The corporate advantage in online groceries.
A case study for corporate unfair advantages in European online groceries.
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This week, we're sharing our thinking and insights for the European online grocery opportunity space. With COVID-19 and the consequent boom in online shopping, it's a massive opportunity being considered by many ambitious entrepreneurs trying to break in as well as incumbent businesses considering an investment to open/grow the online channel.
Sparked by our engagements with corporate leaders as well as the insights of very own senior advisor Robin Terrell, we bring to you a case study for corporate unfair advantages in European online groceries.
So what's for dinner tonight?
Selling groceries online (online grocery) is a difficult business. The traditional retail business of selling groceries (retail grocery) is a highly competitive and low-margin business. To move that business online successfully, only online grocery ventures with sufficient scale will be able to survive in the long term, offering competitive prices while maintaining some level of profit, just as it has evolved in the retail grocery segment.
We believe online groceries is a prime example of an opportunity best suited for corporate venture building; incumbents not only have a significant unfair advantage of scale resources to outcompete a startup “in the wild”, but may be the only long term sustainable player in the space.
A difficult proposition to achieve online, so far
Whereas retail groceries have gone through decades of innovations to optimise and achieve profitability, online groceries require a new set of still-evolving technologies and processes that are far from optimised.
E-commerce fulfilment — case in point, where companies like Amazon has invested billions in fulfilment centres and the technologies that control, process, and automate its fulfilment operations. Groceries is a difficult e-commerce category because consumers want a broad and diverse selection, perishable products add to the cold chain infrastructure requirements as well as complexity of inventory management and risk of inventory loss, and new and seasonal items means a constant updating of product pages and promotional content. That’s quite a higher intensity of operational requirements than selling books, shoes or candles. Alibaba’s Freshippo, which operates in China, carry 50,000 products SKUs online. Tesco carries 30,000 product SKUs online.
Groceries are generally lower margin products, and so optimisation is crucial to achieve profitability. To make online groceries even feasible, robotic automation is the table stakes. Check out Ocado’s automated warehouse in Andover, which can process up to 190,000 customer orders per week. This might be the cutting edge, but it’s the scale and efficiency of fulfilment operations required to make online groceries possible.
Last-mile delivery — The challenge with online groceries is the delivery requires a controlled cold chain, a significant infrastructure challenge for even the leading global logistics companies. There’s also the hard requirements for convenient and narrow delivery windows. And this is significant — if you miss the delivery it has real consequences for a family’s evening that other product categories simply don’t.
What is needed for online groceries is essentially a premium, on-demand delivery service. Today, cold chain infrastructure is underdeveloped and on-demand delivery services are still growing up. For the latter, these are billion dollar market cap businesses including Deliveroo, Grubhub, Postmates, DoorDash, Uber Eats, but compared to traditional logistics businesses these businesses are very much in the early stages. Many of these companies are struggling to turn a profit, despite all of them primarily focused on a comparatively higher margin product in restaurant meals.
Corporates can tip the scales
A critical mass of consumers will need to adopt online groceries for the cost of the business operations to make sense. Even then, only online grocery ventures with sufficient scale will be able to survive in the long term. This is where corporates will have an unfair advantage.
Infrastructure — Online groceries will require fulfilment warehouses and last-mile delivery networks. Corporates with existing infrastructure assets, be it warehouses, driver fleets, existing retail chain network, will have an unfair advantage over startups in the wild. Supermarkets and other incumbents with existing networks of retail stores have also the specific advantage of doubling their in-store inventory for e-commerce. In-store fulfilment, though, can be operationally complex and experientially quite disruptive to a shopper. Tesco in the UK have gone through various iterations of fulfilment models for online groceries, experimenting with in-store fulfilment and then shifting primarily to dedicated depots during the mid- to late-2000s. Today, in-store fulfilment or “dark stores” are making a comeback.
Integrated operations — Crucial to deliver a seamless shopping experience. From last minute basket changes, to replacing a sold-out item, to rescheduling a delivery, the business needs to be responsive to changes in real-time. A business that fulfils through one third-party partner, and delivers through another third-party partner, will be unable to deliver that experience. An integrated operation is also crucial to deliver on profitability. With low product margins, it is important to consolidate functions and remove the margins paid to intermediaries and partners. Amazon has been at this for some time now, but as Amazon Fresh continues to struggle to find a foothold, we can’t imagine how a new entrant would delivery a vertically-integrated online grocery business. Though we can imagine how a large incumbent with unfair scale advantages might be able to.
There’s still time
The pandemic has led to a huge surge in first-time users as well as more frequent use by existing users, but even then, we’re still quite early in the adoption curve. In the UK, online grocery spend accounts for 7% of total grocery spend, pre-pandemic (up to 13% during the pandemic). This compares to all online retail spend as a percentage of total retail spend of 22% (up to 32% during the pandemic. Meanwhile, in Germany online grocery spend accounts for just less than 2% of total grocery spend, pre-pandemic. This compares to all online retail spend as a percentage of total retail spend of 14% in 2018.
Regardless of how much user adoption will sustain in the near-term, the long-term trends of convenience shopping are hard to ignore. Compared to more advanced e-commerce markets in the US, China, and certain Asian cities, and it’s clear there’s still a lot of upside for UK and European markets.
In short, there’s still time to break into online groceries. And it’s an opportunity reserved for an exclusive set of highly scaled companies.