- High potential attracts investors and entrepreneurs alike
- Experts predict a wave of consolidation and changing business models
- Automation as a key to profitability
Press Article
Quick commerce: is it quick? Yes! Is it profitable? No!
(Marchtrenk, 30 August 2022) The number of specialists offering online grocery orders delivered quickly (quick commerce) has risen rapidly over the last months. Yet only a few are making a profit. Experts like scholars Dr. Matthias Schu and Dr. Michael Schedlbauer (Vice President Business Development Grocery) foresee a wave of consolidation and a change in business models. As they see it, automation will be a crucial lever when it comes to profitability and long-term success in online grocery retail.
On the other hand, there is the platform approach, where the supplier acts as "orchestrator." The supplier carries out the core tasks within the value-added chain, but coordinates all other processes with partners. Instacart and bringoo are examples of this model. The grocery retailers in whose shops the orders are picked are responsible for storage and assortment policy; this is known as the "asset light" approach in the trade. As Schu explains, the appeal of this approach is the idea that a combination of different offers and retailers can be brought together under one roof and the product risk remains with the trade partners.
The advantages: greater selection available to the customers, better distribution of fixed costs among the platform suppliers and exploitation of other income streams, for instance in the form of revenue sharing. If the partnership includes businesses like bakeries or flower shops, they can attract customers who are looking for the typical local assortment and appreciate the advantages of quick delivery. Generally speaking, Michael Schedlbauer, expert in the area of grocery retail at TGW, considers the platform model more advantageous than the stand-alone solution "because, as a rule, it offers the possibility of larger shopping carts due to the wider range of items and other revenue streams. However, it does require partnerships in order to be successful."
Picking as mission-critical variable
No matter which model they use, all quick commerce players want to be profitable, and preferably sooner rather than later. But that is easier said than done. This industry is characterised by narrow margins and high personnel costs as well as an atmosphere of crisis due to a lack of investor money. One challenge is the high portion of costs spent on picking and delivery. According to a study conducted by Capgemini in 2018, the "last mile" accounts for 46 percent of the total costs. The two experts say that there are five parameters that could allow companies to still have a chance of making a profit:
- Shopping cart total: one option is to introduce a minimum order amount. But it shouldn't be too high, according to Schu, because that would drive away customers. Optimisation of the product range, for instance by offering high-margin products, is also a good idea.
- Delivery fee: in quick commerce, delivery fees generally do not cover the delivery costs. According to Schedlbauer, the companies are currently still in a position to carry the additional delivery charges. However, he expects that fees could vary considerably in the future. One solution is dynamic pricing, following the example set by airlines.
- Advertisement subsidies: this is common in stationary trade 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: classic solutions such as striving for the highest number of stops per hour are not feasible with delivery times of under 15 minutes. Such promises require expensive 1:1 delivery rides. Schu believes the delivery times will soon be extended, at which point rides could be consolidated and route-planning software implemented. He does not consider autonomous deliveries by robots to be a possibility in Europe within the next five years.
- Increased efficiency during picking: fundamentally, there is little potential here compared to classic retail and e-food. With such low item quantities and such small warehouses, comprehensive automation is not financially attractive in the short or medium term. Nevertheless, retail expert Schedlbauer is of the opinion that fulfilment automation will be necessary in high-wage countries in order for companies to become and remain profitable. Automation of large distribution centres or a network of micro fulfilment centres (MFC) is the way to go, according to the expert. New players are forcing "classic" omni-channel retailers to offer shorter and more flexible delivery times than are currently customary. Schedlbauer considers three hours to be "perfectly feasible," but 60 minutes is already somewhat economically challenging because the bundling of deliveries during the last mile is becoming less and less efficient. Anyone offering extremely quick deliveries within minutes must dispatch deliveries directly from the store – with the corresponding prices.
Wave of consolidation
Both Schu and Schedlbauer are convinced that quick commerce is a fad and that a wave of consolidation is imminent. "Right now many suppliers are hoping to be bought out by other players," says Schedlbauer. He expects that delivery times will soon be extended to 30 or 45 minutes and that such quick deliveries will then be offered as a premium service. Chains such as Rewe would carry out the extremely quick premium deliveries from their shops and all other deliveries from their warehouses. In his opinion, the large suppliers who partner with delivery services have the best chance of surviving in the long-term. Such delivery services profit from the model because even if the demand for groceries temporarily wanes, they can continue to utilise their workforce to capacity by delivering other goods such as flowers, drug store items or pizza.
