Around the world, online grocery is in flux as new services hustle for market share, fueled by billions of dollars of venture capital and other investment. Globally, quick-commerce players are taking on-demand convenience to a new level by delivering groceries in minutes. Aggregators are blurring the boundaries between meal delivery and grocery ordering. Unexpected collaborations keep appearing.
Recent research by Bain & Company illustrates how the pandemic has accelerated the rise of digital in the Middle East and North Africa. The fast-moving consumer goods e-commerce market in specific has nearly doubled in the past three years.
The surge in innovation fits our belief that online grocery will continue to gain popularity after going mainstream in the lockdowns of 2020 and 2021. Many of the tens of millions who tried it out of necessity are now regulars out of choice, won over by its convenience. But the wave of investment doesn’t mean that disruptive newcomers are bound to get the upper hand over traditional grocers.
Working with online grocers and startups globally, we’ve pinpointed three strategic realities that should have a much bigger influence on the fate of incumbents and disruptors alike as they race to scale up capacity to meet rising demand.
Reality #1: Omnichannel grocers retain a scale and customer intimacy advantage
Omnichannel incumbents remain inherently larger than their challengers. But greater scale is not the only advantage of operating both a network of stores and an online grocery service. Omnichannel players also know more about the full breadth of customer needs because they are tapping the biggest market opportunity: the “full basket” shopping mission. It’s hard for quick commerce players to build the same customer intimacy, because they are only serving targeted needs from a narrow selection of products.
What’s more, omnichannel shoppers are a big prize from a revenue and margin perspective. In the US, they tend to spend almost as much per month as their online-only or store-only counterparts combined. Supplier relationships are another omnichannel strength. For large consumer packaged goods makers, incumbent grocers offer standout profitability.
It’s clear that some customers love the speed and simplicity offered by quick commerce, even if those immediate purchases tend to come at a premium price. However, only a subset of a typical country’s population lives in catchment areas with the critical mass of shoppers that quick commerce needs to make money.
Incumbents nonetheless need to stay alert. For one thing, quick-commerce firms, many established in the last 24 months, are purpose-built to compete on the new retail battlefields of logistics and data. Their agility isn’t hampered by legacy ways of working and infrastructure. Nor do they face incumbents’ onerous obligation to find capital to invest in their physical stores.
Reality #2: Fixing the economics of online grocery is an emerging priority for quick commerce too
A few months into the pandemic, we argued that the unexpected surge in demand for online grocery posed a threat to the industry because it had turbocharged a channel that was structurally less profitable than in-store transactions for most grocers. We laid out how incumbent grocers could defend themselves against the threat of massive profit dilution by optimizing their omnichannel network, diversifying revenue streams, and removing unsustainable channel subsidies.
This remains an urgent task, and, on one level at least, disruptors can serve as an inspiration. Some food delivery aggregators, for instance, are doing a better job than incumbents of recouping the cost of providing an online grocery service, charging fees that more accurately reflect the benefits enjoyed by consumers.
Quick commerce is also supplying examples for incumbents to emulate. Yet it faces an economic challenge overall. For one thing, as they race to gain scale, many quick-commerce players currently depend on large discount offers to acquire customers. But it’s unclear when or, more accurately, if these promotions can be scaled back, given the essential need to win and retain new customers.
Although quick commerce has ridden the growth opportunity provided by the pandemic—all the while measuring its progress against indicators such as increase in customer base, number of orders, and average order value—growth alone will not be enough to chart a path to profitability. The underlying model needs to mature, or we will see accelerated consolidation or failures.
Improvements need to be found across the board: higher average order values and higher-margin baskets (without slowing down picking); better supplier terms; faster picking and delivery; dynamic pricing based on the time of day and customer price elasticity; less shrink; and fewer delivery delays and missing items.
Reality #3: There’s no single answer to fulfillment—and some capex will be wasted
Between now and 2025, online grocery incumbents and disruptors face another common challenge. They both need to expand fulfillment capacity to handle hundreds of millions of additional orders—and that’s on top of the 2020 lockdown demand peaks. Many grocers are likely to need multiple fulfillment models.
In the pandemic, omnichannel grocers have largely added capacity via in-store picking, which is flexible and requires little capital, but it has scaling limitations and a tendency to crowd aisles, to the annoyance of shoppers. Some have chosen to team up with food delivery apps, which also offers capital-light flexibility, but with the loss of margin, customer touchpoint, and data.
Emerging into the pandemic recovery, executive teams should give special consideration to automated fulfillment centers for the densest catchment areas. Automation can give omnichannel grocers a route to online profitability, albeit with a risk of cannibalizing more profitable in-store sales. And while the cost of building automated fulfillment centers remains high today, it’s likely to come down in the long run.
As they ramp up fulfillment capacity, executive teams at all online grocers need to be willing to take risks with their capital expenditure, particularly when it comes to automation. The technology is advancing so rapidly, amid so much hype, that it’s impossible to back the winning innovation every time.
Quick-commerce players, too, will need to adapt their service model if they selectively expand beyond the most attractive, densely populated cities (and their rich supply of independent delivery riders). In moving into the second-tier urban centers, they will have to tweak the model and relax delivery times to compensate for longer delivery distances.
Fulfillment and last-mile delivery are still big challenges that need to be cracked—and there are other lingering strategic questions in online grocery. However, the sector’s recent surge in disruptive competition has opened the door to new approaches that, through cycles of experimentation and iteration, can rebuild the economic foundations of online grocery for good.