The rise of the on-demand grocery delivery industry

February 1, 2022

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Forgot to buy that one ingredient for dinner? Normally you would have to choose to go for a quick run to the grocery store to get that ingredient or you just make dinner without it. However, in the last few years, and in the last few months in the Netherlands, a new solution for this problem has been working its way up in the food industry; the so-called “on-demand grocery delivery companies”. These stores offer normal grocery store products, which they promise to deliver within a very short time, for example within 10 minutes. That doesn’t make it hard to understand why the Dutch word for it is “flitsbezorging”, which roughly translates to “flash delivery”. How does this new industry work? And what are the consequences, both for the food industry and our society?

The trend of delivering groceries to your house instead of going to the grocery store has been happening for a longer period of time now. One of the leading providers, the Turkish company Getir, was founded in 2015. With an enormous valuation of approximately $7.5 billion [1], Getir leads a large group of numerous “10-minute grocery delivery” companies which can be found all over Europe and also at a few hotspots in different continents.

In the Netherlands, larger companies like Albert Heijn and the delivery company Picknick already provided the service of ordering all your groceries on their website, so you can have it delivered at home. However, often it takes a few days for you to receive your order. With the rise of on-demand grocery delivery companies in the Netherlands, the Dutch industry for delivering food becomes even more competitive, while the customers have a wider variety of options to choose from. These “flash delivery” – companies, like Gorillas and Flink, offer a smaller range of groceries, but they still offer all the essential products and they promise to deliver very quickly, making it a potential competitor for normal grocery stores. Furthermore, the companies provide the services via a mobile app, making it very easy to quickly order something.

Currently, these companies are only situated in the larger Dutch cities. In these cities, the 10-minute grocery delivery companies establish so-called dark stores. These are the stock houses from which delivery guys pick up the orders, and are named after the black-taped windows of the stores. The dark stores get refilled frequently. Each city often has numerous stock houses. This is to provide more products and to provide more local quick service. The companies often tend to try and open more dark stores to further improve their abilities to deliver in time and to reach more people. A few months ago, the supermarket chain Jumbo also started to collaborate with Gorillas, making the existing Jumbo stores in some sense new dark stores for the 10-minute grocery delivery company.

The prices of the on-demand grocery delivery companies are often equal to (or slightly higher) prices in the normal grocery store, but the companies tend to provide large discounts when they enter the market in a new place, making the grocery deliveries more appealing. This is done with the idea and goal to reach more potential customers, from which a larger part hopefully will stay as a customer after the companies stop having such discount promotions. Next to the price you have to pay for the products, you also have to pay for the delivery costs, which is a predetermined amount. This is often around €1,80.

Although the on-demand grocery delivery industry is still expanding to new places and growing enormously in the already manifested places, there are a lot of doubts that the industries’ revenue model works in the long term. The market namely has a lot of competitors at the moment, and these competitors all fight for the same customers. Therefore, to try and reach these customers, the companies often have to make more customer acquisition costs (like the discount promotions). The acquisition costs are so high that it is almost impossible to make a profit.

Next to the high competitor market, the companies also need to have a lot of dark stores to guarantee their services. Building more dark stores costs a lot of money and, combined with other costs like the acquisition costs, it means that the company needs to have a large volume of sales to cover all these costs. However, as a starting company, this isn’t way easier said than done and could be the pitfall for a lot of the 10-minute grocery delivery companies.

Next to the financial obstacles, there are also some social obstacles. The dark stores tend to cause a nuisance in the cities, with the constant going, waiting, and incoming delivery guys. When dark stores are refilled, it can also cause unsafe traffic situations or just traffic jams. The deliverers who have to deliver fast also cause unsafe situations in traffic. As a consequence of all these problems, some of the larger cities in the Netherlands already have decided to prohibit the construction of more dark stores.

There seem to be a lot of obstacles for the on-demand grocery delivery companies to become stable companies, so why do they even try? Well, the market still provides a very high potential revenue source, especially when you retain all these customers in the market. So, it isn’t weird that these companies are trying to succeed in this industry, it just is a larger risk you have to take. Furthermore, the fast delivery companies have a potential that of course goes beyond delivering food. If the companies were to collaborate with companies in other branches of products, like electronics, then the fast delivery service could be expanded to anything, making it a more stable revenue model. We can conclude that we certainly haven’t seen the last development in this industry and it will be exciting to see what the future will bring.

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