Executive Summary
The most expensive mile in real estate is the last-mile.
Average delivery costs in America associated with last-mile logistics account for over 50% of the total cost of shipping. American retailers pay between $5 and $10 for each last-mile delivery, and $10 to $18 dollars in the case of failed deliveries.
Large retailers mostly address the last-mile challenge head-on by building and managing their own logistics infrastructure. Small retailers rely on traditional mail carriers. The remaining have more options.
3PLs are rapidly growing in popularity and permit many smaller retailers to combine their delivery needs to be then managed by the independent 3PL.
Real estate is the most powerful method for retailers to best address their last-mile challenges.
The challenges of last-mile delivery in Latin America embody all those found in America, and then some.
Latin America’s e-commerce market is expanding rapidly (i.e., 37% growth in 2020) and in 2022 represented a market size of around $117 billion.
Latin America received a little more than 10% of the $11 billion venture capitalists invested globally in last-mile delivery startups during the last decade. The region is late to the game, but most indicators point towards it receiving a larger share of global venture investments in the next decade.
Introduction to Last-Mile
The most expensive mile in real estate, at least in the developed world, is the last mile involved in the journey to deliver a product ordered online to the customer. In other words, moving the product from the final distribution center to the customer’s doorstep or hands. Customers’ expectations have shifted dramatically with the advent of same- and next-day delivery. 45% of customers in America are Amazon Prime members. An Oracle consumer research study found that 74% of customers want their orders delivered in one to five days, and 80% become angry when orders don’t arrive when promised. Half of the respondents said fast delivery is an important factor in whether they place an online order in the first place.
The value of the last-mile was established in America in 2010, when Amazon announced same- and next-day shipping for its Amazon Prime members. Once the online customer in America expected rapid delivery, other retailers either had to invest in their delivery and order fulfillment infrastructure, or risk losing market share.
Figure 1: Amazon’s Growth Since Prime Shipping Introduced
In Europe, same- and next-day delivery emerged in 2014 when Amazon announced free 2-day cross-border delivery across Europe. In Asia, in 2014 when Alibaba launched same- or next-day delivery networks throughout China. In Latin America, in 2018 when Mercado Libre announced same- or next-day delivery. The pattern is clear, once the dominant retailer in a region announces same- or next-day delivery, e-commerce activity explodes with new market share going to those retailers who can deliver consistently fast and accurate deliveries. Accompanying the increased e-commerce activity is more investment in logistics infrastructure and technology to improve order fulfillment infrastructure and capabilities.
The Last-Mile Challenge
The core last-mile challenge faced by retailers is encapsulated in this problem statement:
Customers strongly prefer same- or next-day delivery and not to pay much for it; if retailers don’t meet these expectations they will lose market share to competitors; near perfection is required in the delivery journey to satisfy the customer; and by far the most expensive and logistically complicated part of the journey is the last-mile.
Figure 2: Amazon’s Escalating Logistics Costs
There are very real and difficult last-mile logistical challenges associated with same- and next-day deliveries. In urban areas roads are narrow, parking difficult, and traffic can be painfully slow. In rural outskirts, addresses may not be clearly marked, and the driver may need to drive many miles just to make one delivery. Heavy, large and cumbersome items pose unique challenges. Driver shortages are an issue in many geographies.
When products arrive late, damaged, or never at all, the retailer’s brand is tarnished. Incorrect order fulfillment can lead to more shipping costs and restocking fees which erode already tight margins. These adverse consequences are why retailers are spending big on building last-mile capacity. Average delivery costs associated with last-mile logistics account for over 50% of the total cost of shipping. Experts estimate American retailers pay between $5 and $10 for each last-mile delivery. The figures jump to $10 to $18 in the case of failed deliveries.
Figure 3: Last-Mile Market Size Outlook ($ Billions)
Investments in last-mile startups have increased dramatically to solve important technology challenges related to last-mile logistics. In the last decade, $11 billion has been invested globally into these startups. Some high-profile transactions and partnerships include Walmart investing in Cruise, Target acquiring Schipt and Deliv, Costco partnering with Instacart for same-day fulfillment, and Dominos Pizza partnering with Nuro. WIND Ventures, using Pitchbook data, created the following charts which are helpful.
Figure 4: Capital Invested in Last-Mile Startups
How American Retailers Tackle Last-Mile
Large American retailers mostly address the last-mile challenge head-on by building and managing their own logistics infrastructure. They have the balance sheets to make these large investments, sufficient scale, and ability to bring in partners as required. Amazon is investing heavily, with one to four last-mile facilities in each city, and around 400 nationwide. These facilities are generally 140k ft² (i.e., 13,000 m²) and costs close to $40 million, each. The high cost is attributable to the installation of electronic vehicle charging points, vehicle fleet, and technology. Given Amazon’s size, it is also plausible that they may not be getting the best prices for land and from development partners. Upping the ante, Amazon has recently constructed a $4 billion dollar air hub outside of Cincinnati to aid its last-mile operations.
Figure 5: Typical Amazon Last-Mile Facility
Small retailers, without budgets or scale, are generally forced to rely on traditional mail delivery services (e.g., UPS, FedEx, USPS) to handle their entire shipping process, including the last-mile. The relatively high per-unit shipping costs will either be passed on to the customer, imbedded in the pricing, or taken from the retailers profit.
The remaining retailers have sufficient scale, and access to capital, to unlock more options to reduce per-unit shipping costs and provide greater delivery transparency. Many have turned to well-funded last-mile delivery startups which aim to solve various challenges in the delivery process through automation and technology. Others have made smaller scale, relative to Amazon, infrastructure investments in strategic markets in order to be able to make some deliveries themselves. Lastly, and probably the most popular option for the “mid-tier” retailers, is to partner with third-Party Logistic (“3PL”) companies.
3PLs are rapidly growing in popularity and permit many retailers to combine their delivery needs (i.e., achieve economies of scale jointly) to be then managed by the independent 3PL. The advantages of 3PLs to the retailer are cost and time savings, relative to other viable options, low CAPEX, more focus on delivering for the retailer than mail carriers, and flexibility. Disadvantages include loss of control relative to doing it on your own, IT investment required to integrate with the 3PL, and issues from lack of complete customization due to servicing many retailers (i.e., each retailer having different return policies which change frequently).
The Role of Real Estate
The more one studies the last-mile challenge, the more it becomes clear that real estate is the most powerful method for retailers to best address their last-mile challenges. That is, having small distribution centers as close as possible to the consumer, and within the various population nodes where orders are originated. Crowdsourcing of drivers has been tried to reduce reliance on real estate with limited success, and as of now does not look like a solution most American retailers are willing to risk their brand’s reputation on.
A significant challenge for new last-mile real estate projects is obtaining local building and town planning approvals. Since these buildings are ideally directly inside of population nodes, the local planning boards apply more scrutiny. The rationale for not approving last-mile real estate projects include the perception that the jobs created aren’t desirable, increase traffic congestion, and that the buildings aren’t usually aesthetically pleasing.
Some developers are responding by instead retrofitting existing structures in the hopes that planning approvals are not required, or require only minor zoning variances. Last-mile developers and retailers have had success taking over space in poorly performing department stores in dead shopping malls. Low-trafficked movie theatres have been successfully converted into order sorting and fulfillment centers. Office buildings with stubbornly high vacancy rates are a prime target for conversion. Lastly, the most recent trend to emerge is for developers and operators to bulk-up existing structures vertically in densely populated areas where floorplates and land plots are constrained and expensive.
Another popular real estate strategy involves ‘dark stores’. Dark stores are relatively small and shuddered retail shops, within population nodes, which have been converted to function as warehousing and order fulfillment centers. This concept is particularly popular with grocery delivery retailers, and last-mile technology delivery companies such as Uber Eats in America, and Rappi in Latin America. The stores are closed to the public and designed for order fulfillment and to efficiently get the delivery-ready product to the driver. Zoning is becoming an issue in some cities as the converted retail spaces are generally zoned for retail trading only, yet the dark stores’ uses are arguably industrial. Some criticize dark stores’ storefronts for being aesthetically unappealing, especially when they are located in well-trafficked retail properties.
Last-Mile in Latin America
The challenges of last-mile delivery in Latin America embody all those found in America, and then some. Traffic congestion is worse in Latin America which complicates deliveries and makes estimating delivery times difficult. Cell service can be sporadic, even in metropolitan areas, so mobile applications relying on GPS and 4G data may not function appropriately, if at all.
Theft is an issue. Leaving packages on the doorsteps of customers is untenable due to the high theft risk. Many of the drivers are gig workers and may find more reward for themselves in selling the customer’s product on the black market, rather than completing the delivery. The later is partially mitigated by the higher than average pay most delivery workers make, relative to other available options.
Homes and apartments are often difficult to find and not well marked, further increasing delivery times and rates of delivery failure. The vehicles (e.g., cars and motorcycles) used to deliver online purchases are generally owned by the gig worker, and older than those in America, making deliveries more likely to be delayed due to mechanical failure. Not all customers in Latin America pay electronically, adding a cumbersome cash management layer to many last-mile deliveries.
Latin America’s e-commerce market is expanding rapidly (i.e., 37% growth in 2020) and in 2022 represented a market size of around $117 billion. According to Americas Market Intelligence (“AMI”), the largest e-commerce player is Brazil’s Mercado Libre, by a wide margin. Mercado Libre fulfills 90% of its shipments in Brazil through its own supply chain, using more than 10,000 vans, 260 trucks and 4 planes. The other regional retailers, including Amazon, are playing catchup.
Figure 6: AMI’s Chart of Top 5 Marketplaces in LATAM
The AMI report describes that the large and rapidly expanding e-commerce retailers in the region are investing heavily to build their own last-mile capacity. Commercial real estate is relatively cheap in the region at the moment, and therefore they are benefiting from favorable land costs and rental rates. Brazil accounts for almost 60% of total e-commerce consumer spending in the region, and therefore should continue to receive the most last-mile industrial real estate investment. Mexico and Colombia also have favorable trends, and Chile and Argentina are among the next fastest growing e-commerce markets In Latin America.
Figure 7: AMI’s Chart of Retailers Investing in DCs
Venture capital companies have invested heavily in last-mile delivery startups in Latin America. Most of these mobile applications are aimed at mobilizing gig delivery workers to complete last-mile delivery logistics, aided by automation to handle items such as payments, dispatch, complaints, order tracking and more. An example is the popular Colombia-based Rappi which permits customers to purchase a wide range of meals and consumer goods, make payments, and track the delivery process. Most items are delivered within 45 minutes from the time of ordering, and some within 10 minutes. The later is achieved through Rappi’s Turbo marketplace, which is established on proprietary dark stores built to rapidly fulfill and handover the customer’s orders to the driver within minutes.
Figure 8: AMI Chart Highlighting Rappi’s Use of Dark Stores
Rappi recently closed a $500 million funding round, at a $5.25 billion valuation, led by T Rowe Price with additional capital from Ballie Gifford, Third Points, Octahedron, Y Combinator, Andreessen Horowitz, and Sequoia Capital. The company has raised over $2 billion since 2015, and operates in 9 countries and 250 cities. The region is late to the game, but most indicators point towards Latin America receiving a larger share of global venture investments into last-mile companies in the next decade than it did in the last.
