Traditional grocers wrestle with rapid delivery

Those colourful scooter drivers nipping about with small bags of groceries are big business. Turkish unicorn Getir is reportedly eyeing a $12bn (£8.8bn) valuation for an upcoming funding round, almost double the market cap of ‘big four’ supermarket chain Sainsbury’s (SBRY). 

Getir is one in a slew of ultra-fast delivery apps including Jiffy, Gorillas, and Zapp that are competing to deliver shopping to your door in as little as 15 minutes – a market that analysts at Berenberg estimate could be worth £4.4bn by 2025, in the UK. 

These delivery start-ups make money by charging grocers a commission of anywhere between 5 and 15 per cent on each order made through their apps. This is on top of the service fees, delivery fees, and price mark-ups that consumers pay.

“What's exciting about rapid grocery delivery companies is the fact that they might have found a way to do home delivery of groceries in a profitable manner,” said Ruth Lewis, a consultant at Bain & Company, who noted that many grocers still struggle to break even on online groceries.

So far, the average dark store is loss-making, due to aggressive discounting designed to lure in customers, and each one shifts between 300 and 800 orders per day, with each order worth an average of £22, according to Lewis. To become profitable, daily order numbers and basket sizes will both need to increase by around 50 per cent, she said.

Join them or beat them

This army of highly-funded delivery start-ups posed an interesting conundrum for traditional bricks-and-mortar supermarkets, not wanting to miss out on a trend supercharged by lockdowns and self-isolation: to cooperate, or stake their own claim on this new market?

Partnering with Deliveroo (ROO) – as Waitrose, Aldi, Morrisons, Co-op, and Sainsbury’s all did – initially offered a low-cost, low-effort solution. On-demand grocery was 8 per cent of Deliveroo's overall gross order value in the second half of 2021.

This is not a completely new area of competition for the supermarkets. Sainsbury’s revved up its 60-minute delivery service Chop-Chop in 2020, after an initial outing in 2016 remained confined to London in subsequent years. In 2021, Tesco (TSCO) followed suit with its own one-hour ‘Whoosh’ service, to be in 600 stores by the end of next year.

Unsurprisingly, Sainsbury’s and Tesco (TSCO) have been the most proactive with rapid deliveries given they face the greatest risk of cannibalisation, with their convenience stores (Tesco Express and Sainsbury's Local) accounting for the largest proportion of these sales, according to Berenberg, which forecast the pair plus Marks and Spencer (MKS) could lose 2-4 per cent of sales directly to the start-ups. 

Lewis at Bain said the success of these new players is not a given, however, given the scale-first, profitability-later mentality. The average rapid delivery firm is losing somewhere between 30 and 50 per cent of their customers every year, she added, meaning they have to offer more promotions to lure in new customers. 

“With each round of funding that has unfolded over the last six months for these big players, investors are increasingly asking, for how long do we need to invest in promotions?” she said. The true addressable market of shoppers for rapid delivery apps may turn out to be “a lot smaller than these platforms claim” once these offers are ramped down, said HSBC’s co-head of consumer retail research, Andrew Porteous. In the meantime, there are other businesses that are already benefiting from the rise of ‘q-commerce’.

Speed bumps 

Meanwhile, the apps have already reached the heady consolidation phase. The US delivery giant GoPuff acquired Dija, Getir took over Weezy at the end of last year, and the alcohol-delivery space is seeing lots of deals in the belief it could be an effective way to bring basket sizes up. 

There are further challenges ahead. Most partnerships between rapid delivery apps and grocers are set to expire after two or three years, and Aldi already choose to end its partnership with Deliveroo in January. 

The rapid delivery apps also appear to be getting cold feet about their own strategy. This month, Getir said it would trial customer ‘click & collect’ from several of its dark stores, an approach also being pursued by its London-based rival Jiffy – closing the gap between the quick-commerce businesses and the convenience shops they are trying to disrupt.

But this is home turf for traditional grocers, whose purchasing power, economies of scale, and existing customer bases give them a strong advantage. Analysts at Berenberg pointed to Tesco and Sainsbury’s as being well placed for the future of online convenience through their in-house offerings, as well as Marks and Spencer, through its part-ownership of Ocado’s retail business. 

Tesco has also hinted that the “sweet spot” will be in integrating rapid delivery into its regular fulfilment centres, allowing them to offer a “much larger shopping trip in a much tighter timeframe” of seven minutes. If the supermarket delivers on this, it would be a proposition that would take massive investment at which even scale-focused VC firms might blanche.