Digital transformation - 6 min
Need for Speed - The Delivery Race among Grocery Startups
Exploring the hype of investing into instant grocery delivery with Dominic Mehr.
In 2021 alone, $16bn have been invested, and many companies have reached unicorn status (a valuation above $1bn).
A lot has changed in recent years in the online grocery sector. Besides crypto, web 3.0, and the metaverse, the biggest hype in the startup and investor scene has surrounded quick commerce. Not so long ago, when you pitched an investor online grocery and last-mile startups, you often received a free glass of water and a “We will gladly look into it, but don't really see how this can ever make money”. Things are very different now. In 2021 alone, $16bn have been invested, and many companies have reached unicorn status (a valuation above $1bn).
Prominent examples in 2021 include Jokr (raised $260m in Series B with a valuation of $1.2bn), Getir (reaching unicorn status in March 2021 after 5.5 years, currently valued at $7.7bn), and Gorillas (reached a valuation of over $1bn only nine months after launching). Revenues have increased by more than 300% over the past year, reaching $4.7bn. New players are emerging at ever-increasing funding rounds on an almost weekly basis.
Of course, classical venture capitals are at the forefront of the investment army. But recently we have also seen increased activity by strategic investors, led by rounds of Doordash and Delivery Hero, consolidating and expanding their markets with the goal of future inorganic growth. There are also corporate investors making aggressive moves in the sector, sometimes combining financial investments with supply contracts. Rewe played this move in 2021 with its partnership with Flink.
As in so many other e-commerce fields, COVID-19 boosted the demand due to lockdowns and fear of infection at the point of sale. Surprisingly, many other big retail brands are still not offering digital channels, let alone high-speed delivery, and thus are not building the right offering based on their assets and unfair advantage. Running a profitable business is a huge challenge for quick commerce players. They rely on key profitability drivers to optimize: order frequency, average basket size, deliveries per hour, the margin on products, and the salary cost of the last mile. Many are still experimenting with these factors by:
Increasing the basket size and deliveries per hour. This might require adoption in the delivery process, e.g. bigger backpacks or a switch from bikes to vehicles.
Optimizing assortment margins and costs. Margins are traditionally high on fresh products like fruits, fresh meat or dairy. These are the products that require expensive cooling at warehouses and during delivery and also result in higher waste.
Optimizing rider cost structure. The limited source of riders could ultimately result in higher wages.
Having said that, we expect quick commerce players to invest in new revenue streams like advertising or additional last-mile services, delivering not only food but also your next iPhone or your medication. Glovo is an excellent example of a ‘deliver everything’ strategy. Owning the last mile will be key for retailers. The direct access to the customers' doorstep and the process of gaining their trust in a service will lead to increased customer satisfaction and thus increased business. Even more, products will be delivered to the home versus being picked up at an offline location (medicine seems to be the next hot market). Those who own the last mile will also own a bigger share of customers' future wallets and will directly influence customer satisfaction. It would seem that outsourcing this crucial step of the customer journey is a very short-sighted approach.
Quick Commerce OR the “Classical Online Grocery”?
Deciding between quick commerce and the classical online grocery is the wrong approach, as they both serve different target audiences. A family with two kids will typically need a wider range of assortments and will also accept same or next-day delivery. It’s less impulse-driven. This also works beyond the extremely dense city centers, as demonstrated by Picnic, the leading player in the Netherlands, or the Rohlik-Group, which is active in Eastern Europe and now expanding to several countries in Western Europe. They have been able to deliver at least seven orders an hour with an average of over €40 baskets, having a huge impact on the aforementioned unit economics. It’s less about one versus the other, but rather deciding which service to offer to which audience.
As unit economics are challenging, consolidation in the market has already started and will continue. There will be space for only a few major players, yet many untapped markets still exist that offer opportunities for retailers. Increasing financing costs could impact upcoming funding rounds and valuations.
Overall, we still expect to see a range of dynamics in this still immature space. The shift from offline to online might be slower than some enthusiasts and investors expect, but it will continue for the food sector and beyond. A reduction or complete eradication of COVID-19 restrictions will most probably impact the growth rates, but the segment will still clearly outperform the classical offline retail. Not participating at all will only lead to diminishing future revenues for retailers. As such, we have already seen quite large corporate venture capital investments in this space and expect to continue to do so on a global level. Also, as some corporate investors develop more strategic appetite, we expect to see more corporate venture building projects leading to diversification and future growth.