Rethinking last-mile logistics, post-COVID-19: Facing the ‘next normal’

Last-mile success will be tough, but getting it wrong could be catastrophic, write Eric Hannon, Bernd Heid, Anja Huber, and Christoph Klink of McKinsey & Company

Has traditional ‘last-mile’ logistics reached the end of the road? How cargo arrives at the customer’s doorstep has never seen greater change, and it began before the COVID-19 pandemic hit. With e-commerce on the rise, customers demand a greater level of service and convenience, and disruptive technologies from electrification of delivery vehicles, to droids and drones are shaking up entire delivery chains.

Special report: Who will dominate first and last mile delivery?

Such innovations come at a cost, however, as fleets of delivery vehicles cause urban congestion and air pollution. Furthermore, COVID-19 is generating short-term disruptions and longer-term structural changes, with e-commerce experiencing soaring growth in new online categories like groceries and home care. Overall US e-commerce sales have increased over 30% since the outbreak of the pandemic. In Germany, DHL saw parcel shipments increase from 5.3 to 9.0 million parcels per day, similar to Christmas peak times.

We predict COVID-19 will accelerate digitization and electrification, drive the consolidation of the logistics and retail markets, lead to stronger traffic regulation and foster new hybrid online/offline retail business models. We also believe COVID-19 will be a catalyst for contactless, unattended and autonomous delivery technologies, putting added pressure on cities.

This article explores the longer-term structural changes ahead for the last mile and seeks to help last-mile ecosystem players embrace the “next normal” and win in the post-COVID-19 era. With those goals in mind, we assessed 24 supply chain and technology interventions and their potential impact on emissions, congestion, and delivery cost. Our insights reflect a study developed jointly by the World Economic Forum, McKinsey & Company, the World Business Council for Sustainable Development (WBCSD), Leaseplan and more than 30 public- and private-sector partners who contributed related data, expertise and case studies (a copy is available on mckinsey.com).

Unparalleled demand for last-mile transport

E-commerce has grown significantly in the past decade, as new digital business models and smarter logistics concepts enable both instant and same-day deliveries (respectively growing 36% and 17% a year). While COVID-19 has amplified and accelerated this trend, elevated e-commerce and time-definite delivery levels should remain above the pre-COVID-19 baseline in the long term (Exhibit 1).

McKinsey-Ex1-Demand for last mile transport
Exhibit 1: Both pre- and post-COVID-19 trends are driving increased last-mile deliveries. Source: McKinsey & Co

Additionally, new categories have gained momentum online, such as groceries and furniture. To illustrate, China’s food delivery leader, Meituan Dianping, experienced an increase in grocery deliveries in March and April of 400% compared with last year. In the United States, research suggest e-commerce spending will grow for child products, household suppliers, groceries, and food takeout, even in the longer term—hence the change in consumer habits will be “sticky”. (Exhibit 2).

McKinsey-Ex2-online retail demand
Exhibit 2: Demand for online shopping in the US will increase strongly going forward. Source: McKinsey & Company

Increasing pressure on cities

Rising last mile demand could boost the number of delivery vehicles in the top 100 cities globally 36% through 2030. Without effective interventions, emissions and traffic congestion would likely increase over 30% in these cities globally (Exhibit 3).

Consequently, COVID-19 will increase congestion problems and the pressure to decarbonise. We believe people will switch from public transport to individual transport options through at least 2021, especially in metropolitan areas that rely on it heavily. Individual vehicles will replace shared mobility solutions, which must address health concerns. Cities will face increased congestion and backlogs due to even more delivery vehicles. We will also see some mitigating effects such as more ‘work-from-home’ schemes reducing commutes. However, some cities already began to reclaim the space and plan infrastructure for lower levels of commuting.

McKinsey-Ex3-ecommerce demand
Exhibit 3: A lack of effective last-mile countermeasures will hurt urban quality of life. Source: McKinsey & Company

A transition playbook for private/public sector partners

In response, players should consider new solutions. We assessed 24 supply chain and technology interventions in terms of traffic volume, CO2 emissions, congestion, delivery cost, investment need and qualitative dimensions such as customer convenience and level of competitive disruption (Exhibit 4).

McKinsey-Ex4-interventions
Exhibit 4: Prioritized last-mile interventions. Source: McKinsey & Company

We developed these interventions based on two different scenarios: an aggressive, highly regulated “mandated adoption” scenario, and a more conservative “customer choice” option that relies on end-customer pull. The McKinsey homepage includes in-depth versions of both scenarios. Each standalone intervention can resolve some problems caused by increased last-mile delivery, but experience suggests bundling these solutions could have a bigger impact on sustainability and cost-related questions.

COVID-19 has accelerated the roll-out and amplified the impact of certain interventions. For instance, we believe contactless and unattended deliveries (e.g. trunk deliveries, parcel lockers and boxes) will gain momentum. These interventions can boost short-term customer confidence and remain relevant in the next normal as customers seek their added convenience. Meanwhile, logistics players will benefit from reduced delivery costs. All leading logistics players as well as e-grocery businesses like UberEats and Deliveroo have introduced digital solutions to avoid face-to-face contact over the last few months.

Additionally, while autonomous vehicles and shared robo-taxis for passenger transport will likely see delays due to COVID-19, the pandemic has fast-tracked experiments with robots and drones by tech leaders like Alibaba and JD.com. Consequently, we expect investments in these technologies to expand and large-scale pilots in inner city areas to increase.

McKinsey-Ex5-last-mile interventions grid
Exhibit 5: The impact of the mandated adoption scenario on specific indicators. Source: McKinsey & Company

We developed three different transition roadmaps and believe taking an integrated ecosystem approach would optimize the last mile for both private and public players while minimizing customer disruption (Exhibit 6). Clearly, private and public players have different aims that require different interventions. For example, cities and municipalities see reducing emissions and traffic congestion as top priorities, while private logistics companies want to reduce delivery costs and minimize disruptions in current business models. The optimal transition roadmap scenario will align business priorities with ecological and social priorities and urge all stakeholders to take quick action.

McKinsey-Ex6-last-mile transition scenarios
Exhibit 6: Scenarios to optimize the transition to optimal last-mile performance. Source: McKinsey & Company

The sustainability scenario

This scenario assumes cities will prioritise sustainability-related topics such as freeing inner-city traffic zones from congestion. Of the three, it has the greatest acceptance among the public since the pandemic. It could include EVs, night deliveries, deliveries at marginal times, explicit parking areas for delivery vehicles, as well as stronger enforcement mechanisms regarding second-lane parking and overall traffic.

COVID-19 has raised the possibility of a less traffic-jammed future and improvements in emissions and global warming. In New York, pollution levels have dropped by nearly half compared to a year ago. Hence, cities could seek greater EV adoption in the next normal, prompting automakers to ramp up EV production for delivery vehicles. Cities are likely to embrace the value of digital solutions like congestion charging and geo-fencing. Cologne and Milan offer prominent recent examples of stricter access restrictions.

Likewise, due to soaring demand for curb-side delivery and pick-up and drastic reductions in traffic and urban parking, many cities have imposed curb pricing and adopted flexible curb regulation. Cities could also combine support of public health and safety with solutions that decrease congestion and emissions. Overall, this scenario could reduce CO2 emissions by 35%, unit costs by 15% and congestion by 25% compared to a business-as-usual 2030 baseline.

The economic scenario

This scenario seeks to reduce delivery costs while promoting sustainable deliveries and avoiding the disruptions associated with urban consolidation centres (UCCs). Express lanes can slash delivery times and costs and parcel lockers are less disruptive than UCCs.

Fully implementing our proposed “ecosystem scenario” would require investments of about €11.5bn by 2030 for a city with roughly two million inhabitants

Trends in this scenario include the need to find new ways to consolidate deliveries, assuming volumes remain higher in the next normal. Likewise, interventions for unattended deliveries could bring down delivery costs while avoiding excessive returns.

This scenario could lead to a multi-brand approach where consumers pick up and return parcels from different players such as UPS and DHL. While multi-brand solutions compel players to collaborate with competitors, they might cost less than waiting for start-ups to launch last-mile delivery solutions. Additionally, solutions based on advanced analytics and the Internet of Things such as load-pooling and dynamic re-routing could contribute to an overall scenario that reduces emission by 10% and unit costs and congestion by 30% each.

The ecosystem scenario

The ecosystem scenario can help private and public players equally. Increased EV penetration will occur due to regulation and reduced battery costs, producing a positive total cost of usage (TCU). Likewise, regulation should enable night deliveries, and cities that invest in future-proof infrastructure will benefit from multi-brand parcel lockers.

The COVID-19 impact in this scenario should include the emergence of new hybrid business models. We believe pure brick-and-mortar retail will continue to struggle even after COVID-19. To illustrate, there has been a drop in store traffic across apparel and quick-service restaurants of 60% to 80% in the US since the beginning of the year. We expect a greater blending of online and offline retail. In extreme scenarios, closed or struggling stores in city centres could function as “dark stores” (i.e. fulfilment centres for local pickup and delivery).

Getting it right will be tough, but getting it wrong could be catastrophic. We encourage both private and public ecosystem players to tackle the problem one intervention and last-mile pilot at a time

Fully implementing our proposed “ecosystem scenario” would require investments of about €11.5bn by 2030 for a city with roughly two million inhabitants. These investments include an EV-only fleet transition, additional labour costs for night-time deliveries, the costs of installing and maintaining parcel lockers and boxes as well as multi-brand parcel shops, and costs associated with the development and licensing of V2X (vehicle to everything) connectivity solutions.

In all scenarios, we believe that robust, harmonised regulations would help automakers and logistics players better allocate R&D investments and accelerate the adoption of sustainable supply-chain technologies. The use of data and advanced analytics is a vital enabler for interventions such as effective load-pooling and real-time traffic control. Likewise, joint data standards and effective data sharing can bring tremendous benefits to all ecosystem players.

One last-mile pilot at a time

All last-mile ecosystem players are under tremendous pressure to act, but could also benefit from the changes ahead. Getting it right will be tough, but getting it wrong could be catastrophic. We encourage both private and public ecosystem players to tackle the problem one intervention and last-mile pilot at a time.


About the authors: Bernd Heid is a Senior Partner, Eric Hannon and Christoph Klink are Partners and Anja Huber is a Consultant at McKinsey & Company

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