Right here, Right now: Assessing the Grocery Delivery Market
Online groceries, micro-fulfillment & warehouse automation.
It comes as no surprise that the pandemic has accelerated online shopping — nowhere is this more true than for the grocery segment. The European market for online groceries will expand by 66% by 2023. Here we examine the challenges and opportunities grocery retailers face, and the rise of warehouse automation and micro-fulfilment.
Traditional grocery retailers have failed to adapt
Covid-19 has led to an e-commerce surge but the costs of running a delivery network remain high. In the UK, e-commerce took two decades to go from 0 to around 7% of total grocery sales. The Financial Times reports that it has risen from 7% to 13% in about 8 weeks. The trend also holds true for other European countries that have been traditionally slow to adopt online grocery shopping. Researchers at Bain estimate that both German and Italian online grocery sales doubled during the pandemic.
Tesco and Sainsbury’s both expect to make around the same profit this year as last year, despite a huge shift away from eating out and towards more food consumption at home. It is evident that the big retailers have failed to adapt their logistics to capitalise on increased demand, with cost and complexity cutting into margins. Even Amazon has struggled to develop a sustainable solution for delivering temperature-controlled products.
Warehouse automation has enabled grocery retailers to meet demand in a cost efficient manner
Ocado, founded in 2002 in the UK, was a first mover in online grocery shopping. Since then it has pivoted to become the leading provider of e-commerce and fulfillment technology for other grocery retailers. Today, they operate 54 robotic fulfilment centres globally, as well as licensing their own micro-fulfillment proprietary technology that they launched in 2014.
Until recently, Ocado relied on third-party system integrators to provide the warehouse automation equipment used in its distribution and fulfilment centres. This includes the AutoStore solution which Ocado has been accused of copying unlawfully. In addition to bringing the technology in-house, Ocado announced a $1bn investment round last year and is set to solidify its position as global leader in the warehouse automation market. It is important to note that Ocado’s evolution away from online grocery fulfillment towards licensing their own technology has been a challenging journey which has taken many years and high capital investment.
Other players in the space provide a technology stack that can be used within existing stores and are touted by companies such as Fabric, AutoStore and Takeoff — reducing picking costs by up to 80%.
Supermarkets tried to automate and failed
Traditional supermarkets have tried automation but were deterred by the complexity of integrating it across locations, and reverted to picking customers’ orders in stores and then loading them into vans — the inefficiencies and the potential order inaccuracies with such a model are obvious. In addition, supermarkets must maintain the availability of delivery slots — so that consumers can order and receive groceries when they need them. This will be critical to staying competitive.
This graph demonstrates that almost all current models of online grocery shopping are not profitable — the only way to achieve profit is to charge additional fees. Only automated micro-fulfilment operated click-and-collect online grocery was profitable, with a margin of 2 percent.
Meanwhile the convenience store goods segment has grown into a lucrative market of its own
We’ve all been there — picture the scenario. You’re sitting on the sofa, craving a packet of sweets or a tub of ice cream but are too lazy to go to the shop. Today, with a few taps on our smart phone we can get these goods delivered within 15 minutes. Like the previous growth of third party delivery services,new players are emerging in this space quick and fast. The most notable of which is Berlin-based Gorillas which recently raised a $290 million series B round and expanded to cities across Germany, the Netherlands and the UK. Among the many players following suit, Dija, founded by former Deliveroo executives, is aiming to win the race to capture the lucrative London market.
Quick commerce (also known as q-commerce) is the next generation of e-commerce, and as the name suggests, it is all about speed. How is this being achieved?
Micro-fulfillment as a disruptive business model
Adjacent to the warehouse automation for grocery retailers is the last mile delivery for convenience store goods — driven by innovative micro-fulfilment-based business models. Start-ups across the globe have different approaches to micro-fulfillment but at its core it involves using small-scale warehouse facilities in accessible urban locations to deliver goods to end consumers in a cost effective manner and at speed.
It is important to distinguish that Gorillas and the like operate in a different market to grocery retailers propped up by Ocado — their focus is on non-perishable items with a long shelf life. A key difference is how these new players simplify their micro-warehouses i.e with no robotics and little to no automation. Instead, groceries are shelved tightly in order of size and type such that employees can quickly pick and pack items and send them to riders at lightning speed.
US giants are catching up
Meanwhile, e-commerce for groceries in the US took a different approach. Instacart was created in 2012 due to consumer reluctance to engage with online grocery shopping. Instacart’s initial offering was to employ freelance shoppers to pick and deliver items to the end customer, with users paying an annual subscription or per order fee. Elsewhere in the US, Amazon’s acquisition of Wholefoods in 2017 has promised to shake up grocery e-commerce and compete with Walmart’s ‘curbside’ offering. The question is how quickly Amazon can develop, implement and compete with the maturing solutions that we are seeing in Europe?
China offers favourable conditions for micro-fulfillment to thrive
Chinese-based Miss Fresh has received $1.4 billion in funding and operates a network of micro warehouses in 16 major cities. It’s success has been built on low rent prices and streamlining the options offered to customers. It is important to note that their micro-warehouses can hold double the number of items than a same sized store can. Of course, we must appreciate the favourable market conditions for micro-fulfillment startups in China — notably population density and cheap labour which improves unit economics drastically. However, these favourable conditions alone do not promise success for startups in China. 150 startups within the grocery segment of e-commerce have failed in recent years, largely due the challenge of generating sustainable profits i.e ensuring enough demand.
Conclusion
Ultimately, the developments in warehouse automation and micro-fulfillment have resulted in an efficient and convenient way for us to buy our weekly groceries or convenience store goods. The growth of players in both domains suggests a future where almost all our grocery shopping could be done online and not in-store. When that will happen will in large part depend on the speed of innovation of the warehouse as well as changing customer preferences.
With the global urban population set to increase to 70% by 2050, how will warehouses integrate with our cities in the future? What technologies will enable even more efficient grocery deliveries? And which players are likely to come out on top? We will be exploring this in our next installment.
Continued Listening
To learn more about some of the points touched on above we enjoyed listening to Autostore’s Andrew Benzinger speak on “Grocery Micro Fulfillment” on the Digital Grocer Podcast.
I would love to hear your thoughts and suggestions on the micro-fulfillment and the future of grocery deliveries. Feel free to reach out to me as js@amplifierlab.io
