The pandemic made the average American think a lot about supply chain and logistics even if they don't use those words. Most people think in terms of "where is the toilet paper I ordered" or "why can't I get a refrigerator delivered," not in a more technical way.
Amazon (AMZN) has raised the bar when it comes to all things delivery related. Consumers expect that nearly everything you order should show up the next day. The only exception to that may be really large items like appliances because the online leader does not sell those (at least partially because fulfillment is such a challenge.
Many companies that do sell appliances use third parties for deliveries which adds costs and creates a layer the company does not control. Costco (COST), which has been very careful when it comes to managing members' expectations on deliveries, has gone in a different direction.
The warehouse club has taken many of its big and bulky deliveries in-house and that has been very successful.
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Costco Wants to Control the Member Experience
When a food delivery company messes up your order it may or may not be related to the underlying restaurant. Perhaps the delivery driver didn't grab every bag or maybe the place you ordered from never put your baked potato in the bag in the first place.
In either case, at least some of your anger gets directed at the restaurant which has few, if any options to correct the problem. Now, imagine if you ordered a major appliance -- think a stove or a refrigerator/freezer combo -- and the outside delivery company makes a mistake.
It could tell you the wrong day, miss its four (or even eight) hour delivery window, or simply not show up at all. That reflects poorly on the company which also can't control how the situation gets remedied or handle any special requests.
Costco has removed those problems from its equation by buying its own fulfillment company. CFO Richard Galanti offered an update on those efforts during the company's second-quarter earnings call.
"With Costco Logistics, we continue to transition from vendor drop ship to direct ship from our own inventory, particularly in big and bulky items," he said, "Overall, this lowers the cost of the merchandise and improves delivery times on service levels to our members.
Costco Has Made Big Delivery Progress
Costco bought Innovel Solutions for $1 billion in March 2020. Since that purchase, it has made huge strides in its ability to deliver large items to its members.
"Prior to this acquisition, in the U.S., we were completing a few years ago about 2 million big and bulky deliveries and installations per year," Galanti said. "In fiscal '22, we completed 4.3 million big and bulky deliveries and installation.
Costco's previous 2 million deliveries and installations were made by third parties.
"In fiscal '22, about 70% or a little over 3 million of the 4.3 million were done by us. In the fourth quarter, in fact, that percentage of deliveries and installations done by -- performed by us was 81%," the CFO added.
The warehouse club has also been able to improve its delivery times.
"Pre-acquisition, the estimated average days to deliver was above 15 days, and we were working with over 100 delivery partners. Today, our average delivery time for big and bulky is just under five days, and we're continuing to work to improve that. And we were down to eight primary delivery partners," he said.
This may seem like a small solution, but this is Costco taking control of a part of its sales and fulfillment process that it previously placed in third-party hands. That allows it to control the process and ensure that its members remain happy.
