09-03-2020 14:49

The last mile is no longer driven in the dark

Fredrik Hamilton, founder and CEO of Budbee, discusses the company's journey to becoming the leading e-commerce B2C delivery player in the Nordic region and how its data-driven business model is disrupting the field.
Online delivery Budbee

In the latest Nordea On Your Mind report, ‘E-commerce and Corona‘, Johan Trocmé (JT), Director of Nordea Thematics, talks to Fredrik Hamilton (FH), founder and CEO of the Nordic region's leading B2C last mile delivery service provider Budbee. The company has taken the field by storm, with a growth rate of roughly 200% and expected revenues around SEK 400m for 2020.

Hamilton explains how the company's data-driven business model is disrupting the incumbents and why online retail is actually more sustainable than visiting physical stores. He also delves into how COVID-19 has been a catalyst for online shopping, a trend he expects to continue even after the pandemic.

JT: I think almost everyone has a negative experience from a home delivery, and it is easy to see how incumbent logistics players are struggling to scale up and meet growing demand and to overcome issues with legacy systems and models. How would you describe Budbee’s business model, and how does the way you operate differ from that of postal services and traditional forwarders?

FH: Budbee is focusing exclusively on B2C deliveries, to retail consumers, in contrast to many of the incumbent players who are coming from the B2B side. It is much simpler to deliver to a corporate customer and make them happy with the service, as they typically have staff able to receive deliveries during regular working hours. By addressing the consumer side, we think it is important for us to specialise in this, in order to do it well. There are few synergies between the two sides, as their respective nature is different. Today's consumers were prior to the COVID-19 pandemic typically at work during the day, so we designed our business from the start to make deliveries in the evening and during weekends. This has been the basis for the flows across our value chain, how we ship goods between countries and cities. We saw the lack of transparency, the lack of knowledge of where a parcel is and when delivery of it can be expected, as a big problem. It made consumers sceptical of the quality of home delivery services, and probably helped to create a bias for picking goods up at a service point instead – which is only a partial delivery solution.

I had these insights when I worked as a business developer at Rocket Internet in 2013, and we were launching an online store. The big difference between store-based and online retail is that in physical retail we consumers do all the work ourselves. We travel to the store. We pick the goods, try them out, we pay, and we carry the goods home. When shopping online, it is an entirely digital process until we click the purchase button. Then it is important that a forwarder can provide a good delivery experience, not least because it is the only party having any physical interaction with the customer.

Online still represents a very limited share of overall retail sales, and I expect this split to reverse, at least within my lifetime. To drive this development, I saw a great need to create a good service for B2C e-commerce deliveries.

IT systems are crucial for most businesses, and there is a huge advantage in being able to start with a clean slate, without needing to upgrade or integrate complex legacy systems. Similarly, a new player in logistics does not need to maintain a big existing flow of parcels while at the same time disrupting itself. I think one of the greatest problems for the logistics industry historically has been its poor use of data to make well-informed decisions. For Budbee, making data-driven decisions has been at the core of what we do from day one, understanding our revenue and cost drivers, optimising efficiency and returns, and ensuring the best possible user experience for our customers. From a production point of view, we are not so different from our incumbent competitors. We have similar flows. We have similar hub and spoke systems covering the journey out to the last mile. But the cost of sending a parcel using a typical DHL or UPS service is considerably higher than the typical cost of a Budbee delivery. For those companies it is an express service, often cross-border, which has meant less pressure for cost optimisation compared with a standard e-commerce delivery.

We differ from incumbent competitors both in having a newer technological platform, and in the operational characteristics of our business. If you are expecting a delivery from a traditional operator, you don't know when you will receive it. What it can communicate is essentially the working hours of the driver. We communicate expected delivery times down to minute intervals. How can we do this? Our operating model is different. We schedule the exact route for the driver's deliveries. Using machine learning and our algorithms, we are good at estimating delivery times. Incumbent players leave the responsibility for route planning to the driver. They simply don't know the order of the deliveries along the route in advance, and have no way of effectively or reliably communicating estimated delivery times along the way. And there is no way for them to learn from the data of historical deliveries to be able to make well-informed decisions.

JT: You founded Budbee when you were a student at the Stockholm School of Economics. How did it all start? What made it take off? How has your owner base evolved, from founders and angel investors to today’s backing from Kinnevik, H&M and Stena Sessan as big shareholders? What has got these big players involved?

FH: While working as a business developer at Rocket Internet when I was still a student, I was based in Istanbul, Turkey. We were going to launch an e-commerce operation in Azerbaijan. We were not given visas, so we had to stay and do it from Turkey. This is when it dawned on me how critical deliveries are for an online store. There is a saying that the best conversion for an online retailer is after the first purchase. This is when the customer realises what she or he forgot to order, and makes an additional purchase. And the delivery is the only physical contact with the customer, which convinced me that in the future Budbee would need to become a strong consumer brand. It is about trust, quality and service levels.

I started thinking about it, moved back to Sweden and graduated from the Stockholm School of Economics. I am not risk-averse, and I felt strongly that I wanted to start a business. Having lived on student loans, I had not built up any expensive habits, and the jump to becoming an entrepreneur was not as dramatic as if I had been pursuing a career for a number of years prior to doing it. We started testing some logistical models, and the core of what is now Budbee was started in mid-2016.

I have an extremely long-term perspective on Budbee. It will take time to build the business. It is a company I will take to my grave. I think many startups focus almost exclusively on the user experience, arguing everything will be fine as long as you have a slick app. I would argue it is equally important to have a solid backbone, the processes, the infrastructure, to be able to scale up and handle the big parcel volumes we have in our system. We feel this view has paid off during the COVID-19 pandemic, when we have seen parcel volumes explode. Many companies have struggled to meet soaring demand, but we achieved around 200% growth in volumes in 2020, similar to our historical growth rates, but from a much higher base. We are forward-leaning in our investments in sorting machines, terminals and processes, so that we can scale up. Without this, we would not have been able to pursue the dramatic volume growth we saw in 2020.

Given what I said about having a long-term perspective, it has been important for me to find investors who take a long-term view, who might prefer centurial rather than quarterly reporting. It takes time to build a great business. We were fortunate in attracting fantastic angel investors at a very early stage. Kinnevik became an investor in the spring of 2018, becoming our first institutional shareholder. It is a long-term investor with plenty of experience in industries that are facing disruption. After this we started building a more senior management team, and expanded into new markets like Finland and Denmark. H&M's chairman Karl-Johan Persson was the principal of one of our original angel investors, and his share of that ownership stake was transferred to H&M when Budbee entered a commercial agreement with H&M a couple of years ago, making H&M our second institutional shareholder. In the spring of 2020 they were joined by Stena Sessan, and in January 2021 by AMF.

JT: What can you tell us about how the business has grown and evolved? Volumes, revenues, profits, number of staff, number of geographical markets? What are your aims? What are the main constraints on growth?

FH: We originally started creating a technological platform for running a last mile delivery business like Budbee, with the intention of offering it to players such as those who are Budbee's direct competitors today. But none of them wanted to buy it at the time. We did not want to disappoint our original investors, so we reviewed what we had and concluded that we did see great value in our route optimisation algorithm, the customer interface allowing recipients to track their deliveries in real-time, and the smartphone-based driver instructions. So we emailed probably 100 or so e-tailers, and found interest among particularly some meal kit food delivery players and won some delivery service contracts by early 2015. This was not really the market segment we had targeted at the beginning, and we wanted to explore if our service could be applied to parcel deliveries. With the operational experience we had acquired, we decided to exit the groceries segment in 2016 to focus exclusively on parcel deliveries, and signed agreements with the Swedish e-tailers Bangerhead and Apotea. We started on a small scale, covering only part of Central Stockholm. But we grew quickly, expanding to the cities of Gothenburg and Malmö, and now we are present in four countries: Sweden, Finland, Denmark and the Netherlands.

We currently deliver millions of parcels per month. We have consistently trebled our volumes every year, enjoying a growth rate of around 200%. Our revenues should reach roughly SEK 400m for 2020. We are not seeing any signs of growth slowing at present. Having such a clear long-term focus, we are committed to regulatory compliance. We currently only operate in EU markets, which require the same permit for commercial delivery services with motor vehicles. I don't see any constraints relating to this.

We have several potential growth drivers. We can enter new countries. We can gain market shares if consumers are happy with our service and choose Budbee. And we could potentially enter new agreements with additional e-tailers, to execute deliveries for them. We launched a smart box pickup service in mid-2020, which could be another avenue for growth. Here, the consumer receives a unique code, goes to the box and uses the code to open it and pick up the parcel.

Number of new mechants. Source: Kinnevik Q3 Report

FH: It always requires effort to keep your technological backbone robust, but ours has proven to be very scalable. We have grown from nothing to becoming the leading e-commerce B2C delivery player in the Nordic region with consistently high customer satisfaction. We invest a lot in our IT systems to maintain this ability to grow. Everything is developed in-house, using our own staff.

We are not capital-heavy. We don't own our delivery vehicles. We partner with local forwarders who provide drivers and vehicles. We don't own our premises. There is nothing wrong with doing that, but we are not a real estate group. We co-operate with professional landlords. And having grown to our current size, we can drive the agenda more, requiring new buildings to be climate smart.

JT: In many of our presentations to clients of our previous two e-commerce-themed Nordea On Your Mind reports, they have raised concerns that online shopping may not be particularly sustainable, owing to the home deliveries of ordered goods. What is your view, and how do you approach sustainability in Budbee’s business model?

FH: There is no more sustainable alternative than online retail. A distribution vehicle makes a couple of hundred deliveries during an evening. This represents a couple of hundred customer contacts by one driver. Even if all customers don't drive their car alone to visit a shopping centre, many do. And that travel, with all the emissions it causes, can be eliminated entirely when using our service. With greater delivery volumes, the distances between recipients shrink. While in service, the vehicles we use today spend more time standing still while drivers pick up loaded goods and deliver them to customers, often to several recipients in the same building.

Sustainability is core for us, and we consider ourselves a leader in sustainability in our industry. We are climate compensating for all our deliveries, for our premises, plus another 10%. But climate compensating is reactive. We try to be proactive. In Sweden, nearly 100% of our deliveries use fossil-free diesel; 5-10% of our daily deliveries are by bicycle. We require the new premises that we rent to be climate smart, well insulated, with solar panels on the roof. We have some electric delivery vehicles, but unfortunately their batteries are not yet good enough for what their usage requires. We expect this to improve in the next one or two years, just like we have already seen for passenger car batteries.

JT: How has the COVID-19 pandemic affected Budbee so far? Do you expect any lasting changes to consumer behaviour, or other permanent effects which could impact your business?

FH: We saw a massive upswing for e-commerce delivery volumes late in Q1 2020, when it became clear that COVID-19 was a global pandemic, and Q2 was even stronger. Q3 was somewhat calmer, but still up sharply y/y.

It is clear that we have found many new customers during the pandemic, who were previously not convinced about how convenient online shopping is. Looking at China, the regional SARS pandemic of 2002-03 became a catalyst for online shopping, which made e-commerce really take off. I expect a similar development in our markets from COVID-19, which I suspect will impact much of 2021 as well. Once social distancing can be eased, I expect some – but not all – physical store shopping will be resumed. The social aspect of shopping, like eating out, will still be there. But some shopping will have permanently migrated online. I think the already high growth for online retail will accelerate.

Nordea On Your Mind is the flagship publication of Nordea Investment Banking’s Thematics team, which produces research for large corporate and institutional clients. The research does not contain investment advice and typically covers topics of a strategic and long-term nature, which can affect corporate financial performance.

Top decision makers at Nordea’s large clients across the Nordic region receive Nordea On Your Mind around eight times per year. The publication’s themes vary widely, and many are selected from suggestions by clients. Examples of covered topics include artificial intelligence, wage inflation, M&A, e-commerce, income inequality, ESG, cybersecurity and corporate leverage.

Data-driven business decisions have been at the core of Budbee from day one.

We use machine learning and algorithms to plan delivery routes.

Budbee's owners now include Kinnevik, H&M, Stena Sessan and AMF.

IT systems are developed entirely in-house.

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Top decision makers at Nordea’s large clients across the Nordic region receive Nordea On Your Mind around eight times per year.

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