Among all the other issues facing companies trying to recruit drivers, throw another factor into the mix: tips.
Most drivers don’t get them. But one group does: the drivers who deliver goods to private residences and install televisions, washing machines and Pelotons. Those drivers don’t want to give them up, and it’s a factor in the balance among which companies struggle to retain and recruit drivers, and which ones have good numbers in that category.
That was one of the points discussed at the recent FTR Transportation Conference in Indianapolis, in a panel looking at the economics of last-mile delivery. The talk about tips came up in a review of the growing role of “big and bulky” ecommerce, where not only can an item that previously was just purchased in a store, like a television or washing machine, now get bought online. But the expectation for rapid delivery that comes with ordering a book or shirt from Amazon is present in these heavier goods as well. And with that rising, the opportunities to get tips rises as well.
John Hill, the president and COO of Pilot Freight Services, a logistics provider, said when it has moved staff into, or made acquisitions of heavy product last-mile delivery firms, “we didn’t have to give the people gigantic raises as we morphed them from B to B delivery.” The reason was simple: “They were delivering in the home and getting tips. As ecommerce grows, their income is growing because of the mix of business.”
The possibility of getting additional income through tips brings about other benefits, Hill said. “It encourages them to be polite, to do the right thing and to engage with that customer,” Hill said. And the fact that they get tips, Hill said, means it becomes the type of job that a driver would far rather have, getting home every night, than be an over-the-road truck driver.
That added income flow may help retain those drivers. But Bob Fatovic, executive vice president of Ryder Systems (NYSE:R) —which recently has made acquisitions to put it into that heavy product final-mile business—said he still has concerns about attracting drivers to that field, and by extension, to broader driver occupations.
In looking at ecommerce, Fatovic said, “what occurs to me is that this is very labor intensive.” The heavy product last-mile arena also takes a certain amount of skill. “People who might qualify as diesel mechanics or OTR drivers or local pickup LTL drivers may not be the right type of people to install a washing machine of a big screen TV,” Fatovic said. “There is also the removal of the old item. And if we can’t find people to do the easier jobs than this, where are we going to find the people to do delivery of the big and bulky, as well as parcel items?”
Ryder recently entered the last-mile business through a $120 million acquisition in April of MXD Group, which at the time of the acquisition had 109 e-commerce fulfillment facilities in the U.S. and Canada. At the time of the purchase, Ryder said the deal increased the company’s e-commerce hubs to 121, with the math showing that it only had 12 of them to begin with. It also moved Ryder into last mile delivery for “big and bulky products,” it said in its announcement of the purchase.
Fatovic said the brands that deliver the big and bulky times “care very much who is going into the home, and how the communication is being handled. From a customer satisfaction standpoint, those brands are driving high satisfaction rates. We can get instantaneous feedback. These customers are paying for delivery If they are paying $3,000 for an item, the delivery might be 4-5% of the cost of the good.”
No discussion of last mile and ecommerce can last more than a minute without Amazon coming up, and John Larkin, a managing director of Stifel, brought the etailer up right away. Larkin said Fred Smith, the founder and CEO of FedEx, would implicitly threaten Amazon with the power of the FedEx network, noting that Amazon would “never be able to replicate it.”
Things have changed though, Larkin said: “He’s using that a lot less.”
Larkin discussed recent steps by Amazon, including the introduction of Amazon Flex—allowing individuals to make deliveries right from their private vehicles—or the Delivery Service Partners program, which has Amazon aid an entrepreneur in creating a broader delivery business than just stuffing parcels in a private car and making deliveries. “It appears to me that the Amazon model is to skim off the baseload volume of the entire parcel supply chain and handle that with their contractors or their assets such that they achieve 10% utilization of their network during high season and then rely on external partners to provide the surge capacity,” Larkin said. “That is all well and good, except the outside vendors didn’t design their networks to be peak only. So it will be more and more disrupted going forward.”
It’s a “crowd source” model Amazon is undertaking, Larkin said. Amazon Flex, for example, is based partly on the idea that the person making deliveries out of their car also could be driving for Uber and Lyft when not delivering packages. The idea is that “they could make more money doing packages instead of waiting four hours at the airport.”
Amazon, Larkin noted, also has its new program where it is going to buy 20,000 Mercedes Springer vans and lease them out to independent contractors who would deliver exclusively for Amazon, like the Delivery Service Partners. “That would make me nervous if I was sitting in Atlanta at UPS or at FedEx,” Larkin said.
But the idea that Amazon is a last-mile beast that can call all the shots was challenged by the panelists. For example, Larkin spoke of the idea of somebody like UPS reverse engineering and providing something akin to a ecommerce offering. With its system in place, UPS has low marginal costs to add such activities, “and the theory is that a seller might ask, ‘do I really want Amazon having all of my data?’ Maybe I need an independent distribution channel and somebody neutral not competing against me.” Fatovic echoed that, saying that “at some point, there will be a lot of brands and consumers who don’t want to put their network into the Amazon network and will be looking for alternatives.”
Larkin suggested not overlooking the U.S. Postal Service as a key player in how the industry evolves. If Congress would “let it,” Larkin said, without specifying what it was that needed to be done, “the U.S Postal Service could be twice as efficient.” As Larkin noted, it has a built-in advantage: “It’s the only entity that goes to every delivery address, every day. It’s a pretty remarkable network.”
One concern all three panelists expressed for the last mile arena was the Dynamex decision and the California Supreme Court’s decision that Dynamex had incorrectly classified its employees as independent contractors. But since ICs, as the panelists called them, are so key to the last mile delivery process working, as Hill said, “they have to make sure they have all their I’s dotted and their T’s crossed.” And all steps need to be taken to ensure that they are at arm’s length, he added.
Fatovic said the issues of classification are coming up only in a few states besides California; Massachusetts and Illinois were cited. Ultimately, the best way to ensure ICs keep that legal designation is the way they’re treated, Fatovic said. “If independent contractors are being treated fairly, this all works,” he said. “If you have a brand or a 3PL abusing these contractors, you’re going to have problems.”