costs are reduced by efficiently utilizing delivery workers and vehicles by (a) taking orders from customers who are reached rapidly, (b) taking orders from customers who are in the vicinity of the store, (c) taking orders in advance and clubbing deliveries in the same area, (d) optimizing vehicle routing with advance orders, (e) optimizing picking and packing process of multiple orders at the store. Low labour cost in developing countries allows small retail stores to employ an unskilled worker to make home deliveries in their immediate vicinity to increase customer’s propensity to buy from them. Orders are taken on phone and deliveries completed rapidly with the worker returning soon to assist in store operations. Small retailers add delivery workers in line with demand and delivery costs are covered by increased sales. Erratic demand is effectively managed by the retailer negotiating on phone with known customers and urgent orders are often met. Small orders are common but since delivery is in the immediate vicinity it is viable to serve them. Such service cannot be matched by the larger retailers in developing countries who can typically offer only delivery fee based door delivery. High labour cost in developed countries forces home delivery, when offered, to be fee based, as high cost of workers making home deliveries are not covered by retail margins. This restricts home delivery to those who see the value to pay for it, but delivery fee increases the viable geographical area of delivery. Optimal delivery fee pricing is critical as high prices lower demand while low prices prompt buyers to place smaller orders making operations unviable. Both free and fee based home delivery have been attempted by retailers internationally over time with varied results. One option is to offer free quick service to fulfil grocery orders of customers. Such orders are typically small and of low profitability. Kozmo.com failed spectacularly in 2001 while attempting a one hour free home grocery delivery in Manhattan. To increase their propensity to buy with home delivery, customers can be offered options to avoid their delivery fees – this is best done as an introductory offer to let the customer try out the home delivery service at low risk for free for the first order. Further free home deliveries can be offered only for large orders over a specific limit where the margin on the large order covers delivery cost. This effectively increases the profitability of home delivery orders for the retailer as buyers add more items to their order to cross the specific limit or club their future requirements in the order to take advantage of the delivery fee waiver. The home delivery fee can appear reasonable by offering a premium or exclusive product range that is not easily available in nearby stores. Max Delivery now in Manhattan uses this mode to attract customers who would like to avoid travelling long distances to buy premium products from exclusive stores that are not in their vicinity. Their customers may not mind paying high home delivery fees as their order size is typically large and they can avoid the higher costs and the time to shop at distant premium stores. By avoiding low priced commonly available items, Max will have fewer but larger value orders with higher margins. A slot booking system enables retailers to even demand over the day and to club home deliveries. Tesco uses a slot system in the UK that lowers its costs, yet charges high home delivery fees to make it a profitable additional business that does not cannibalize on its store sales. The savings from “everyday low prices” at Tesco usually covers the delivery fees for larger orders. Home Plus has built its market share in Korea by taking orders through the day on their smart phone application for evening only clubbed home deliveries made typically by part-time workers. Triveni in Kerala, India uses a large retail store built on a boat that moves to 56 locations every week in the Kerala backwaters, anchoring at a village for an hour every week to enable villagers to shop in a large size store that is unviable to have in their village. We examine these five cases (Kozmo, Max Delivery, Tesco, Home Plus and Triveni) to identify the business model elements and major trade-offs involved in home delivery retail. We then suggest how investors can use these elements to assess the viability of new home delivery retail business models and avoid spectacular investor led failures like Kozmo.