The Future Of Online Groceries - Ultra Fast Convenience 2020

As online penetration rates remain high and are increasing especially in the areas which suffer new national or regional lockdowns, as we enter the second and third Covid waves in the West, online grocery is being transformed.

The big multichannel grocers have or are working on their big basket solutions, be they home delivery or click & collect. But there is another basket size that is not yet served well, which is the convenience shop type - often distressed shopping late at night (OTC medicines for example) or ingredient substitution, etc. This is the new growth frontier in online grocery - ultra-fast convenience deliveries. This report analyses the grocery offerings, rather than restaurant takeaway deliveries, as the restaurant delivery app players with their logistics networks are all muscling in on this space now.

If one dares to look at a future beyond Covid-19, there should be a big future opportunity for small baskets, according to Tesco a £10bn opportunity in the UK, or in other words about 4/5 of the entire online grocery sector as it stands. And in any other markets, the opportunity will be as promising.

But as Amazon has demonstrated over the years with their relatively small average basket sizes in online grocery, this is really hard to make work financially. The commissioning and delivery cost will eat up all the available margin, especially as food transaction baskets are not that high value. But at least Amazon changes a Prime fee for rapid deliveries (PrimeNow and now AmazonFresh free on regular Prime membership in the US and the UK) and has a minimum basket (otherwise extra fees apply). As an aside, Amazon also manages to mix food and higher non-food margins much better in these baskets due to it being the everything store.

Then again, there seems to be a sector that manages two make these ultra-fast deliveries work up to a point. Restaurants can do it apparently, serving food baskets rapidly (to keep the meals hot) and are being convenient and have trained customers to be willing to pay fees (service/ delivery fee for rapid delivery). The point that most of the aggregator services (Deliveroo, Uber Eats, etc) are still loss-making is a different matter.

There is an opportunity to exploit for grocers they should be able to raise network synergy effects if they combine all food requirements and offers on one app and on one delivery vehicle (at the moment this is still a future opportunity, even though some Chinese companies are on their way to achieving this). Naturally besides attracting new shoppers and shopping missions adding a point-to-point delivery system where this makes sense will also alleviate the operative burden on grocers’ online grocery operations.

One can ask the question of whether companies can make money with network effects on a point to point delivery run (restaurant to household), especially with such small time windows. A related question is how many orders can operators reasonably expect to batch within the tight time frame for hot meal deliveries. The UK’s Deliveroo works with 3 drops an hour which are very good, but probably at the maximum end of efficiency for a point to point system.

So where is ultra-fast online grocery going in the future? The publisher believes that there will be a demand created by online grocers, logistics marketplaces, and takeaway apps due to their current offers. Arguably due to the Covid pandemic, many retailers panicked into delivery partnerships to reach shoppers unable to get to their stores. But the publisher believes that these services can not easily be withdrawn, as shoppers have transferred expectations about delivery times and capabilities from hot takeaway deals to their groceries.

Currently, online grocery retailers are not set up to meet this demand on their own, as their logistics network is optimized for the next day (or later) deliveries. That said, once shoppers have been trained to have higher expectations, the retailers able to meet them in conjunction with a service provider or through their own (future) proprietary set up will emerge as the winners.

This means that the pressure on being ultra-fast will only increase for retailers going forward. Online grocers working with next day delivery could soon become laggards, even though same-day capabilities are quite cutting edge still as we are writing this.

Tapping into new delivery and logistics models, such as the takeaway apps, seems to be an enticing option for grocers. Not for nothing have Amazon invested in Deliveroo after all. The company is building out its amazing logistics footprint, even more, becoming increasingly more the pipe through which everything flows.

Other outside developments such as the upgrading of the infrastructure (5G) will also mean that everything is becoming faster and faster, and faster online grocery fits in with this trend. But where there are winners there are also losers. Gig economy employment is unstable and the environmental impact could also become a huge topic if cities are swamped with delivery drivers at all times of the day and night.