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Inside the economics of 10-minute grocery delivery startups, which eke out higher margins with pricier convenience store goods and less choice

Inside the economics of 10-minute grocery delivery startups, which eke out higher margins with pricier convenience store goods and less choice

  • aprile 14, 2021
  • Tempo di lettura min.

Insider

Inside the economics of 10-minute grocery delivery startups, which eke out higher margins with pricier convenience store goods and less choice

To understand how these startups think they can make money, it broadly helps to think about how big grocers, like Tesco and Sainsbury's in the UK, turn a profit on online delivery.

For the most part, they don't, according to Bain retail expert Joelle de Montgolfier.

"It is literally impossible to make money," she says. For big grocers, online delivery involves employing someone to pick out and pack items of the consumer's choice, and in most instances deliver it to the customer's home, she explains. Customers expect cheap grocery store prices. This bites into grocery retail's already narrow average gross margins of, de Montgolfier estimates, about 4%.

This tallies with big grocers saying they are struggling to turn a profit from online delivery.

The likes of Getir and Gorillas hope to make money by tweaking the model here and there to be more efficient, according to another Bain retail expert, Ruth Lewis.

One way to achieve this is "dark stores", mini stockrooms in unloved parts of the city, like railway arches, that store goods ready to be ferried out to nearby customers.

"First of all, they have 'hyperlocal' fulfilment centers," Lewis says. "A [large] grocer might have one or two fulfilment centers supporting an area of London — these guys will have small fulfilment centers that are max one or two kilometers from the desired population they are selling to."

She adds that it will be easier for dedicated grocery pickers to navigate these smaller stores, while pickers for bigger brands are either picking up items in-store, a less efficient process, or running around bigger warehouses.

Getir's Salur affirms this, adding that for big grocers, "their main business is customers coming to their stores — when pickers walk into stores, customers are not happy with that. Logically, doing it all from the same store makes sense, but in real life it doesn't really work."

The startups also don't try and offer a comprehensive range of products, unlike big grocers. When, like typical millennials, Insider looked for avocados on Getir, they weren't listed.

"They'll typically only have 1,000 and 5,000 SKUs, an individual product, meaning they can have much smaller fulfilment centers," says Lewis.

Finally, adds Lewis, startups are behaving like bigger grocers by buying products wholesale, negotiating hard on price, and then charging consumers for the convenience of speedy delivery. "If you're buying from these guys, you're not thinking 'I want Aldi prices.' They can operate at a premium."

She points to the fact that these startups are focused on convenience store items — treats like cigarettes, alcohol, and chocolate — rather than basic goods.

"These guys are in the game of every order being profitable, but it is literally a fraction," adds Bain's de Montgolfier.

The two analysts estimated that, with a focus on convenience store items, startups could hope for average gross margins of 5% to 7% — higher than the 4% that bigger grocers achieve.

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