Profit in e-delivery?

The economics of free delivery of goods ordered on the Web just don't add up. So why do businesses think they can make money from...

The economics of free delivery of goods ordered on the Web just don't add up. So why do businesses think they can make money from it, asks Dan Remenyi

Dan Remenyi

Opinion

Can you cost-effectively sell a bottle of wine, a CD, a snack, a sandwich or even a bottle of pop on the Web? Being able to effectively deliver products at such a low cost that the carriage charge will not have a negative impact on sales is the logistics equivalent of walking on water.

What it amounts to, in effect, is free delivery. Transport is a key element in the economic equation and unless it is properly integrated into the cost model, the business will not survive.

Take Urbanfetch.co.uk, a Web site that offers to deliver a wide range of goods to anywhere in the London metropolitan area within one hour - and with no delivery charge. The terms and conditions of Urbanfetch. co.uk are that there is no minimum purchase and the order will be there within an hour of hitting the button on the Web site. In theory, then, it will deliver a bottle of soda pop for £1.20. Clearly this is a nonsensical business model.

Other sites are a little more rational about the carriage issue. Bagsoftime.com, for example, requires a minimum purchase of £10 for a delivery and this gives them a little more profit to pay for the delivery.

Economics equation

But let us look at the economics of this. Let us assume that these e-delivery Web sites receive purchase orders that carry an average price tag of £25. The gross margin on this type of sale is likely to be on average 40%. Thus the average gross profit is £10. The net margin will of course depend on a number of variables and a very important issue is the size of the turnover.

The greater the turnover, the larger the number of units or sales over which to allocate the overhead costs that need to be taken into account to calculate the net margin. A net profit in retailing of 20% is considered to be quite good. So the retailer will have a final net profit of £5 on that sale of £25.

Enter e-delivery. Before the product can be handed over for carriage it needs to be wrapped. Then the courier needs to place it in his or her bag and be on his or her way.

Now let us assume that the average order needs to be delivered a distance of half a kilometre, and that this journey, in London traffic, takes a courier 15 minutes. The cost of a courier's basic pay is, say, £10 an hour. Then there are the costs of the motorbike, the cost of insurance and the vehicle registration as well as petrol and so on.

It is clear that if the gross and net profit assumptions are valid, a £25 order will operate at a loss unless the courier can make at least two deliveries to the same office or to the same building or adjacent buildings at the same time. The economic equation does not work out.

So what are the e-delivery Web sites such as Urbanfetch.co.uk, Bagsoftime.com, Kozmo.com and Koobuycity.com playing at? Their business model has to be based on the fact that their business will grow quickly and that volume will bring with it economies of scale. But of course the economies of scale will only kick in if the deliveries are made to the same office or building or adjacent buildings at the same time.

These Web sites' business models are also based on the hope that they will be able to attract much larger purchase orders of say an average of £100 or maybe £200. Then these Web sites are really in business with some sort of economic sense behind it. But right now it is unclear that this market will turn out in this way. There just may not be a materially sized market for this type of service.

It is now thought that Bagsoftime.Com has enough cash to keep going for only a few weeks. Urbanfetch is having a closing down sale. Bagsoftime.com is now trying to negotiate a merger. It has reduced its cash burn-rate, as it is concerned that it might not be able to strike a deal in time. If it goes to the wall there will no doubt be some relief felt in the other e-delivery Web sites which may in the short term pick up some of the current demand.

But the real question is how long can the others in this sector survive? E-delivery is probably a phenomenon which will simply not survive.

Professor Dan Remenyi is an e-business consultant and author in the field of the effective employment of IT. His latest book is called The Effective Measurement and Management of IT Costs and Benefits.

Read more on IT jobs and recruitment

Start the conversation

Send me notifications when other members comment.

Please create a username to comment.

SearchCIO

SearchSecurity

SearchNetworking

SearchDataCenter

SearchDataManagement

Close