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How will same-day and on-demand delivery evolve in urban markets?

By Florian Bauer, Ludwig Hausmann, Jan Krause, and Thomas Netzer
How will same-day and on-demand delivery evolve in urban markets?

Delivery start-ups have struck a chord with consumers. But brick-and-mortar retailers and parcel services could still compete by playing to their strengths.

The B2C delivery market has been roiled by change in the past few years. In a 2014 McKinsey report on logistics trends, same-day delivery was considered “the next evolutionary step in parcel logistics.” Back then, a consumer survey indicated that latent demand for higher-convenience offers would give fast parcel delivery (service within 1 to 12 hours) 15 percent of the market for B2C domestic parcel deliveries by 2020. The supply side at the time, however, was just emerging. While early providers of same-day delivery gained market traction, they weren’t alone for long.

A new set of competitors—on-demand urban delivery providers—has since entered the B2C delivery market. These start-ups, including Deliveroo and Foodora in Europe, as well as DoorDash and Postmates in the United States, offer a different form of service: they integrate demand aggregation via their own mobile platforms with dedicated in-house operations to enable (almost) instant delivery. These innovations in the go-to-market approach and logistics model have attracted almost $5 billion in venture capital (VC) since 2014 in Western markets alone (exhibit), with leading players on average raising more than 90 percent of their total funding in that period. That’s shaking up the urban shopping and delivery landscape.

US and EU venture capital financing history for urban delivery start-ups, looking at urban grocery and urban prepared food delivery for 2010-13 and 2014-17

Intrigued by this rapid evolution and the recent developments, we undertook new research, which included conducting interviews with more than 40 industry experts, from start-up founders to investors and their partners along the entire value chain, as well as making test purchases. We discuss our findings on the market in this article and a new report, The urban delivery bet: USD 5 billion in venture capital at risk?

Many delivery start-ups are one-trick ponies

Although urban delivery start-ups are striking a chord with consumers, their rise is ultimately due to investors’ bets on a virtuous cycle. Namely, the success of the urban delivery market depends on scale at a level that is only possible with heavy up-front investment.

More than two-thirds of today’s urban delivery start-up action is in one category: prepared-food delivery. However, winners in this space are already emerging, and their dominance is clear. For the many runners up, a new hunting ground is needed, but it will be hard to come by. Markets such as groceries or nonfood retail do not offer the same rare combination of high gross margins and high urgency as hot food does. At average variable costs per delivery as high as $7 to $10, profitability will remain out of reach for these start-ups in the broader market—unless they reinvent themselves and address the limitations of their instant delivery model. This entails moving from pure point-to-point delivery to more cost-efficient network-based consolidation (and with it, from instant to same-day delivery) and adopting “old school” models of product warehousing and employment. For most new entrants, however, a shift of this magnitude would exceed their capabilities and budgets, and trying to make it happen would set them up for failure.

But start-ups unleashed a big opportunity—and some traditional players are well placed to compete

Even as most start-ups struggle to adapt, their impact on urban consumers’ expectations will be lasting: shoppers have grown fond of having the city at their fingertips. Given this renewed attention to and scope for service enhancements, the same-day formula in retail could come full circle. As same-day delivery stands to outgrow instant delivery by ten to one, it could unlock an opportunity worth more than $200 billion for retailers in Europe and North America over the next decade.

In this context, two types of traditional players could make a mark. On the retail side, brick-and-mortar stores stand to recapture ground from fast-growing pure e-tailers. They alone have the dense network of physical stores to support same-day order fulfillment and delivery from “the city as a warehouse.” In logistics, incumbent parcel services—not start-ups—stand to gain at least 80 percent of the future same-day market. Only they have the critical capabilities that retailers will seek: proven expertise in consolidated network operations, synergies with significant base volume, and the commercial capabilities and standing big-customer relationships to support such deals.

Brick-and-mortar retailers and parcel giants may have advantages that move them in the pole position to win in same-day delivery. However, they are not yet fully equipped to provide the supercharged, digitally enabled same-day experience that consumers want and that pioneers like Amazon or Zalando are keen to offer. To compete, they’ll need to enhance their operations (especially through digital enablement), effectively integrate stores in urban delivery networks, and courageously cannibalize their own business before competitors take a bite out of it. If they succeed, they will tap into a new, dynamically growing value pool—and leave many start-ups and VC investors watching from the sidelines.

Download The urban delivery bet: USD 5 billion in venture capital at risk?, the full report on which this article is based (PDF–4.1MB).

About the author(s)

Florian Bauer is an associate partner in McKinsey’s Vienna office, Ludwig Hausmann is an associate partner in the Munich office, and Jan Krause is a partner in the Cologne office, where Thomas Netzer is a senior partner.

The authors wish to thank Tim Ecker for his contributions to this article.
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