On-demand grocery was a lockdown hit. Can it last?

We’ve all been there. You’ve been looking forward to making this dinner for weeks, but a key ingredient is missing. A moment of madness with the last of the Oxo cubes earlier in the week forces you to dash up the road to your local supermarket. Marching there and back costs you an additional twenty minutes you don’t like losing, but at least the gravy’s sorted.

Increasingly, though, there’s an alternative to this mildly irritating state of affairs. Over the past year, dozens of on-demand grocery start-ups offering deliveries of staple items have sprouted across Europe and North America. Simply by downloading their mobile app and making a minimum order, a delivery driver with a backpack loaded to the brim with tins, fruit, vegetables and pasta will materialise at your front door, often within just 15 minutes of making your order.

Such drivers have become a common sight for Peter Backman. The food industry analyst spies roughly 20 such riders from Getir pedalling furiously between nearby residences and their local dark warehouse on Finchley Road in London every hour. “If each of them are carrying orders worth, what, £30?” he says, looking upward for some quick mental calculations, “that’s £600-worth in my local area every hour.”

Founded in Turkey in 2017, Getir is one of the oldest and most profitable on-demand grocery start-ups operating in the UK. In the past few months, however, they’ve also been joined by Zapp, Gorillas, and Gopuff, recently arrived from the US. All offering the same basic service with slight variations in discount offers, minimum orders and item availability, they’ve proven a potent alternative to traditional supermarkets and corner shops for young, twentysomething professionals who prize convenience when it comes to shopping.

“Most of that’s connected to busy work lives, busy school lives and a lack of planning,” explains Daryl Porter, a senior partner at Tomorrow Retail Consulting. And while Millennials and Gen-Zers make for a natural target market, given their familiarity with online delivery through firms like Amazon and Deliveroo, Porter believes that the innate appeal of having groceries appear at the door within minutes will inevitably reach older generations, too.

It’s a bet that VC funds are also making. Estimating the potential market for on-demand groceries in the billions, investors have handed money hand over fist to dozens of start-ups in the segment, some merely months old. Last month alone, Zapp raised some $200m in its Series B funding round to fund its expansion throughout the UK, the Netherlands and France; Getir, meanwhile, sought a market valuation of $12bn. Their appeal also seems to be borne out in the data. In the UK, for example, consumer spending on such apps rose by 123% in the second half of 2021, compared to a 22% fall for supermarkets.

Even so, doubts remain as to the ability of these startups to turn a profit. Not only is the size of the addressable market for on-demand groceries a point of contention, but for some, the costs involved in supporting operations that deliver a wide range of items to doorsteps in 15 minutes or less are simply too high to remain sustainable for long. Then there’s an issue of timing. Born in the early days of the pandemic, when reliable delivery services were in high demand among those consigned to their homes for months on end, can the market transition effectively to a new era of hybrid work and the end of Covid restrictions?

Pandemic pangs

The sector certainly owes a great deal to the unique market conditions created by Covid-19. While on-demand grocery start-ups certainly existed before 2020 – see Getir in Turkey, and Gopuff in the US – it took the first cycle of lockdowns to really invigorate the segment.

As consumers began working from home en-masse and proved reluctant to venture to physical stores to shop for groceries, demand for large food deliveries from supermarkets grew exponentially. The problem was, the model for online grocery delivery at the time “actually expected customers to organise their busy lives around the needs of the retailer,” says Steve O’Hear, Zapp’s vice-president for strategy. That meant “vying for delivery slots and accepting replacement items.” Such competition meant that customers had to forego a quick trip to the shops in favour of a large, weekly order – or else make a risky dash to their local Tesco or Morrisons.

As such, the entrepreneurs behind Zapp, Getir and Gorillas saw a lucrative, niche market for small grocery deliveries made in short timeframes. It also helped that investors themselves were often stuck at home during lockdown. “Previously to the pandemic, investors were not interested in food,” says Matthieu Vincent, the co-founder of DigitalFoodLab. Now, their minds concentrated by their daily interactions with Amazon and Uber Eats drivers at their front doors, they invested heavily in a host of new, on-demand grocery start-ups – helped, in part, by persistently low interest rates.

“The creation of these start-ups happened very quickly,” says Vincent, with dozens of new firms emerging with very similar operating models. Most begin in urban areas, explains Porter, where transport links are better and consumers are more used to popping into their local supermarkets or corner shops on an ad-hoc basis. Firms like Zapp or Getir tap into these shopping behaviours by buying up cheap, vacant storefronts in the area, installing shelving and filling it with a small amount of inventory. As the start-up acquires new customers in the local area through aggressive marketing and generous discounts, it learns what they’re most likely to buy and adapts accordingly. By maintaining tight control of this small inventory (and charging more for it), these firms can minimise waste in individual dark stores and, eventually, make them profitable.

Therein lies the gamble behind much of the VC investment in the on-demand grocery segment, says Porter: the calculation that a sizeable return will be had once enough of these stores have learned how to turn a profit. So far, those returns have failed to materialise. While many have attracted colossal investment, all firms solely dedicated to on-demand groceries are still in start-up mode. Some seem to be burning through cash at an alarming rate. Recent analysis from Bain found that, after factoring in payroll costs for dark store pickers and delivery drivers as well as generous discounting, a £17 order leads to an operating loss of £24.

Meanwhile, on-demand grocery firms are grappling with municipal authorities across Europe and North America. Boroughs clamping down on new dark stores include West in Amsterdam, which hosts ten. “We noticed fairly quickly that they took over places where this was not really convenient, and where you could see trouble emerge quickly,” said Melanie van der Horst, a member of West’s executive committee, in an interview with Politico. This included elevated street noise from lorries offloading goods at the dark stores, and poor behaviour from delivery drivers. “They leave their trash, they urinate,” said Van der Horst. “Drugs are used.”

Both Amsterdam and nearby Rotterdam have now imposed a one-year ban on new dark stores opening in their respective jurisdictions, while sentiment against such facilities seems to be tightening in Lyon and Paris. Similar concerns have emerged in UK cities, where some fear that dark stores might put corner shops out of business. Even so, it is easy to forget the role that such facilities can also play in urban renewal, says Backman. While their tinted windows may not look altogether appealing, “you’ve got to bear in mind that there is a lot of high street property which is deserted,” he says, especially on British high streets. “Better to get some rent from somewhere rather than nothing.”

On-demand grocery’s path to profitability

All the while, the market for on-demand groceries continues to change. Recent months have seen the segment enter a period of consolidation, with comparative minnows like Weezy and Fancy being snapped up by Getir and Gopuff respectively. None of this is unusual, says Backman – in fact, it mirrors the early days of restaurant delivery start-ups, when many more companies than Just Eat, Uber Eats and Deliveroo competed for the hearts and stomachs of British consumers. Just as that trio dominated online takeaways, says Backman, so too will a handful of firms emerge in the groceries space.

Whether those companies that remain will reach their desired number of consumers, however, remains unclear. Born of the pandemic, these firms now have to contend with a customer base spending less and less time at home as Covid-19 becomes endemic. As such, the time when these start-ups had “access to an unlimited number of consumers residing at home and willing to order everything online has finished,” says Vincent. “People are able to go outside to restaurants, stores and work.”

Competition from more established players in the delivery segment is also heating up. Just Eat, Deliveroo and Uber Eats have all dipped their toes into online groceries, striking sweetheart deals to deliver goods from local supermarket chains. Even so, says Backman, the slice of revenue these players ultimately derive from groceries “hasn’t skyrocketed,” which he takes as more evidence that the ultimate size of the market is more limited than investors initially predicted.

Convenience always wins online.

Steve O'Hear, Zapp

O’Hear, meanwhile, believes that the successful embrace of e-commerce by other sectors bodes well for start-ups such as Zapp. “My own thesis is that convenience always wins online,” he says. “Whenever an offline-to-online shift results in a product or service becoming exponentially more convenient, not only is that shift successful, but the demand for that product or service increases – and the market size grows accordingly.”

Neither has the end of the pandemic had any negative impact on Zapp’s sales. “We actually saw a sales spike immediately after the end of the first national lockdown,” says O’Hear, a trend that he claims has only continued. This has been helped, he says, by Zapp’s strong customer retention rate and approximately two-thirds of its orders now reaching profitability.

Vincent, however, remains sceptical that on-demand grocery start-ups can continue to subsist off groceries alone. For one thing, he says, “I think the path to profitability has to be linked with price levels,” meaning that the happy time of discount orders will have to come to an end sooner rather than later. More deals with supermarkets are also likely, whether that’s in the form of exclusive arrangements to deliver groceries from a single brand or access to consumer-generated order data. That moment may come sooner for these start-ups than they realise. As interest rates rise again, money is becoming more expensive and VC capital harder to find. It may be the case, argues Vincent, that investment funds “are willing to put their money to work elsewhere.”

Porter is a little more optimistic. A former resident of New York City, he remembers when he could have five or six items being delivered to his front door with a few taps of a mobile app. That’s no longer the case in his new home in Ontario, Canada. “I think when a customer tastes speed,” says Porter, “when they taste the convenience of these delivery services, there is no world where they forget them completely.”

Read more:

• The slow and silent rise of dark kitchens