E-Commerce is Overpowering the Parcel Delivery Industry
The growth in e-commerce is vastly outpacing the rest of the retail industry. While total retail industry sales for the second quarter of 2017 grew 4.1 percent over that in 2016, e-commerce sales rose 16.2 percent. This growth, coupled with the insatiable consumer demand for faster deliveries started by services like Amazon Prime, have stretched the existing parcel delivery infrastructure to its limits. Complications and cost premiums arising in the final leg of the delivery process have become known as the “last-mile” problem.
According to a McKinsey study, last-mile costs account for more than 50% of delivery costs, even if they take place over a small fraction of the total transportation distance. Additionally, customers are demanding faster deliveries but remain sensitive to delivery price changes, especially in the grocery sector. Currently, most e-commerce retailers depend on third-party companies like FedEx or UPS to complete the delivery process. For retailers like Amazon, the gap between what they charge for delivery and what they pay to third-party companies is growing wider. With rising costs and fewer resources available to the market as a whole, efficient and innovative solutions to the last-mile problem can provide a crucial differentiator.
Wal-Mart: From Lumbering Beast to Plucky E-Upstart
Wal-Mart was a late entrant into the e-commerce arena, which has been dominated in the last decade by Amazon. However, recent investments by Wal-Mart into their online platform have paid off, as e-commerce sales in the previous two quarters are 60% greater than in the same period in 2016. In a short time, Wal-Mart has successfully transitioned from a brick-and-mortar retail model to an omnichannel model.
Rising last-mile delivery costs are a fundamental concern for Wal-Mart since they derive a large part of their competitive advantage from offering the lowest prices. Wal-Mart is approaching the last-mile delivery challenge in a variety of ways:
- Encouraging customers to retrieve online orders in-store: The most straightforward solution Wal-Mart has implemented involves having customers complete the last-mile by themselves. In the past year, Wal-Mart has installed self-service kiosks where customers can pick up their online orders. Customers use a barcode, and a conveyor belt delivers the items within 45 seconds. The kiosk differs from delivery lockers since it can adjust the size of the storage compartments according to parcel size.
- Use of ride-sharing services to conduct delivery: Wal-Mart is testing home deliveries through Uber, Lyft, and Deliv. Upon completion of their purchase, customers request delivery for a small fee. Wal-Mart’s associates then contact the delivery driver through the standard application, and the driver delivers the parcels. Wal-Mart notifies the customer via text and email when the order is on the way.
- Acquisition of tech-oriented delivery startups: Two months ago, Wal-Mart acquired Parcel, a same-day last-mile delivery company operating in the New York Metro area. Parcel uses routing algorithms along with leased vehicles with a goal of delivering within a two-hour window. 
- Using store staff for deliveries: This approach is currently being tested in a few cities. Associates can deliver packages while on their way home from work. The program has only involved employees who volunteer through a proprietary mobile app for these deliveries, relying on traditional shipping methods to make up for any shortcomings. The app also provides features including navigational assistance and custom scheduling. The employees are paid at their hourly rates.
For the long-term, and considering the challenges of rural delivery (where their competitive advantage is most substantial), Wal-Mart is also testing the use of drones for home delivery of small parcels and curbside pickup. Wal-Mart is also looking to use drones for inventory management purposes.
The Path Ahead
From these options, I think that Wal-Mart should pursue encouraging customer pick-up as well as the acquisition of startups. Customer pick-ups allow Wal-Mart to leverage its multitude of stores into much lower delivery costs, allowing them to maintain their value proposition. Wal-Mart could even further encourage this behavior with additional discounts. The acquisition of startups provides Wal-Mart with innovative ways to attack the last-mile problem in different settings with an entrepreneurial approach.
In contrast, the use of ride-sharing services increases the cost of the goods for the consumer, and this additional fee might result in the loss of value that the customer realizes from Wal-Mart’s lower prices. The staff delivery program depends on the customer being at home to receive their parcel. Wal-Mart wages are less than what employees can make working for ride-sharing applications, and there is no compensation in the model for mileage. There is a myriad of additional risks (including the possibility of car accidents, parcel damage, or the behavior of employees during the deliveries) that Wal-Mart does not currently account for in their current operating model.
Wal-Mart’s approach to retail channel integration and last-mile delivery services show that traditional retailers still benefit from innovative problem-solving and an entrepreneurial approach. The challenge for the company as it moves forward lies in focusing on the solutions that allow it to maximize its current competitive advantages. But are these solutions enough for Wal-Mart to keep abreast of its tech-savvy competitors like Amazon?
 US Department of Commerce, “Quarterly Retail E-Commerce Sales 2nd Quarter 2017”, https://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf?utm_source=Triggermail&utm_medium=email&utm_campaign=New%20Campaign&utm_term=BII%20List%20E-Comm%20ALL. Accessed 10 Nov 2017.
 Joerss, Martin, et al., “How customer demands are reshaping last-mile delivery”, https://www.mckinsey.com/industries/travel-transport-and-logistics/our-insights/how-customer-demands-are-reshaping-last-mile-delivery. McKinsey & Co. Accessed 10 Nov 17.
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 WalMart.com ” Wal-Mart Announces the Acquisition of Parcel, a Technology-Based, Same-Day and Last-Mile Delivery Company” https://corporate.walmart.com/article/walmart-announces-the-acquisition-of-parcel-a-technology-based-same-day-and-last-mile-delivery-company. Accessed 10 Nov 2017.
 Perez, Sarah, “Wal-Mart tests using store staff for last-mile deliveries” https://techcrunch.com/2017/06/01/walmart-begins-testing-using-store-staff-for-last-mile-deliveries/. Tech Crunch. Accessed 12 Nov 2017.
 Layne, Nathan, “Exclusive: Wal-Mart seeks to test drones for home delivery, pick-up”, http://www.reuters.com/article/us-wal-mart-stores-drones-exclusive/exclusive-wal-mart-seeks-to-test-drones-for-home-delivery-pickup-idUSKCN0SK2IQ20151027. Reuters. Accessed 14 Nov 2017.