(Marchtrenk, 30 August 2022) The number of quick commerce businesses has risen over the last year, yet only a few are making a profit. Scholars Dr. Matthias Schu and Dr. Michael Schedlbauer foresee consolidations and changes in business models coming, with automation as a crucial lever for profitability and long-term success.
In the grocery industry, the business model "quick commerce" is based mainly on the example set by Gopuff, which was founded in Philadelphia in 2013. The fundamental idea is much older than that, though, dating back to 1998. Many other startups around the globe have since adopted the strategy, including Instacart, Shipt, and Mercato. Many of these businesses promise delivery times under an hour, with some as short as 10 minutes.
The recent spike in demand for quick commerce has been fueled by COVID-19. Personal health concerns and quarantine periods introduced people to grocery and food online retail (e-food).
Experts divide e-food into several subsegments, but the boundaries between these are getting fuzzier: purely online grocers (e.g. Thrive Market or FreshDirect), omnichannel retailers (e.g. Walmart, Kroger, or Amazon Fresh), restaurant delivery (e.g. DoorDash), meal kit delivery (e.g. HelloFresh), and other specialists or niche players (e.g. Imperfect Foods, Farmbox Direct, or GrubMarket).
MEGA TREND AND COPYCATTING
Since the e-food segment has achieved high double-digit growth rates over the past few years, investors are treating it as a new mega trend. Around the world, more companies and start-ups want a piece of the pie with most new players simply copying existing business models. However, as industry insider Matthias Schu notes, "The copycats are going to have it rough, because even in cities with over 200,000 inhabitants there is only room for two providers." Schu, an e-food expert, teaches at the Lucerne University of Applied Sciences and is the author of "Das E-Food Buch" and the "Quick Commerce Report."
Countless entrepreneurs see great potential and low entry barriers, and therefore build start-ups whose services often these characteristics:
• Delivery times of under one hour
• Delivery by bicycle or motorized vehicle
• Hyperlocal fulfillment from small warehouses or stores
• Broad but shallow assortment focused on convenience
• Offering of between 700 and 3,500 items
• Mix of branded items with good margins and their own brands
PICKING EFFICIENCY AS A CRITICAL VARIABLE
All quick commerce players want to be profitable, but that is easier said than done. This industry is characterized by narrow margins and high personnel costs. One challenge is the costs of picking and delivery. According to a study conducted by Capgemini in 2018, the "last mile" accounts for 46% of the total costs. Many players are also pumping investor money into marketing campaigns and urban expansion, but are currently operating in the red.
Schu and Schedlbauer note five variables that companies can manipulate for a chance at profitability:
• Shopping cart total: One option is to introduce a minimum order amount that isn’t too high to drive away customers. Product range should also be optimized by primarily offering high-margin items.
• Delivery fee: Current delivery fees generally do not cover the full costs. According to Schedlbauer, companies are able to carry the additional delivery costs for now, but he expects this won’t last, resulting in fees varying considerably in the future. One solution is dynamic pricing.
• Advertisement subsidies: This is common in retail but has not yet been entirely embraced by quick commerce. Industry expert Schu considers it a good idea to recommend products via apps or websites in order to generate revenues.
• Increased efficiency during the last mile: Striving for the highest number of delivery stops per hour is not feasible with under-15-minute delivery times. Such promises require expensive 1:1 order delivery rides. Schu believes that times will soon be extended, allowing for destination point consolidation and implementation of route-planning software. He does not consider autonomous robot deliveries to be a possibility in Europe within the next 5 years.
The increase in quick commerce players is forcing traditional omnichannel players to also offer short delivery times. However, a 1-hour delivery time is already somewhat economically challenging for these businesses because the bundling of deliveries during the last mile is becoming less efficient. Anyone offering extremely quick deliveries within minutes must dispatch deliveries directly from a store, and do so with corresponding higher prices.
• Increased efficiency during picking: With such low item quantities and small warehouses, comprehensive automation is not financially attractive in the short- or medium-term. Nevertheless, retail expert Schedlbauer is of the opinion that fulfillment automation will be necessary in high-wage countries for companies to become and remain profitable long-term. Automation of large distribution centers or a network of micro-fulfillment centers (MFC) will be the way to go because they will reduce personnel costs and support a consolidated and more efficient last mile.
WAVE OF CONSOLIDATION
Both Schu and Schedlbauer are convinced that quick commerce is a fad with a wave of consolidations coming. "Right now, many businesses are hoping to be bought out by others," says Schedlbauer. He expects that delivery times will soon be extended and very quick deliveries will be offered at a premium. Chains like Kroger would carry out these quick, premium deliveries from their stores, with all other deliveries from their warehouses. In his opinion, the large businesses who partner with delivery services have the best chance of surviving long-term. Such delivery services also profit from this platform model, because even if the demand for groceries wanes, they can utilize their workforce to capacity by delivering other goods or meals.https://www.tgw-group.com/us/news/press-releases/2022/quick-commerce-quick-yes!-profitable-no
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