Cracking the Last-Mile: Amazon’s Drone Delivery

Ryerson MBA is participating in The Economist’s Real Vision Investment Case Study against teams from some of the world’s other leading MBA programs. Their challenge? Analyze Walmart and Amazon to determine which retail giant’s stock is the better investment choice over the next 10 years.

Ryerson MBA Student Krysten ConnelyHere, team member Krysten Connely discusses how innovative approaches to last-mile delivery could impact the long-term success of Amazon and Walmart. Visit The Economist website to view the full analysis and vote for Ryerson MBA.

Retail giants like Amazon (and Walmart) badly want to deliver your next order to your doorstep in under 30 minutes, using drones.

In our written submission for the Real Vision Investment Case Study Competition, we argued that shipping and delivery innovation and execution is one of the top retail trends that will set retailers apart in the next five to 10 years.

In recent years, e-commerce revenue has spiked, largely thanks to free, fast (e.g., same-day, less than 1-hour), reliable, and convenient shipping – reaffirming the notion that these ever-evolving omnichannel retailers continue to struggle with cracking the last-mile. Last-mile delivery represents the last leg of the supply chain – the moment when the consumer receives their order – and is often the least efficient, most expensive, and least controllable part of the delivery process.

With a fast-growing sharing economy, last-mile delivery is becoming increasingly competitive as retailers race to improve delivery speed and service through new solutions like drones and couriers. A number of tech-based companies are disrupting the delivery business by sidestepping the traditional parcel delivery method (e.g. UPS, FedEx, Canada Post) and controlling the last mile. For example, Norway-based Nimber is a community delivery service that matches people who need to send something with someone going that way, while London-based Shutl offers a rapid fulfillment service by connecting online retailers with local same-day couriers.

Ahead of the game is Amazon, which launched its own fleet of delivery trucks and more recently unveiled Prime Air, a proposed drone-delivery service that would drop off your package in your backyard or doorstep in 30 minutes or less (check out their slick new drone design). Although the infrastructure is there, little has happened in the space thanks to stringent Federal Aviation Administration (FAA) drone regulations, which, until now, maintain that drones must be piloted by a human and remain within the pilot’s line of sight.

Even though the FAA’s drone-related regulatory policies are set to soften within the next year, significant hurdles exist in the realm of drone delivery, including:

  1. Package size and limited range

Amazon’s drone delivery would be limited to packages under five pounds that fit within specific measurements. Plus, deliveries would be restricted to areas surrounding Amazon’s fulfillment centers (although Prime Now warehouses will likely serve as hubs for drones).

  1. Execution

Drone delivery is programmed to work well for houses (particularly for back or front yards offering large landing spots), but what about apartment buildings? While still unanswered, this issue might be mitigated by Amazon’s centralized locker-based delivery system at local convenience stores like 7-Eleven.

  1. Air Traffic

Skepticism around how drones will share the air with commercial and noncommercial drones remains high. In an interview with Yahoo Tech in January, Amazon vice-president Paul Misener highlighted the company’s proposed “layered” approach to air traffic control, whereby Amazon’s drones would operate between 200 and 400 feet – 100 feet below commercial jet airspace.

  1. Safety, Security, and Privacy

For drone delivery to be successful, there’s no doubt that reliable, safe, and crash-free trips are part of the equation. Yet, drones flying packages kilometres away from a centre, navigating trees, power lines, and other objects at high altitudes to deliver to your doorstep elicits prevailing threats of commercial drone accidents. Amazon claims that its “sense-and-avoid technology” (which is heavy, bulky, and expensive) will mitigate these threats, but to date, they’ve remained unproven and have spurred further privacy concerns related to a drone’s built-in scanners and cameras.

  1. Battery Life, Weather, Price, etc.

Findings from a 2014 survey of more than 1,400 U.S. consumers revealed that 80% of consumers are willing to pay for drone delivery (PDF), with almost half of them saying they would pay at least $5.

At the time of our analysis, Walmart was testing drones for home delivery, curbside pickup, warehouse inventories, and its grocery pick-up service. That being said, Amazon, the world’s largest e-tailer, continues to be the industry leader in last-mile delivery. With strong consumer appetite and looming regulatory reform, doorstep drone-delivery is just a matter of time.

Want to go even deeper into the Amazon vs. Walmart debate? Visit The Economist’s Real Vision Investment Case Study to view our full analysis. And don’t forget to vote for us for the People’s Choice Award – registered users can vote daily!