The Future of Last-Mile Logistics

It seems every time the consumer-goods industry starts to catch its breath, Amazon.com (AMZN -1.64%) shaves even more time off its free-delivery window. To catch up, a lot of companies are getting creative.

In this week's episode of Industry Focus: Energy, Motley Fool analysts Nick Sciple and Dan Kline break down the state of last-mile logistics today, and what it might look like soon. Find out why robots probably aren't coming for your job anytime soon, how Amazon changed expectations across the board, where drones and autonomous vehicles fit into the picture (and where they really don't), just how much RFID can tell companies today, what tech makers can do to offset the risk of "techlash," and more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Oct. 3, 2019.

Nick Sciple: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, October 3rd, and we're talking last-mile delivery. I'm your host, Nick Sciple, and today I'm joined in studio by Motley Fool contributor Dan Kline. What's going on, Dan?

Dan Kline: Not too much. How are you?

Sciple: I am doing all right. You're in town because the two of us are going to the very first AEW TV taping tonight. For folks who aren't familiar with this, can you give them the rundown?

Kline: Basically, this is the alternative to WWE. We've done a couple of shows on WWE. This is the first wrestling promotion that's on a major network, TNT, that has real strong financial backing. They're using more of a sports-based presentation. Instead of some of the comedy, some of the soap opera, you're going to get a little bit more wins and losses. It's some names you know, or names we know, and really a lot of up-and-coming talents. Sold out in a, what, 16,000-seat arena?

Sciple: It's the first time there's been a legitimate challenge to WWE probably since WWCW in the late '90s. We'll see how it goes. Exciting times if you're a wrestling fan. If you're not, maybe not as exciting.

Kline: I was going to say, we'll follow this up on a Consumer Goods show at some point.

Sciple: [laughs] We'll see how it goes. As I mentioned off the top, our main topic today is last-mile logistics. I think this is particularly relevant these days because of Amazon and others. More and more popularity of one-day, same-day shipping, that sort of thing. Those things are really cool for a consumer, but they aren't magic. For all that stuff to get to your door takes a lot of moving parts. Last-mile logistics is exactly what it sounds like -- moving those goods the last mile from the transportation hub to your door. It's among the most difficult of those moving parts in the logistics supply chain, what we're going to be talking about today.

Dan, first off the top of the show, what is going on in this arena? What are companies trying to do to solve this problem?

Kline: At the moment, it's very manual. Now, there's absolutely robots. If you go into an Amazon warehouse, it is giant robots working next to people. They don't look like robots in a cool sense; they're boxy. But that's bringing stuff where people are still doing a lot of the picking and a lot of the ordering. There is technology -- I saw a lot of this at Groceryshop -- to take this to a more minute level. And then, there's the second piece, taking it from the warehouse and bringing it to the person, which could be automated. But right now, a lot of companies are throwing a lot of labor at getting you same-day or next-day delivery, and they're not charging very much, if anything, for it.

Sciple: Yeah. As we mentioned, this is an incredibly complicated process. How great is it for the consumer that folks aren't charging you for something that requires all these moving parts?

Kline: I think we're in a weird time for consumers where market share is more important than profit. I think you and I have discussed this on air before -- I have like seven different food delivery apps in my phone. Maybe they charge $2.99. Some of them might even charge $5.99 for a certain size order. But they don't charge more for the food. I don't have to leave my house, I don't have to deal with waiting in line, paying, all of the other things. They bring my order to my door for $2.99 or $0. That's pretty good.

And Amazon -- I didn't ask Amazon for one-day delivery. I could care less most of the time if Amazon is getting me one-day or two-day delivery. I simply want to get what I'm looking for. And all of a sudden, now I just get one-day delivery. And that is expensive. And a lot of that expense right now is in people. That's the numbers we've talked about. There are 100,000 people pulling Instacart orders. There are 45,000 people pulling Walmart grocery orders for curbside pickup and delivery. Those bodies cost money, and they're not really being priced into the system.

Sciple: Exactly. With the current state of the labor market, they actually are getting to cost more and more and more. We've seen some businesses having difficulty staffing out what they need to accomplish there, which has had them pushing more into automation. We've had some concerns -- I think there's literally one presidential candidate whose entire campaign is about concerns that jobs are going to be taken away from automation. This is something that is really very much on consumers' minds.

Kline: Let's talk about that a little. Grocery stores have automated checkout. Not fully, but most places have self-checkout. Grocery stores are largely not employing less people. They're putting more people on the floor, in customer service roles, which leads to greater sales, which makes it easier to employ more people. The challenge is, what's the tipping point? If you're Walmart, and you can use technology to eliminate not only checkout, but self-checkout -- you just put your stuff in the thing, it charges your credit card, you're out the door -- well, at some point, you might do that. But that's very, very, very expensive to do across a large store. You're talking billions of dollars across a chain as big as they are. What are you saving? You're saving employees making $13 an hour. So, your short-term investment for your long-term payoff, that's a tough one to get companies to make.

Sciple: Yeah, certainly. Maybe we're reaching the point where some of this technology, the price has come down enough, and the cost of labor, given the currency of the labor market, has come up enough, that we see some investments there. Another place that companies have been investing to prepare their workforce for this transition has been retraining their staff. Can you talk a little bit about what Amazon and some others have done there?

Kline: Amazon has basically looked at its labor force and realized it employs a lot of people who have jobs that will be automated. But it also has a lot of job openings. So, one of the things it's been doing is going to its employees -- and Walmart has been doing this as well -- and saying, "Here are the roles we're going to need going forward. Here are the steps you can take," and they're paying for the training. That's a lot cheaper than laying you off and saying, "Oh, well, Nick, we laid you off as a podcast host. How are you at driving a truck?" The reality is, if they teach you to drive a truck, they'll have a truck driver; you'll appreciate having a job; you might be cheaper than an experienced truck driver because you just learned how to drive a truck. It works for everybody.

Companies are going to have to take a very active workforce approach because, yes, we're going to automate, which will create less jobs; but there are 6 million job openings according to the recent Glassdoor report that came out a couple days ago. 6 million openings, and there's probably a couple million more openings that companies aren't even bothering to advertise, because if you can't hire an entry-level guy, can you hire the three people above him? It becomes very challenging. So, I'm guessing we're at a real crisis, and that is going to force automation at some of these. As is the need to, "Yeah, we're going to spend a million dollars to put in a system that does a lot of our grocery order packing, and that's going to cost us in the short-term, but in the long run, three less people are going to work here, and that's worth it to us because we can't find those people anyway."

Sciple: Yeah. As we've pushed more into same-day logistics and demand from consumers for these products, automation is going to have to happen for this to make sense. There's been a lot of talk over the past decade or so that automation is going to be taking away jobs. That hasn't happened as quickly as folks might expect. You can look at productivity data going back to 2000. We've seen productivity start to slow, which is inconsistent with as much automation as we've seen. However, we're starting to see a lot more investment and some more technology become more cost-effective. One of those that you called out to me -- if you want to talk about that a little bit -- is RFID, and how the cost of that tracking technology has reached a point where you can start using it at a bigger scale.

Kline: I sat down with -- I apologize, I'm forgetting her name -- a vice president from Avery Dennison, the labeling company, at Groceryshop. Wonderful interview that technically had some problems. Otherwise you'd be hearing it right after this. What we talked about is RFID, which is the ability to track any item -- you can embed, essentially, a chip into a bag of potato chips, an individual potato chip; well, you don't want to eat them, but you get what I'm saying. That used to be affordable on a pallet basis. To track inventory in a warehouse, it has long been a useful tool. You know, "Hey, that pallet of refrigerators came in." And you could update your inventory, do all that. That is cost-effective now on an item level. That's how something like an Amazon Go -- I don't know if they use exactly RFID. But, the ability to look at one item. That takes labor out in a lot of ways. You don't have to send someone to the shelf to go, "How many boxes of rice are left?" You know how many boxes of rice because when it left the store, it tells you, "It left the store. It's not on the shelf anymore."

It also allows you to do some smart planning. Nike has actually done some of this with RFID. You go online to buy a pair of fairly rare sneakers. They can look and see, "You know, these sold out in West Palm Beach, but boy, in North Dakota, the stores still have six of them. Let's have North Dakota ship that order." It'll be good for them. They'll get rid of something that they're having trouble selling. And, it's not going to cause us to have to have the West Palm store ship it -- from North Dakota to West Palm to you. It can go directly to you, because they know where all their inventory is at any given minute.

Sciple: Yeah, and that's becoming more and more important over time. For folks who may not be away, RFID stands for radio frequency identification. It allows tracking of inventory, those sorts of things that have an RFID chip on them as they move around. Another area which I think is really exciting, particularly when it comes to autonomy, probably the first place where we're going to see autonomous vehicles in our day-to-day life, are some of these low-speed, small, autonomous delivery vehicles. There's been a number of start-ups in recent years in this area. Nuro, Refraction AI, Starship Technologies, Marble, Kiwi. More recently, we've seen Amazon get involved in this space with its Scout robot. These robots are particularly interesting. You think of, autonomous vehicles, they're driving on the main road. What these vehicles try to do is, they hang out in bike lanes or on sidewalks. They drive at low speeds and go over low distances. The exciting part about this technology is, it's autonomous technology where we have the technology to deliver this today. When we talk about full-scale self-driving, for full-size vehicles at highway speeds, you need a more robust sensor suite like LIDAR or something like that, which can become prohibitively expensive. However, at these lower speeds, you can use a more basic sensor suite, so it's easier to get these things to market. As well, there's less risk to injury to folks, and you deal with less regulation, because you're not using the surface streets.

Kline: I'm very skeptical about this! This is a device the size of a small bathtub, in terms of storage capacity. It crawls along. If it's a mile away, it takes half an hour to make the delivery. And its capacity isn't that great.

I see some uses for it. You've been to my home near Disney World. That house is literally a mile away from an Amazon distribution center. There's a lot of homes clustered in there. And there's a straight line sidewalk that those vehicles could probably work on. People bike on them. So, OK, in that neighborhood. But, you know what else there is? Kids with baseball bats. We've seen it with scooters, the wanton destruction or just carelessness of it. I have a hard time believing the Amazon robot that costs, who knows what, but I'm going to say $40,000, is [not] going to get destroyed out of casual glee. It doesn't seem to me like a sustainable idea unless you're talking college campuses, niche places that are very enclosed, maybe delivering a couple of city blocks or something. I cannot picture this turning its way into my crowded development, going by a bunch of kids playing basketball and not getting harassed.

Sciple: Yeah, that's been a concern, as you mentioned, with scooters. I actually saw a story today from your hometown in Fort Lauderdale. Classic Florida Man story. A guy had been arrested for cutting the brakes in over 100 electric scooters. They've invented a word for this, called techlash. I will say, I'm a little bit more optimistic on this technology reaching the market. I think Amazon investing in this is a signal that at least they see some economic viability for this. When it comes to these sensors, they're surprisingly less expensive than you would think.

However, there is another problem. We've been talking about the last-mile problem when it comes to delivering goods. However, these robots aren't going to go to your door. Maybe you've solved the last-mile problem, but you haven't solved that last-50-feet problem. Any thoughts there, Dan? Are folks going to come out of their front door and walk to the street to pick up their packages?

Kline: I think the problem is, Amazon has created a different expectation. They'll bring it in your door, in some cases. Is there a niche use for this? Yes. If I am at home, have the flu, and Walgreens -- which is testing drones in one tiny city -- will fly me some Theraflu, some chicken soup, and some throat lozenges, and I don't have to leave the house, it'll parachute down to my front door, I see a strong value in that. In most cases, what are you buying that you need Amazon to bring you immediately? I get it -- you're a new parent, you're out of diapers? All right, that's very important. But for the most part, there's a CVS everywhere. Yeah, there's convenience. I see the food delivery aspect of this. On the other hand, we don't generally live as close to many of the places we eat from as we do to an Amazon or Walmart distribution point. All of these technologies are going to be in the mix. I've seen the autonomous Amazon vans. Those make a lot more sense to me. But, again, you get the van to my door, I'm not going in the back of an unnamed van.

Right now, we're just playing on the edges of all this. I actually think most of the automation is going to happen into getting the right product from the warehouse to a truck, and there are still going to be drivers in most cases. Or -- I live in a building with a doorman, and we get Amazon grocery, so, Whole Foods, and they're in special bags, and they all come at once. That would make sense for autonomy because it's a big order coming to someplace who could receive the order. It's not being parceled out door to door, individually. That could happen. But I don't think you're ever going to have a humanish robot -- maybe not never, but in the next few years, you're not going to have a human robot who's like, [robot voice], "Here is your order." Which, by the way, it has to talk like that if we have that.

Sciple: I tend to share some of your concerns. Although, to your question of, do we need it that fast, I could have said, 10 years ago, do I need something in two days? Why can't I wait a week? I think customer expectations have quickly contracted how long they're willing to wait before goods come to their door, and its continuing to contract.

Kline: Do you feel like Amazon made a mistake with that? I look at one-day delivery, and I totally understood the city-based same-day delivery. When you live in a city -- both of us live downtown in a city -- I have less room. So it is quite often that I'm making dinner and I need something, and I will pay Instacart to show up in an hour with whatever item I'm missing. That's a convenience that's worth it for me. And Instacart does charge more. You pay more than the grocery store price for the item. You have to get to $35, you have to pay for delivery or be a member. That's worth it to me. I'm not sure, if I need a sweatshirt, it's ever like, "All right, it's cold now. Better order a sweatshirt." I think for most things, Amazon has created an expectation that's too expensive to deliver on.

Sciple: I see some of your points there. I think Amazon's move into one-day delivery is more to make -- it's going to be tough for the rest of the market, too. The rest of the market had answered their two-day offering. If they can stay one step ahead of the rest of the market, they make the rest of the market bear those expenses as well. That remains true as well to them increasing their minimum wage across the board. I think they want to keep the pressure as much as possible on their competitors to differentiate their offerings. But I do agree with your point. There's not a lot of things I need in one day. Often, they'll say, "Hey, if you can wait a week, you can click this button and we'll give you an extra dollar to buy something on Amazon," and I do tend to click it.

Kline: I think what you will see -- Amazon has this ability -- is more, call it predictive ordering. It would make sense for Amazon to analyze what I buy, and send me, "Hey, these are the things you buy and the schedule you buy them on. Can we deliver you these things all once a month?" They do subscriptions, but we've talked about my complaint about Amazon subscriptions -- you can't customize them. If it's something sold in a three-week supply, you can only get a once-a-month delivery. Doesn't really work. But I do see them using their AI, their intelligence that they've applied to their warehouses and what they stock, and be able to give you a customer-facing, "Hey, I see you buy dog food every week. Do you have a dog? We'll send it to you on Friday," and they don't have to rush it as much. Or, they can use the logic of saying, "Hey, we're doing same day-delivery in Nick's neighborhood. We'll bring him his dog food early." That kind of stuff. Efficiency. I think you're going to see Amazon and Walmart really lead the way with that. And then, maybe a year later, you'll see white label versions of it.

Sciple: One example that comes to mind is, if you remember, maybe six months, a year back, Amazon rolled out this offering that said, "Hey, if you want to, we can make sure you get all your Amazon deliveries whatever one day a week that you always get those deliveries. Isn't this so convenient for you?" And they sold it that way. But what it really is is, isn't it a lot easier for Amazon to deliver you one package one day a week than it is to bring you five different packages five different days a week?

Kline: I use that service sometimes. Again, I live in a building. I don't get deliveries to my door for packages. I have to go down, there has to be someone there, I have to wait in a line, then I have to carry up a bunch of stuff. So if I know there's nothing in my Amazon order that I'm going to need, I will place my Amazon order and have it all come in one box. Usually I end up ordering things on their own as well. So, I see a very strong value in that in the very niche market -- or, if you live someplace where your door isn't necessarily a safe place to leave a package, so you know you can be home when the UPS guy gets there on Thursday, then it makes sense to have Amazon deliver on Thursday. Yes, I see that it benefits the company; but I also see consumer benefit to it.

Sciple: Yeah, it works out nicely that way. One topic I did want to want to talk about briefly before we go away. You mentioned the Walgreens drone partnership. We chatted about this a little bit before we started taping. A lot of people have been saying, maybe going on seven, eight years, that drones are going to become more and more significant when it comes to logistics. Based on what you've seen following this market, how do you expect that to roll out? What applications do you think drones will have in logistics?

Kline: Drones are absolutely going to help with inventory and warehousing. They already are. They're not in public places, so you don't need any of the same licensing. I don't picture a world where I stand out on my balcony on the third floor and a drone flies up and brings me a sub. I just don't see it. What I do see is, my family has a home in rural New Hampshire. It is six miles from the closest CVS or grocery store. But it's also six miles where there aren't very many people around. That would make a lot of sense for drone delivery. You're taking the danger factor away. You're not likely to hit someone, you're not likely to have a kid with a baseball bat knock it out of the sky. And, those roads aren't super easy. There's not a good way to get around. There's no efficiency in delivering via truck. I have neighbors, but not that many of them. So, I think drones are going to be a tool. They already can do a lot of the things they need to do. But nobody wants a sky filled with drones delivering Chipotle.

Sciple: Yeah. We talked about the techlash thing against the scooters. As you mentioned, having enough drones to where it can deliver it to your balcony, in your apartment, I can just see the backlash from folks. "I see these drones all over the town, they're causing all this noise and disruption," as well as, you have to think about, the FAA has to worry about how many things are flying around in the sky. You have to track these things for planes and those sorts of things. So, I do tend to agree that the last mile in rural spaces is really where drones make sense.

Kline: We haven't talked about it, but UPS got permission to essentially build a drone airline, but they have to have flight paths cleared. This might make a lot of sense for UPS in certain markets, to be like, "Hey, once a day, we're doing a drone to your remote office complex, so just tell us what you need and ship back what you need shipped back." All of this technology is interesting and will be useful. That little rolling vehicle may make sense in certain areas where you're shipping small things to a lot of different people. But none of these are the answer. And I think what we don't know yet is, what is the technology that's going to make last-mile delivery affordable? What is going to take all the expense out of this? You can't be making a ton of money same-day delivering me $22 worth of lunch. It just doesn't make that much sense.

Sciple: I've ordered toothbrushes on same-day delivery. I can't imagine that's efficient for the company to be doing that. But, what are you going to do?

Before we go away, Dan, high level, going forward, what's your biggest question in the transition of last-mile logistics? What are you following?

Kline: Really, what I'm following is how they're using people, and the slow, prodding move to, almost every decent player, down to like a Publix, some of your not-public companies, are starting to automate some part of the delivery process. Even some of the restaurants have a second line that's operating specifically for delivery orders. They're actually serving those. It's how those develop and how those automate. We've talked about it before -- McDonald's could automate food production. The food would come out better and closer to what you ordered. But, what would it cost for them to install that equipment? You're going to hit the tipping point where Target says, "We can no longer find enough warehouse workers," or, "The turnover is too high in warehouse workers. We want a warehouse that, instead of being 50/50 automated/people has a couple of people that are polishing the robots and making sure everything runs correctly."

Sciple: Dan, thanks so much for coming on the show. For our listeners, if any of y'all have some thoughts on where the future of last-mile logistics is going -- would you be knocking over one of these robots when it drove down the road? -- why don't you shoot us an email at [email protected].

Dan, as always, thanks for coming on the podcast!

Kline: Thanks for having me!

Sciple: As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for his work behind the glass. For Dan Kline, I'm Nick Sciple, thanks for listening and Fool on!