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Writer's pictureShaunish Mookerji

Why Last Mile Delivery Is Going To Be Affordable By 2030

Last-mile delivery is a notoriously tricky business. There are several huge VC-backed companies in the space focusing on on-demand fulfillment, most of which post net losses every year - Doordash, Grubhub - as well as traditional high-cost legacy parcel delivery like FedEx and UPS. As more and more commerce moves online, retailers are forced to use these services more. But it’s expensive. So today, retailers are forced to choose between absorbing high shipping costs into their already thin margins or passing the cost on to their unhappy customers.


There are other models. Amazon has tackled last-mile by subsidizing the high cost of delivery with the Prime subscription, and building their own fulfillment network from scratch. Startups like Davinci (a Silicon Road Ventures portfolio company) are using technology and micro-fulfillment centers to improve delivery efficiency. Still, for the majority of brands and retailers, delivery is an unsolved problem.


What drives these high costs? Mostly it’s driven by the cost of fuel, and the cost of hiring drivers. Here’s an excerpt from the annual 10-K report filed by UPS in February of this year, commenting on increasing costs:


They list four main reasons for cost increases since 2022: fuel cost, higher employee benefits, higher employee compensation, and inflation. But UPS goes on in the next section to mention that despite higher costs, their operating margin has actually increased 20 basis points in the last year. They cite better internal efficiency, as well as passing increased fuel costs to their customers in the form of fuel surcharges. So in the end, it’s their customers - including the many retailers and brands using UPS to fulfill online orders - who take the hit.


Since the report was published in February, inflation has slowed, thanks to increased interest rates from the Fed. But fuel costs (which UPS predicted would decrease in 2023) have gotten even worse - the price of a barrel of crude oil is up almost 20% since then. And the labor side is no better. After tense negotiations earlier this year, UPS struck a historic deal with their unionized workforce Teamsters to pay hourly workers $7.50 more per hour by the end of the five year contract, and UPS says the average driver will now earn $170,000 per year in pay and benefits. Great for the drivers, but bad for UPS, and bad for the retailers, consumers, and shareholders who will eventually have to bear the cost.


So last-mile delivery will likely get even more expensive in the short-term, with more expensive fuel and labor. But there are two technology waves that I think will reverse this trend in the long term, until getting a package delivered will be almost as affordable as a traditional retail sale.


The obvious one is autonomous driving, which one day could offset those rising labor costs. The tech isn’t perfect yet, but already Cruise is testing driverless cars in cities across the country. As long as the cost of buying one of these vehicles is less than $170K a year, you can bet that UPS will be extremely interested. Robotrucks and drones will never threaten to go on strike, and companies like UPS may find they have a very enticing alternative to the Teamsters union by the end of this decade.


The other big cost of delivery is fuel - and here there is another technology trend that may save us. Noah Smith writes about the incredible advances in clean energy in the last decade. Over that time period, the price of energy from wind has declined 70%, and the price of energy from solar has declined an eye-popping 89%. Solar and wind are now the cheapest way to produce electricity, with natural gas close behind. At the same time, the cost of storing energy in batteries is falling precipitously too. Here’s a chart from the article of the price/kWh for lithium ion cell batteries over just the past year:



If these trends continue, it adds up to a future of clean, abundant, cheap energy. As we transition from gasoline to electric-powered transportation, that translates into direct savings for the carriers delivering packages, as well as the retailers and brands that sell those products.


For now, I’ll grudgingly pay the shipping costs to get my stuff shipped to my door. But I hope that in the not-too-distant electric robo-delivery future, those costs will disappear.


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