Universal drone delivery would complete eCommerce revolution in retail

New Drone
Jonathan Malankar, HBS '16
Jonathan Malankar, HBS ’16

By Jon Malankar, HBS Class of 2016

“I’ve seen it. It’s gonna happen. It’s coming.”  That’s straight from the lips of Paul Misener, Amazon’s VP for Global Public Policy and he’s talking about Amazon Prime Air, or as I like to call it: drones everywhere!  When Amazon first introduced the concept of drone delivery two years ago, many wondered if a drone that looked so fragile itself could safely deliver anything heavier than a keychain.  Fast forward to last November when Amazon debuted a second generation drone model and suddenly drone delivery was now closer to reality than fantasy.  

Old Drone
Old Drone

At the same time, consumer drones flew off the shelves as one of the hottest holiday gift items of 2015.  Even the Federal Aviation Administration (FAA) sped up its act and opened a new registration system on December 21.  So far, 300,000 consumer drones have been registered.  

Drones have arrived, consumers have quickly become comfortable with them and Amazon’s early successes have shown that the regulatory battle is winnable.  We may soon live in a world where drone delivery is commonplace.  What would that mean for the retail industry?  Universal drones would spell the end of push retail and force companies to build inspiring brands that compel people to consume them.

Drones will impact many industries.  For now, let’s talk retail.

Before discussing the potential impact of universal drones, let’s align on assumptions first.  For the purposes of this discussion, we will assume that all regulatory challenges have been addressed.  We’ll also assume that the cost of drone delivery is comparable to current air and ground delivery methods.  Lastly, our discussion will assume that drones will be able to deliver the majority of items that are ordered.  For scope, we will look primarily at retail (e.g., consumer packaged goods, apparel, electronics, etc.)  Drones will undoubtedly do amazing things in farming, security, real estate and other sectors but we’ll save those for another time.

Impulse buying will grind to a halt.

Unplanned purchases are critical in retail.  Does anyone walk into an H&M planning to buy socks?  How about all that candy lined up by the register in the grocery store?  Or that cell phone cable at the counter of Walgreens or Best Buy?  These seemingly small purchases make up a meaningful percentage of sales for both retailers and manufacturers.  

HUECU Eligibility onlineUnfortunately, impulse purchases as we know them today are heavily dependent on consumers entering the store.  Consumers can’t buy those socks, candies and cables unless they are in the store to see them.  In a drone delivery world, foot traffic will approach zero.  Brick and mortar stores have already seen foot traffic cut in half from 2010 to 2013.  Even holiday traffic has declined from 30 billion to 17.6 billion in that time frame.  With Amazon’s stated goal of delivery within 30 minutes, even the occasional emergency purchase might reach consumers faster through Amazon than getting in the car, driving to the store, picking up the item and driving back.  

That said, Amazon itself has tried to reinvent impulse buying with its “Customers who bought X also bought…” and “Frequently Bought Together” functions.  While it’s tough to say for sure how effective these methods are, online impulse buying will likely never match up to offline impulse buying.  Consumers buy goods online fundamentally because they felt a desire to purchase and went searching.  In the future, companies will need to focus on building that desire.

Rest in peace, push marketing.

This may sound obvious but universal drone delivery means brands have to actually inspire consumers to buy their products.  Don’t they do that already?  Yes, some of them do.  Many brands have thrived for decades by simply being on the shelf at a competitive price.  This is what’s called “push” retail.  Manufacturers “push” their products onto shelves by paying premium slotting fees to retailers. Then consumers buy them often just because that’s the first product they saw or it was on sale.  This approach will not last much longer.

New Drone
New Drone

Ubiquitous drone delivery means most purchases will be made off a computer or mobile device.  Amazon Fresh, Peapod, Fresh Direct and others have endless “shelves”.  Manufacturers might still pay extra to get on the homepage or try to otherwise recreate push retail in eCommerce but they would be better off improving their pull marketing.  Online shoppers can find whatever they want with a simple search query.  Manufacturers will have to create real demand so that consumers seek out their products when they go on a retailer’s portal.  

Mergers and acquisitions for all; new players enter the fray.

Universal drones will continue to devalue brick and mortar stores.  Companies with entrenched real estate assets will eventually turn to mergers to attempt to save themselves.  This trend is already underway with Walgreens buying Rite Aid.  Grocery chains have also been teaming up with Safeway-Albertsons and Ahold-Delhaize.  This consolidation will continue.  Whether or not consolidation will do anything to save potentially irrelevant business models is less clear.  

As established players consolidate, the flood gates will open for new players to enter.  The internet enabled competition in many industries but retail hasn’t been truly revolutionized yet.  Although it’s easier than ever to debut a product, securing distribution is still a challenge.  Even Dr. Pepper Snapple Group sometimes uses PepsiCo’s trucks.  Current Amazon Prime delivery in two days simply isn’t fast enough for consumables.  If Amazon’s drones can deliver most items in 30 minutes, every player has access to the best-in-class distribution.  Universal drone delivery is the last piece of the puzzle and will complete the eCommerce revolution that is approaching a tipping point in developed markets.

Whether or not it’s drones, big changes are coming.

Even if drones are all shut down by the FAA tomorrow, distribution in retail will inevitably change.  Uber has entered the delivery business with UberRUSH.  If you doubt their ability to drive change, ask your local cab driver what they think.  Starship Technologies has debuted delivery droids that might as well be called R2-D2.  DHL has entered the drone game in Europe.  One way or another, universal drone delivery will get here and that will be the final piece of the eCommerce puzzle.  Manufacturers and retailers need to get moving now.

Further Reading