What’s the Story? 

The need to deliver orders rapidly and efficiently to meet consumer expectations is pushing retailers to upgrade their last-mile delivery capabilities. We explore how retailers are adopting tools and technologies to reshape the last mile to be more agile, efficient and responsive to consumer demand. This report is a part of Coresight Research’s series of roundtable discussions and research reports, entitled The New Age of Customer-First Supply Chains, in which we present key insights into strategic areas in which brands and retailers can take action to build a resilient and profitable supply chain. Read our first four reports in the series:

• Introduction—Four Pillars for Building a Resilient and Profitable Supply Chain
• Intelligent Demand Forecasting and On-Demand Manufacturing
• Customer-Centric Commercial Collaboration: The Importance of Data in Interconnected Supply Chains
• Supply Chain Visibility: Beyond the Control Tower

Why It Matters

Driven by the recent e-commerce boom and a rise in consumer expectations for convenience and fast delivery, the last mile has become a crucial component of supply chain logistics.

• Coresight Research’s weekly US Consumer Tracker surveys have consistently found that more than one-fifth of US consumers are buying food, apparel, personal care and health products online, reflecting the retention of pandemic-induced behaviors.
• In a May 2021 survey conducted by Coresight Research and strategic consulting and media firm January Digital, “fast, free delivery for online orders” ranked as the top feature that was “very important” to US consumers when choosing a retailer or brand.
• Coresight Research’s annual online grocery survey conducted in April 2021 found that over two-thirds of US consumers who had shopped online in the past 12 months had used same-day delivery services.

Retailers need to balance their efforts in last-mile fulfillment to meet shifting consumer expectations while improving margins and minimizing the overall impact on the environment.

Last-Mile Transformation: Coresight Research Analysis 

Dark Stores Bring Fulfillment Closer to Consumers  Dark stores, which are more prevalent in grocery but applicable in other sectors as well, are repurposed brick-and-mortar stores that are dedicated to fulfilling online orders and so do not serve walk-in customers. Dark stores can be manual or combined with some form of automation; they often support delivery and pickup services. Amid the pandemic, retailers turned to dark stores to meet increased volumes of e-commerce orders, which grew beyond what can be efficiently fulfilled from an operating store. Several retailers, including Giant Eagle, Kroger, Stop and Shop and Whole Foods, repurposed some brick-and-mortar locations into dark stores, driven by the lack of available pickup slots for online orders, a reduction in store-operating hours and the introduction of capacity restrictions inside stores. More recently, dark stores have grown to include smaller warehouses built in dense urban locations, which are typically deployed by vertically integrated instant-commerce companies such as 1520, Buyk, Fridge No More and JOKR. These companies offer delivery of orders in as little as 15–20 minutes. This segment was initially carved out by Gopuff, established in 2013. These dark stores house curated assortments, are optimized for speedy picking and are located as close as possible to the customer, enabling companies to promise such short delivery windows. By owning the dark stores, they have real-time inventory visibility of their products and gain an advantage over the in-store picking model employed by delivery marketplace operators such as Instacart and Shipt. Vertically integrated companies can leverage their dark stores to expand assortments to higher-margin products and develop new revenue streams. By having end-to-end control over the shopping journey, these companies provide brands with a channel through which they can better understand consumer habits and interactions with products, supporting opportunities in targeted advertising.

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Figure 1. Overview of Vertically Integrated Grocery Delivery Providers in the US [wpdatatable id=1442 table_view=regular]

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Source: Company reports/Coresight Research   Many retailers are also partnering with third-party logistics service providers that specialize in offering speedier and cost-effective deliveries through a dark-store strategy. E-commerce fulfillment technology platform Ohi enables midmarket DTC (direct-to-consumer) brands to sell their products to customers within a two-hour delivery window by optimally forward positioning the inventory at its network of micro-warehouses in metropolitan cities. According to the company, consumers who order from Ohi-partnered retailers have up to 35% higher lifetime value than brands that use UPS or FedEx shipping options. Challenges: Dark stores require significant capital investment to set up and need to be in high-population-density areas to execute the promised short delivery times. As more players deploy them, the risk of increasing rental costs for dark stores at urban locations could drive up upfront investment. Store-Based Delivery Platforms Are Becoming More Creative Store-based delivery platforms connect retailers’ local stores to customers digitally, allowing customers to order groceries and other goods from the nearby stores of participating retailers. These platforms operate an asset-light model, do not carry inventory risk, and not require the rollout of fulfillment centers or dark stores before entering a new city or market. As a result, they can scale quickly: Adding one retailer can add many individual stores in one go. These platforms usually offer more choice than vertically integrated players, although the overall offer will be driven by the selection offered by third-party retailer stores. We have seen delivery platforms getting more creative to drive profitability and enhance the customer experience; we present examples below.

• Convenience store chain 7-Eleven’s 7Now service allows customers to pick up their orders from public locations that do not have a traditional address, such as parks, beaches, sports fields and entertainment venues. The chain has set up 7Now Pins, which cover the most popular public destinations and allow customers to receive delivery where it is convenient for them in 30 minutes.
• DoorDash launched DoubleDash in August 2021. The new service enables users to add items from nearby local restaurants or retailers to their original order without being charged an extra delivery fee. The rider can accept multiple orders at once and deliver them together without deviating from the primary route, thus potentially increasing sales and driving margins. At Groceryshop 2021, DoorDash announced that Albertsons will be the first grocer to pilot the DoubleDash service. DoorDash has adopted a hybrid approach with third-party delivery capabilities (marketplace and Drive) as well as operating a vertically integrated model through its DashMart dark stores, launched in August 2020. Each of its 25 DashMart locations carries around 2,000 SKUs and provides both delivery and pickup options.

Challenges: The in-store picking model employed by delivery operators can be more affected by out-of-stocks as the platforms do not have full real-time visibility into the retailer’s in-store inventory. Additionally, delivery platforms surrender pricing power to third-party merchants (retailers), and some retailers raise prices on delivery apps to help offset the merchant fees that they pay to the delivery firm.

• For more on vertically integrated companies versus delivery platforms, please read our separate report

Micro-Fulfillment Centers Leverage Automation To Enable Rapid Delivery Micro-fulfillment centers (MFCs) typically measure 10,000 to 20,000 square feet; they can be co-housed inside an existing store or placed in a smaller warehouse space in an urban location. They have a very high storage density and rely on robotics and AI (artificial intelligence) to pick the desired items, put them into the correct bins and send them to the packer. Albertsons, Walmart, Walgreens and delivery platforms such as Instacart are investing in MFCs to enable shorter order-to-delivery cycles, decrease labor costs and offer hyper-localized product offerings. MFC provider Takeoff Technologies claims to assemble an average online order within 15 minutes, which is 10 times faster than picking in stores. Additionally, the company claims to provide high flexibility to place MFCs close to customers, drastically reducing last-mile costs. MFC technology can be executed in three ways:

• Back of a store—The MFC center is installed in the back of an existing store or in an adjacent space
• Dark stores—Dark stores can be combined with MFC automation to enhance manual picking efficiency.
• As a service—In this case, an MFC company would build out a standalone MFC center and rent out the space to different retailers. The MFC company would run the center instead of the retailer.

Technologies that support MFC solutions can vary substantially, but are categorized into three main systems:

1. Shuttle system—Products are stored horizontally and vertically in bins, cartons or trays. Each row is served by one or more shuttles, which travel down aisles to access products. The lift then lowers the selected bins or cartons to conveyors, which feed order assemblers. This system is proven and reliable, and it is the most widely used in operation right now. However, it can have many single points of failure as a malfunctioning shuttle can block the entire aisle.
2. HIVE system: This is a cube-based system that allows for a very compact storage solution. It has four main components: a 3D storage grid, storage bins containing product inventory, robotic systems that retrieve bins and pick stations that serve as an interface between the operator and system. In this system, robots at the top of the hive retrieve totes and bring them through the picking station along the outer perimeter of the unit. The cube-based profile enables the system to scale vertically in proportion to a facility’s physical footprint and a company’s high-density storage demands. It has less complex mechanics than in a shuttle, has a flexible footprint and does not have a single point of failure. The hive system is in the beginning stages of being rolled out on a smaller scale.
3. Autonomous mobile robotics: This system consists of scalable racks, with robots moving between them. The robots pick from shelves and bring the items to picking stations. This solution has no single point of failure but requires high initial investment. This is the newest micro-fulfillment technology and is offered by young, early-stage companies.

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Figure 2. MFC Companies and the Type of Solutions They Offer [wpdatatable id=1443 table_view=regular]

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Source: Coresight Research Even though MFCs have many benefits, we do not believe they are the right solutions for every retailer. We detail some of the reasons below. MFCs are costly for small to mid-sized grocers. A few million dollars of upfront costs represent a significant investment, particularly for smaller grocers. There is a risk that heightened consumer interest in online grocery, driven by the pandemic, may wane in the near term. These automated systems require a higher volume of incoming orders to justify their hefty price tags. As a result of insufficient online sales volumes, grocers that have invested in MFCs may find them more expensive and less efficient than expected. MFCs are not able to pick 100% of product volume ordered online. While the picking equipment used in MFCs works well with ambient items, it is not designed to handle fresh, frozen, refrigerated and bulkier items (such as cases of bottled water, toilet paper and bags of pet food). These items account for around 30%–50% of an average online order. As a result, manual picking is still required in an MFC setting, requiring retailers to operate separate sizable picking operations inside the store, which adds time and labor costs. However, MFC vendors are working to fill this gap by partnering with companies that provide complementary technology to their automation systems. For example, in March 2021, Takeoff Technologies partnered with refrigeration firm Hussman, giving the MFC provider direct access to systems designed to keep food cold while it is handled. Space is still required for MFCs: Many large food retailers (for example, Walmart) have excess store space that they can repurpose to deploy an MFC system. However, this is often not the case for many mid-sized food retailers. Alternative Modes of Fulfillment Are Gaining Popularity BOPIS and Curbside Pickup While the growth of omnichannel fulfillment programs such as BOPIS and curbside pickup has been a retail industry trend for several years, the Covid-19 pandemic led many more consumers to embrace these services—and many more retailers to implement them. Coresight Research’s online grocery survey conducted in April 2021 found that over 43% of respondents who had purchased groceries online in the prior 12 months opted to pick them up from a store. Additionally, according to a Coresight Research survey undertaken on September 6, 2021, around 26% of the respondents who expect to shop online this holiday season said they would use BOPIS to receive their purchases, and another 20% expect to use curbside pickup. Below, we provide a brief comparison of pickup versus delivery services.

• Quick delivery is gaining traction, but it is more relevant for urban dwellers, whereas pickup remains more relevant for people living in suburban and rural areas.
• Pickup is less margin-erosive and requires fewer resources than delivery.
• From the consumer’s perspective, pickup is cheaper than delivery and gives them control over the time of fulfillment.
• The average basket size for pickup is typically higher than delivery orders.

To better support pickup services, retailers need to optimize their store layouts to offer better access for pickers and shoppers. Retailers should put pickup counters near the front door, for easy and quick access, and allocate dedicated fulfillment areas or parking spots for pickup near the store entrance. The question for retailers moving forward is no longer whether to enable BOPIS and curbside pickup, as most retailers had already done so, but to differentiate their services from the competition. Retailers should leverage technology to refine their approaches to pickup and thus further enhance the customer experience—such as to track the status of orders and provide timely updates to customers. Smart Lockers  Smart lockers are electronic storage solutions that enable retailers to store parcels at convenient locations, including store premises, shopping centers, public terminals and residential areas. Once the package is delivered into the smart locker system, the recipient is automatically notified that their package is ready for pickup. Consumers can access these lockers through various electronic means such as by scanning a barcode, RFID tag or their fingerprint. Smart-locker solutions gained momentum after pickup services exploded with the onset of the pandemic. The advantages offered by lockers over conventional pickup services—including handling multi-temperature product storage and reducing wait times at the customer service desk or at curbside—have galvanized many retailers to incorporate them into their fulfillment mix. Community lockers and kiosks also come with efficiency benefits, such as the ability to drop multiple orders at a single spot, saving on fuel and labor costs. They can also be used to make product returns, thus increasing convenience for customers. Smart lockers are not a new concept. Amazon has led the way in placing lockers across the US, including in apartment buildings and third-party retail stores, since 2011. In European countries, retailers have been delivering to remote pickup points for rural and suburban shoppers to collect. In the US, several retailers, including Ahold Delhaize, Albertsons and Lowe’s, have shown interest in adding smart lockers to their last-mile fulfillment mix amid the pandemic. Many technology vendors have been integrating new features in parcel pickup solutions to make the fulfillment service more efficient:

• Cleveron offers automated pickup kiosks that robotically serve grocery orders to consumers.
• Parcel locker suppliers such as Mobikey and Parcel Pending use Bluetooth Low Energy (wireless personal area network technology) to provide the capability for lockers to be opened via consumers’ smartphones.
• Retail Robotics’ pickup grocery robot, known as Arctan, houses 200 bins and 28 frozen bins. The unmanned setup dispenses orders through any four drawers, allowing it to serve multiple orders at a time.

Challenges: Although parcel lockers and kiosks can provide significant economic benefits, in terms of reduced labor and last-mile shipping costs, they have several operational complexities that would challenge a retailer’s ability to deploy and scale the service. Lockers come in different sizes, but they generally cannot fit very large packages, limiting their use. In addition to investment and maintenance costs, effort needs to be put into negotiating with local authorities regarding selecting locations and setting up smart-locker sites where these are located outside of stores. Additionally, imprecise or wrong order fulfillment could be costly for the retailers. We believe that smart lockers will experience more traction as consumers spend more time out of their homes again while continuing to order online, and as retailers figure out how to provide these remote pickup options more cost effectively and conveniently. Autonomous Vehicles and Drones The pandemic has accelerated trials of autonomous delivery technologies and turned businesses and consumers into eager early adopters. Introducing autonomous delivery robots can significantly help retailers and logistics firms drive down their carbon footprint, achieve their corporate sustainability targets and overcome driver shortage issues. It can also reduce the cost of last-mile delivery, from $1.60 per delivery via human drivers, to $0.06 per delivery through autonomous robots, according to Robotics Business Review. As a result, we expect to see increased adoption in the autonomous delivery space in the near term. Many retailers have revved up their autonomous delivery programs recently. Amazon rolled out its Scout delivery robot service to two new markets in the US in July 2020, while Kroger and Walmart tested Nuro’s second-generation R2 delivery robot last year. In March 2021, Albertsons partnered with semi-autonomous technology startup Tortoise, which will see remote-controlled delivery carts make scheduled drop-offs to customers within an approximately five-kilometer radius. In September 2021, Walmart partnered with Ford Motor and autonomous vehicle developer Argo AI to launch a self-driving vehicle delivery service in three major metropolitan markets. Another notable example in autonomous delivery is Robomart, which acts as a rolling convenience store. In September 2021, Robomart launched a retailer delivery platform that allows retailers to sign up as partners to deploy autonomous vans with assortment, pricing and branding set by them, thus eliminating time otherwise needed for store visits or typical order fulfillment. The development and commercial use of drones are in the infancy stage of mass adoption and usage. As they travel along a straight path, they can guarantee faster delivery than vehicles on the road and are suitable for remote or hard-to-reach areas. Large technology companies such as Alphabet, Amazon and UPS and have been investing significantly in drone delivery projects in recent years and are among the first companies to secure FAA approval as official drone airlines, allowing them to commence trial deliveries under FAA guidelines.

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Figure 3. Autonomous Delivery Retail Partnerships in the US [wpdatatable id=1444 table_view=regular]

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Source: Coresight Research Challenges: Although autonomous delivery is poised for growth, challenges remain. Regulators have shown inclination to cut red tape, but there is currently no federal guideline for autonomous delivery, with each US state making its own rules, which creating a lot of ambiguity. While some states have formalized regulations for the deployment of autonomous robots in real-world applications, others have not put in place any regulations to test autonomous deliveries, making it difficult for the technologies to be rolled out nationwide. In addition to regulatory challenges, autonomous delivery also faces “last feet” challenges. Customers still need to come to the delivery vehicles to collect their packages, which is not as convenient as home delivery. Autonomous delivery robots are coming up with impressive levels of automation supported by AI, high-tech sensors and advanced driver-assistance systems. As costs continue to fall, the return of investment will grow more attractive to retailers where repetitive deliveries could help them gain economies of scale on their investments. As the technology evolves, delivery robots would also be capable of completing multiple deliveries in a single trip. Product Returns Are Reinventing the E-Commerce Experience Product returns have become an integral part of the digital shopping journey. Attractive returns options—including transparent policies—drive customer retention and loyalty but also add costs and complexity for brands and retailers. As e-commerce gains a greater share of the retail market, the overall returns rate will continue to climb, adding significant pressure to retailers’ bottom lines. Despite the high cost of lenient online returns policies, retailers cannot simply make their policies more stringent—according to a Coresight Research survey of US consumers conducted in November 2020, 39.1% of respondents reported that retailers’ returns policies influence where they shop. Retailers are therefore implementing various strategies to make their reverse logistics processes smoother and more efficient, while reducing their impact on the environment. We outline the four primary strategies in Figure 4 and discuss each in detail below.

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Figure 4. Key Returns Strategies Employed by Retailers [caption id="attachment_135993" align="aligncenter" width="705"] Source: Coresight Research[/caption]   Buy Online, Return in Store (BORIS) Many retailers are offering an in-store returns option for online orders to facilitate faster returns. Retailers can then send returned items to a distribution center for a subsequent online purchase or add them to the store inventory. Implementing BORIS can help reduce shipping costs and reduce the risk of a returned item getting delayed or lost. Many consumers also prefer BORIS to avoid paying to return an order. According to a survey by Simon Property Group in February 2021, 76% of US shoppers said that if they are required to pay for return shipping then they prefer to return items in a store to avoid the additional cost. Moreover, consumer preferences for in-store returns are driven by the speed and convenience of returning items quickly and receiving an immediate refund. Returnless Refunds High volumes of returns can aggravate companies’ logistics networks and add complexity to their supply chains. Retailers are therefore increasingly opting to refund shoppers for their online purchases without requiring them to return the merchandise (for certain items). This cuts down on returns costs and maintains customer satisfaction. E-commerce giant Amazon and mass merchandisers Target and Walmart reportedly employ a returnless refund strategy—using AI-powered analytics to identify when the option is appropriate. The technology assesses factors including a customer’s purchase history (to flag potential fraudsters), the cost of processing the return and the price of the product. Consolidated Return Shipments Omnichannel retailers and online pure plays are looking to aggregate return shipments to reduce costs. By partnering with retailers that have large physical footprints or with third-party return specialists that accept returns at physical drop-off points, they gain access to consolidation solutions.

• Happy Returns provides “Return Bars” or physical locations for shoppers to return items for an immediate refund. Products are shipped in bulk back to the e-commerce retailers, decreasing overall shipping costs.

Moreover, retailers are looking to post-purchase specialist platforms such as Narvar, Optoro and as Zigzag to simplify the returns process. These platforms have partnered with retailers and REITs to act as the point of collection for returns.

• Narvar teamed up with Simon Property Group in November 2020 to enable customers to drop off returns from about two dozen retail brands (which are clients of Narvar) at a participating Simon location. In the same month, Narvar partnered with UPS to enable no-label and boxless returns at nearly 5,000 UPS store locations.

Leveraging AI To Reduce Returns Rates and Handle Returns Retailers are leveraging AI technology to automate returns. Many technology providers assist retailers with disposal or liquidation of items that are not integrated into inventory for resale, which makes the handling of returns less of a burden, while others focus on solutions that proactively reduce returns rates by addressing the root causes.

• Newmine’s AI-powered Chief Return’s Officer mines a retailer’s data, identifies returns reduction opportunities and presents improved feedback and corrective actions. By monitoring returns, identifying their root causes and collaborating across organizational silos, Chief Returns Officer’s AI and automation can improve assortment planning, inventory positioning, supplier performance and marketing decisions, according to the company.
• Optoro uses AI and proprietary algorithms to determine which channel will yield the highest value for a product by considering the predicted selling price and shipping costs for the item to reach the proposed destination. It then helps divert returned items to the channel that will get retailers the most money back. Possible dispositions include selling directly to consumers, reselling to wholesalers, or returning to vendors for repair, donation or recycling.

What We Think

The last-mile ecosystem has been evolving for several years. With the onset of the pandemic, its steady expansion gave way to a sudden explosion in growth. With retailers scrambling for quick fixes to meet surging online demand, the initial pandemic response has mostly run its course. Retailers must now revisit their last-mile strategies and incorporate modern tools to focus on the long-term growth of their e-commerce business. Implications for Retailers

• Retailers should assess and forecast demand for online order volume for stores located in urban locations and aggregated to each urban area. This will help provide insights as to whether MFCs can provide enough collective capacity or whether fewer and large facilities such as dark stores are more appropriate.
• Retailers should take a holistic view of their total supply chain strategy from end to end to see how the MFC solution fits into their system before evaluating it based on software and robot design.
• Retailers could invest in AI-aided smart route optimization software that leverages machine learning and analytics to re-route in real time based on constantly changing parameters such as traffic congestion, weather conditions and road restrictions. This will help in more efficient route planning with riders making multiple deliveries per trip while covering fewer miles.
• We expect the autonomous delivery to fit more with the instant commerce model, requiring the customer to be available at home to collect the orders.

Implications for Technology Vendors

• Technology vendors must provide holistic solutions that integrate retailers’ disparate logistics functions onto a single platform to enable seamless management of inventory, last-mile execution and delivery to the end-customer.
• Technology vendors should build out MFC infrastructure that would not hamper regular store business activity. They should provide MFC solutions that are flexible enough to fit in different types of retail locations and have the capacity to add more storage space and robots as order volumes grow.
• Efficiently managing and processing returns is fast becoming a differentiator and key competitive advantage for retailers and e-commerce companies, exploring ways to drive down returns rates and handle returns more efficiently over the long term. Innovators and tech providers can provide support to this end, with solutions ranging from software-as-a-service returns-optimization platforms to returns-handling management solutions that consolidate and process returns.