Quick Commerce is not a Panacea for European Online Grocery – Learnings from China

At present, more than 10 companies compete across Europe with an instant grocery delivery business model of which half were established just in 2020, the year of the pandemic. These companies have raised more than $2B to date. Existing and well-funded online food-delivery service players like Delivery Hero are also joining the race by launching dedicated grocery offerings. However, if learnings from the world′s largest online grocery market China matter, then it becomes clear instant delivery is not the magic bullet to crack the dominance of Europe′s incumbent supermarket chains in the overall $2T+ flat market. Instead, platforms like Pinduoduo, JD′s Super, Alibaba′s Taoxianda, Xingsheng Youxuan or Meituan′s Maicai compete with a wealth of business models which helped to bring online grocery penetration to 20% and beyond. China′s ventures successfully operating in the online grocery space can also teach us that a greater emphasis on merchandising and all aspects of service will be key to build customer loyalty long-term, while being wary of the inverse relationship between delivery speed and average order value.

The idea of ordering groceries online and having them delivered to consumers within less than 1 hour is not new. Already in the heydays of the dotcom bubble, a company envisioned to do just that: Kozmo.com. Founded in 1998, it raised more than $250M (around $400M in today′s dollars) from investors, promising to deliver food, among other categories, within an hour while charging no delivery fees. In 1999, it had revenues of $3.5M and a loss of $1.8M (negative 50% margin). However, in 2001 the business was shut down by its board after the company could not make the business model work at scale.

Some 15 years later another company had a crack at this business model. Gopuff was established in 2013 in the city of Philadelphia, originally mostly catering for students. What started out as a hookah delivery service soon expanded into a much broader convenience store+ product offering, delivered to customers often in no more than 30 minutes. Gopuff most recently was valued at $8.9B after raising a total of $2.4B of which more than 65% occurred in the past 9 months. Last year, Gopuff grew revenues from ~$100M to $340M.

Kozmo.com went out of business after just 3 years. Gopuff meanwhile was turned down by several VCs in the earliest days and it took Covid for a rapid acceleration in fund raising. Little did management teams of either company know that they would become the inspiration for a whole generation of founders across the pond in Europe in 2020.

Is there an overemphasis on the q-commerce business model in Europe?

What has changed fundamentally since the days of Kozmo.com? Indeed, little technological progress has been made in the last 20 years, which would be significant for operating the q-commerce business model. However, in the years since Kozmo went out of business, there has been some fundamental changes: First, the number of global internet users went through the roof (from below 500M to beyond 4B) and mobile took over. Second, things have changed obviously as the demand for online grocery delivery has picked up significantly due to Covid as people preferred staying home for safety reasons. Third, nowadays delivery services are charging fees (which Kozmo notoriously did not do). These are typically around $2. Thus, overall, some might argue Kozmo was just ahead of its time.

While there are many other models around to satisfy grocery shopping needs, the instant grocery model has been one of the favorites of European entrepreneurs and VCs over the past twelve months when evaluated by the numbers of new ventures and funding. But what is it all about? The business model, also sometimes referred to as q-commerce (q = quick), in itself is not that hard to understand.

• Operating model: Retailer (= buy products, bear inventory risk).
• Products/categories: Companies maintain a small product offering of around 1000-2000 SKUs which consumers would otherwise find in convenience stores (i.e., Fresh Food, FMCG, OTC drugs).
• Procurement: They often directly purchase from brands or through distributors.
• Warehousing: Products are stored in self-operated micro-warehouses close to their customers.
• Marketing/customer acquisition: Aggressive, also employing vouchers for first-time users of up to $12 (50% of an average shopping basket).
• Pricing: At present, many start-ups offer their products at supermarket-price-level or even at a discount of up to 10-15%.
• Delivery: After an order in the app was placed, the delivery happens often by bicycle, e-bike or scooter within 10-30 minutes. Delivery fee is around $2, no minimum order value. The delivery staff tends to be employed by the start-ups, too. The start-ups obviously have to comply with the respective labor laws but operations typically run six days a week from around 7/8 am to 11 pm, or even 24/7.

Companies like Getir from Istanbul (total funding: $1B, last valuation: $7.5B) and Gorillas from Berlin (total funding: $335M, last valuation: $1B) are leading the way. When Gorillas announced its $290M Series B less than 3 months ago, it achieved unicorn-status. Just 9 months after launch, this was the fastest for a European start-up company to date. But it does not stop there: Gorillas is rumored to currently be seeking Series C financing between $500M-1B at a $6B valuation. All these numbers and the pace of fund raising are showing us how hyped this business model currently is.

Yet, there are many more companies chasing the success of Gopuff in the US and Getir / Gorillas in Europe. In total, there are now 10+ companies across Europe with more-or-less the same business model. Those include the 2020-established Flink (Germany-based, $300M raised), Zapp (UK-based, $100M raised), Dija (UK-based, $20M raised), Jiffy (UK-based, $7M raised) and Cajoo (France-based, $6M raised). There is also JOKR, which was started by the former CEO of foodpanda. JOKR was established only in Q1 2021 but raised one of the largest ever initial seed rounds (rumored to be $100M) to bring the model to Europe, Latin America and the US. In Europe′s capital cities – especially Amsterdam, Berlin, London and Paris – now all these companies are going head-to-head and consumers can choose from a wide range of platforms.

Figure: Funding numbers of selected q-commerce grocery start-ups with operations in the European region (own research and press releases)

Likewise, companies coming from food-delivery have pushed further into this space and received additional funding in recent months, notably Delivery Hero through Dmart and Glovo through SuperGlovo.

But how big really are these European companies by now? Getting to real numbers for the largest players in terms of transacting users, orders and revenues is hard. Though there is a way to get close to the truth.

• Gopuff just entered Europe via the acquisition of UK′s Fancy. For Fancy no numbers are known.
• Getir is still only present in 7 Turkish cities and London. Around 10% of app downloads came from the UK during the last 30 days while 85% came from Turkey, according to AppMagic data. It previously stated aims of expanding to Germany, the Netherlands and France by mid-2021. Job postings suggest that Getir aims to be present in the US soon, too. Estimated revenues for 2020 stood at $600-700M after a 5X increase from $120M in 2019.
• Talking about Gorillas, we know that they are operating in 30+ cities (incl. Berlin, Hamburg, Munich, Paris, London, Milan, Amsterdam and New York), as this article being written. They have a total of around 200k registered users on Gorillas, according to a recent data leak. Data from AppMagic suggests that the majority of downloads still came from German users during the last 30 days (~40%). Outside of Germany, the UK (~15% of app downloads), the Netherlands (~10%) and France (~5%) followed. Job postings by Gorillas point to future activities in Australia, Hong Kong, Israel, Japan, Mexico, South Korea and the US. Concerning revenues, Gorillas CEO Sümer confirmed the feasibility of crossing $100M in revenues for 2021 during an OMR podcast.

Capturing the market rapidly certainly is one important aspect. However, as companies approach later-stage financing sometime in the future, questions will be asked about the path to profitability in an industry of notoriously thin margins. As it turns out, profitability is extremely hard to achieve with this business model. This has not changed fundamentally since the early days of Kozmo.com. Gopuff had an EBITDA of negative $150M on $340 in revenues (EBITDA margin: -45%). Furthermore, an analysis by the German business monthly Manager Magazine concluded that Gorillas was operating at negative unit economics of -6%. Additional cost such as overhead and technology might push this number up significantly further for Gorillas. This conclusion does not come as a surprise: traditional grocers often achieve 1-3% net margin only and many of them could not make the (much slower) supermarket-to-home delivery models work in terms of profit in recent years. The reason why the unit economics for the q-commerce start-ups are so bad is because of the need to self-operate everything, including warehouse personnel and delivery staff, to match the extremely tight delivery times of often just 10 minutes. And dealing with employment of the delivery staff leads to a number of challenges, including managing the rapid ramp-up of needed headcounts as well as labor relations. However, achieving those rapid delivery times would not be possible in a platform-model (3P). Delivery staff usually only does one order per ride, then returning to the warehouse. Also, many micro-warehouses are needed to make this model work. Indeed, companies ultimately will have to operate hundreds of those. To cover a city like London all the way to Zone 4, for instance, companies might easily operate 20+ of those dark stores.

To put some of the numbers in perspective: the market cap of UK′s Tesco currently stands at $25B with revenues of $75B and operating margin of 3%. In France, Carrefour has a market cap of $14B with revenues of $80B and an operating margin of 2%.

With so many companies competing for follow-up venture financing, it is obvious that this level of competition might lead to the deployment of certain growth strategies: i) new promotions/rock-bottom prices (we are the cheapest), ii) claiming the shortest delivery times (we are the fastest), and iii) rapid-pace expansion (we are the biggest). However, all combined will hardly improve margins and might educate consumers in the wrong way. As expansion continues, rumors are that different ventures pay up to $100 for their riders to bring in riders from other services. Start-ups in the instant grocery delivery space will likely apply these and other strategies during 2021 and 2022 as they are approaching mid-stage financing rounds.

But are Europe′s q-commerce start-ups really chasing for a market as large as many claim? And is q-commerce the key solution to solve online grocery? Is there any way to make this model work in terms of profitability? With those open questions in mind, it is worth taking a look at the developments in China, the world′s leading e-commerce market.

Why China′s online grocery industry matters

China is home to the world′s largest retail market with a total size of $5.7T. Following a 4 percent point jump in 2020, online penetration reached 25%, bringing the size of China′s online market to over $1.4T. This puts China way ahead of the world′s second largest market, the United States, which comes at just under $800B.

Indeed, the top-line number is impressive, but online penetration remains unevenly distributed across categories. Fresh Food and FMCG account for around $2T or 35% of China′s total retail market. While more than every second yuan is already spent online in Apparel & Accessories and Electronics & Appliances; Fresh Food only stands at 15% and FMCG at 25% - a combined 20%. As a result, the online grocery market reached a size of around $400B last year.

Figure: China retail market by categories and online penetration (following Goldman Sachs based on Euromonitor, iResearch, China National Bureau of Statistics)

Obviously, the online penetration rate of Fresh Food and FMCG appears low in the overall Chinese market context. However, to Europeans, these number - 20% online penetration and a $400B+ online market - must still look impressive. Actually, Europe′s grocery market size slightly exceeds China′s at $2.2T. However, given a mid-single digits online penetration rate (e.g., Germany: 2%, UK: 10%), the online market size is just somewhere between $75-125B as of 2020. The market share of q-commerce grocery start-ups so far is minor though, considering the above revenue numbers of major players like Getir and Gorillas. Instead, existing players like Amazon, Ocado or online offerings of supermarket chains (e.g., Edeka24, Tesco Online, Carrefour online) might capture more significant market shares so far.

In terms of current market structure, China′s leading incumbent grocery retailers do not match the market dominance that Europe′s supermarket chains achieve though, making online disruption more likely. For instance, Sun Art, the leading grocer, just holds 8% market share while China′s Top-5 grocers stand at 25%, according to Kantar data. The situation in Europe is significantly different. Germany′s Edeka Group (Edeka, Netto, etc.) achieves 25% market share, the Top-5 grocers 75%. The situation in the UK and France is no different. Tesco in the UK stands at 25%+ and the Top-5 grocers at 75%. Carrefour is the dominant leader in France with 20% / Top-5 grocers: 80%.

Figure: Market concentration of leading grocers in selected markets (following Kantar)

Business model innovation from China might be an inspiration for Europe′s entrepreneurs

Just like in Europe, the last several years have seen major disruption in the Chinese online grocery sphere. This is expected to continue. The grocery category overall is likely to grow 5% annually and by 2025 reach 45%+ e-commerce penetration for a $1.1T online market size, as Goldman Sachs estimated in Grocery Re-Imagined: Steepening online shift in China. 75% of the growth in online market size will come from overall market growth, while the remaining 25% may be captured by online players from existing revenue pools (mostly traditional supermarket chains). At present, the vast majority of online grocery players do not break-even. One study by Founder Securities estimated that around 95% of the 4000+ ventures competing in this space are losing money. The q-commerce leaders specifically have around -25% net margin (see SEC IPO filings from Dingdong Maicai and Miss Fresh).

At the end of last year during an investor call, the Delivery Hero management team estimated that q-commerce eventually will capture 25% of all online grocery within the next 10 years. Yet, this vision did not even come true in China, despite e-commerce being 5-7 years ahead of Europe (i.e., 10+ percentage points online penetration lead, assuming 1.5% gain in local online penetration per annum). Drawing on a classification by Goldman Sachs, actually, it is the smallest online grocery business model. In fact, the q-commerce model accounted only for around $20B in GMV last year, or 5% of the total $400B Chinese online grocery market.

Figure: China market major online grocery business models and share (following Goldman Sachs)

Looking to China, it appears that there are other promising business models in the online grocery space instead. In the following, the five major B2C business models that currently exist in China and the specificities will briefly be introduced.

Figure: Different online grocery business models in China with SKU offering and Delivery speed (own research)

1.     Marketplaces

• Major players: Alibaba (market cap: $600B) Taobao and Tmall, Pinduoduo (market cap: $150B), Bytedance′s (raised: $10B+) Douyin, Kuaishou (market cap: $120B)
• Market share 2020: 60%
• Future market share prospect: <50%
• SKU count: 100M+
• Categories: Fresh and FMCG balanced
• Average basket size: Rather large
• Delivery: 1-3 days, point to point with intercity 3P logistics / $1-2 (depends on store and order value)
• Consumer value proposition: Incredibly large product selection with many unique long-tail SKUs, reasonable prices (e.g., due to direct sourcing from farmers).
• Business logic: asset-light marketplace model with platform operator providing tools and general traffic, brands/farmers open stores and manage operations largely by themselves incl. advertisement and logistics. Platforms make money through platform operations fee, sales commissions and services incl. advertisement. Many brands favor this model since it allows them to control prices and achieve reasonable margins. Pinduoduo made great progress in Fresh Food when it started directly working with farmers, cutting out distribution-layers.

Figure: Pinduoduo

2.     Online Supermarkets / Megawarehouse-to-home

• Major players: JD.com (market cap: $110B) Super, Tmall Supermarket
• Market share 2020: 20%+
• Future market share prospect: Stable at ~20%
• SKU count: Millions
• Categories: Majority FMCG
• Average basket size: Large
• Delivery: Same day, 24h max. / $0-1 (depends on order value)
• Consumer value proposition: huge selection with many rare products (incl. huge range of import goods), trustworthy in terms of product quality due to self-operation model, rarely out-of-stock, fast delivery (often free due to higher average order value).
• Business logic: asset-heavy retail model with full operations of procurement, warehousing, inner-city delivery, profits come from difference between wholesale and retail price.

Figure: JD.com Super 

3.     O2O / Store-to-home

• Major player: JD.com Daojia (market cap: $5B), Alibaba Taoxianda, Meituan (market cap: $200B), Alibaba Ele.me, offerings of traditional supermarkets (e.g., Yonghui), Alibaba Hema, JD.com 7 Fresh
• Market share 2020: <10%
• Future market share prospect: Increasing, 10%
• SKU count: Depends on store, often thousands or ten-thousands even
• Categories: Fresh and FMCG balanced
• Average basket size: Medium to Large
• Delivery: 1-2h / ~$1
• Consumer value proposition: comprehensive (favorite) supermarket product selection, fast delivery.
• Business logic: asset-light plug-in for existing stores to bring inventory online, instant delivery either via delivery staff employed by platforms or via (more often) crowdsourcing.

Figure: Alibaba Taoxianda

4.     Community-based Group-buying

• Major players: Xingsheng Youxuan (raised: $4B), Shihuituan (raised: $1.3B), Pinduoduo′s Duoduo Maicai, Didi′s Chengxin, Meituan′s Youxuan
• Market share 2020: <10%
• Future market share prospect: heavily increasing market share, perhaps 20%
• SKU count: 1000+
• Categories: Majority FMCG
• Average basket size: Small
• Delivery: Next day after 4 pm / free
• Consumer value proposition: social factor, no delivery fee, recipes. Suitable for regions outside of the major first- and second-tier cities, also due to low average order value requirement.
• Business logic: Platforms recruit ten-thousands of captains (can be individuals or stores) which operate community-based Wechat-groups (commission-based payment of around 10%) where they serve as local sales agents and collect orders by 11 pm for a certain day. Afterwards, marketplace sellers provide products over night and delivery happens to captain′s pick-up point by 4 pm the next day, customers pick goods there. Profits come from typical marketplace income streams. Attempts to reduce waste.

Figure: Xingsheng Youxuan

5.     Q-commerce

Major players: Meituan Maicai, Miss Fresh (raised: $2B+), Dingdong Maicai (raised: $1.5B)

• Market share 2020: 5%
• Future market share prospect: Stable, ~5%
• SKU count: 1000-3000 SKUs
• Categories: Majority Fresh, sometimes organic / high-quality products
• Average basket size: Small
• Delivery: 15m (Meituan Maicai), 30-60m (Miss Fresh, Dingdong Maicai) / $0-2 (depends on platform and order value)
• Consumer value proposition: very suitable model for Fresh Food, ultra-fast delivery for impulse purchases.
• Business logic: asset-heavy retailer-model, maintain dark warehouses, and mostly self-operate delivery. Profits come from difference between wholesale and retail price.

Figure: Meituan Maicai

The above introduction of different business models in China go to show the wealth of approaches that China′s existing and emerging internet companies are taking to capture the online grocery space. They involve different combinations of SKU quantity, category coverage, pricing and delivery speed and bring different value propositions for consumers, depending on the nature of purchase (from impulse to planned) and development stage of geography operated. On this aspect, it is important to note the inverse relationship between delivery speed and SKU offering (less choice also tends to lead to lower average basket size), making many slower models more attractive from a platform operator / profitability point-of-view.

Figure: The inverse relationship between delivery speed and average basket size with CBGB detached from this logic (own research)

The majority of those business models exist in Europe, too. However, Europe′s strong focus on the q-commerce grocery delivery model could be misguided. China shows us that the self-operated rapid delivery model might not be what solves most consumer demand. That is also because, if operated on positive unit economics, q-commerce can barely meet prices offered by other channels online and offline (or delivery fee must be higher). Yet, many consumers are highly price sensitive and value savings more than convenience. As such, it is my belief that a range of models might turn out bigger than q-commerce in the end in Europe, too: Large marketplaces will continue to dominate in the future, especially if they are able to cut out distributors and offer attractive customer engagement tools and prices (see Pinduoduo). Large full-scale online supermarkets with same-day delivery (a la Ocado) and outstanding service have substantial potential and can learn from JD Super, which has a unique product selection (incl. many exclusive offers) and built operations including efficient cold-chain capabilities at scale. With European′s increasing awareness for local sourcing and environment, there might be room for multiple specialized online supermarkets even. O2O models (a la Wolt) are certainly very promising, too, as Taoxianda and others have taught us. The key will be for platforms to build suites that supermarkets can plug into their system to bring real-time availability data about inventory online. This allows the dual usage of space: as a supermarket and as a warehouse. The community-based group buying model is a space largely underpopulated by Europe′s start-ups. It though is making small basket sizes with reasonable delivery speed work financially in a platform model which is a remarkable feat. The success of platforms like Xingsheng Youxuan might inspire Europe′s entrepreneurs. Picnic is deploying elements of this playbook but lacks the social engagement and 3P pick-up point aspects.

What developments in China might teach us, too, is that traditional food-delivery service players Delivery Hero can play a big role as well in the online grocery space through a variety of models. Leveraging existing riders, as Meituan does, may prove to be a great advantage. DoorDash demonstrated just that in the US, where it emerged into a formidable competitor of Gopuff within a short time. Chinese traditional retailers were largely unable to benefit from the shift to online in the grocery space. Few, like Yonghui, succeeded with their independent offerings while most of them decided to team-up with online players – with the internet companies being the acquirer. However, Europe′s supermarket chains are much more dominant and have established strong bonds with brands and suppliers over many decades and built advanced logistics systems. Furthermore, many of Europe′s leading grocers themselves experienced significant revenue growth last year (often even reaching double-digits) and are more resourceful than ever. They should not be underestimated and an acquisition in the end might be a possible while favorable scenario for some of Europe′s leading online grocery start-ups. The strategic investment of Germany-based REWE as part of Flink′s latest fundraising round might just be a first sign of what is to happen.

* * * * *

It is encouraging to see the faith entrepreneurs and investors in Europe now have in the online grocery space. The key takeaway from the above reflection though is clear: If we believe that learnings from China are relevant, then q-commerce is an important business model in the online grocery space but not a panacea. According to that comparison, perhaps, it could account for 5-10% of the European online grocery market (thus at present around $5-10B market size). That is because, if operated with positive unit economics, it is just more expensive for consumers compared to other channels. Indeed, many consumers are price sensitive and might also prefer a larger selection without products at times being out-of-stock. Understanding this aspect, at some point companies will realize that the opportunity in the total addressable online market seems huge but the total serviceable online market is way smaller. Moreover, the current practices in operations will not proof sustainable long-term in an industry of razor-thin margins. Noting the inverse relationship between delivery speed and average basket size is key to make models in the online grocery space work and educate consumers accordingly. Taking these developments into consideration, current valuations seem extremely high. Down-rounds for exits via public markets one day will occur for those surviving, since retailers trade with market caps often below their annual revenue, e.g. Walmart with a 0.7X LTM-revenue-multiple or JD.com with around 0.9X. Even when China′s q-commerce grocery pioneers Dingdong Maicai (Revenues 2020: $1.7B) and Miss Fresh (Revenues 2020: $940M) announced plans to go public earlier this month, they indicated aims to achieve a 4-5X revenue multiple – way below what Europe′s ventures are currently raising at. The true competition in Europe′s online grocery market might not be for speedy delivery between the q-commerce players but a broader perspective is needed. Indeed, q-commerce start-ups can learn a fair share from studying other online grocery business models, the moves of emerging food-delivery service players and even traditional supermarket chains like Edeka Group, Tesco and Carrefour. They might aspire to expand their offering with business models other than q-commerce, just like Getir attempts to do with its broader offering including getirfood and getirmore.

Other ventures with different business models will play an important role in Europe′s shift to online grocery for certain. It will require European entrepreneurs with experience in retail, e-commerce and logistics and a willingness to look beyond the hyped q-commerce business model to capture market share from Europe′s dominating supermarket chains. Models like Ocado, Wolt, and Picnic provide promising attempts. However, if Europe really wants to go 10%, 20% or even 40% online penetration in the grocery space, it needs much more ideas, competition and funding for alternative business models.

For any venture in the online grocery space, there are some general lessons from China, too. From my own experience working in China′s second-largest e-commerce company / China′s largest retailer, the key to long-term survival in the retail business is merchandising. Developing direct sourcing agreements with brands and built an independent supply chain is the first step (rather than sourcing from supermarkets). Helping brands optimize their offering for the q-commerce channel (e.g., through allocation of exclusive products, data-based new product development and new product launches) will be key. This emphasis on merchandising made Europe′s large supermarket chains big and it will also be key in the online world. Achieving exclusive merchandising through local offerings with smaller regional brands/merchants, is another aspect. Private labels might also play into the product mix. Optimizing merchandising is far from easy but allows for a strong value proposition and USP in the mid-term. The other aspect which enables long-term survival is service which might include customer call center, all aspects of delivery (not only speed) and after-sales. Based on my experience from trying different online grocery services in Europe, many do not get the service aspect right just yet. For example, many platforms need hours to reply to chat-based customer inquiries and cannot get the delivery address right initially but then also fail to correct it for another three orders. As it shows, in both aspects Europe′s aspiring q-commerce start-ups have room for improvement.

About: I am an incoming Partner at Picus Capital, where I will be the Head of China. I am a personal investor in learn-from-China business models in emerging markets around the world. Previously, I was a Director in JD.com′s online grocery division. In the past, I worked at Mobvoi, a Chinese AI company, McKinsey & Company and IBM. The opinions in this article reflect my own views only.