Quick commerce: what is it and where is it heading?

Quick commerce or Instant delivery, the fast online grcoery retailers have many different names. What they have in common is that they deliver groceries in minutes instead of days or hours.

Nearly all of the companies in this category have been born during the pandemic. Only a handful of companies existed before the pandemic. German Gorillas went on to become the fastest European company to reach unicorn status (six months since founding).

The number of companies has mushroomed over the last two years. There probably is no reliable information on how many Quick commerce companies there are in the Western countries. The biggest players have received very big amounts of funding to enable the race to become the biggest player in the category. 

The assumption behind this race seems to be that the company that first gets above a certain threshold of sales/volume can reap benefits that others can't. 

It still remains unclear where the threshold is, what the benefits are and why they would make such a difference that other companies could not follow suit?

How Quick commerce differs from the traditional models?

The main difference between the traditional and quick models is the time it takes for the customer to receive the order. The quick commerce models don’t really have anything new in their model or they have not removed any significant part of the traditional online grocery value chain.

Quick commerce model can be defined as the ordinary online grocery model, but just faster.

The only part they have removed is the batching of orders. This has two implications on the Quick commerce models.

Firstly, batching enables more efficient routing as there are many deliveries per route for the van. Secondly, the batching makes the process slower as more orders need to be batched together and delivered to a bigger area.

This leads to the second difference: the delivery area. As can be seen from the image below, the delivery areas for the quick commerce players contain only small districts with 1-3 km radius from the dark store.

The small delivery area could lead to more efficient deliveries as the distances to customers are kept short. However, building up the volume in these hyper local delivery areas takes time and can become really expensive.

How do Quick commerce companies make money?

The business media has covered extensively the financial aspects of the Quick commerce sector. Both the generous funding rounds as well as the very high burn rates of the companies’ spending have been written about.

As detailed by a Wall Street Journal article, it currently costs a lot to deliver Quick commerce orders. With the Average Order Values hovering between $30 - $40, it will be difficult for the companies to cover all the costs. According to the WSJ image, the margins in Quick commerce seem to be around 33%. It is reasonably as the service is a convenience service, which tend to have higher margins than traditional grocery.

However, due to the low Average Order Values, there is not much money left to spend on the logistics. Despite not including figures from Sales and Marketing or other overhead costs, the individual orders can’t make a profit for Fridge No More.

Three levers to profitability

There are three areas with which the Quick commerce companies could move closer to profitability:

• ads

• efficiency

• volume

Ads have been all the rage in ecommerce ever since Amazon started to talk about the scale of their Ad business. Ads are an important tool for increasing high margin revenue, but only when there is significantly more customers.

Due to the convenience nature of the Quick commerce models, the Ads businesses could be very lucrative for companies in impulse categories. In categories like candies and snacks, many companies fear that their products don’t get sold in the traditional online businesses.

Another potential area to increase profitability is by improving the efficiency of the warehouses. Micro Fulfilment Centers have been mentioned by many pundits and companies, but most probably they don’t make a big difference before the order volumes grow significantly.

Therefore, the most important lever for the Quick commerce companies is to increase volumes, rapidly.

Volumes, volumes, volumes

With higher volumes, the warehouses and the delivery fleet become more efficient as they are working on higher capacity and not being idle. Higher volumes also lead to better sourcing terms from the suppliers as well as increase the potential value of the Ads business mentioned above.

The Auick commerce companies have understood the importance of increasing volumes rapidly. This is why they spend enormous amounts of money to acquire customers. Most of the companies offer several coupons to customers for trying out the service and then coming back.

According to the material used in the Wall Street Journal article Fridge No More spent $70 to acquire a new customer.

That is a really high Customer Acquisition Cost. However, the Lifetime Values of the customers are very high in grocery retailing as people need to buy food every week. For Quick commerce the problem is that in big cities there are so many similar options for the customers to choose from.

In the physical world convenience retailers rely on good locations to drive traffic. For an online business the importance of location changes quite significantly. If the area has more than one Quick commerce Dark Store, the differentiation will be difficult.

One option for the Quick commerce companies is to differentiate through the product offering. With convenience retailing, the possibilities are rather limited as the products customers need quickly are rather similar always.

Private label products are the basic 101 of grocery retailing. That can provide some differentiation (see Trader Joes). To differentiate with PL products it requires quite significant expertise in sourcing and new product development.

The last significant opportunity that arises for the Quick commerce players if the volumes start growing is the ability to batch more deliveries to the route for the driver. However, that would require the companies to give up on the pledge to deliver in 10 or 15 minutes…

Adapting the business models to incorporate efficiency

Some of the Quick commerce companies have started to drop the very fast delivery promise. For example Gorillas has removed the 10 minute pledge in New York (link).

At the same time Gorillas launched Click & Collect service where customers can coming and pick up the orders that the Dark Store operators have picked for them. It remains to be seen how valuable Click & Collect is to the customers who would need to pick only a handful of products from the stores themselves. What is the added value of Click & Collect, if customer has to come to the store anyway?

Scrapping the really fast delivery promise enables much more efficient routes to customers that live close by.

Slightly slower delivery combined with small delivery area can eventually make the delivery operation significantly more efficient as there is no need to drive long distances to customers’ homes.

Batching could also help in resolving the difficulties that some of the companies have faced with the authorities, especially in the Netherlands and in the US. The cities of Amsterdam and Rotterdam have already banned Quick delivery companies and New York is considering restricting them.

This is due to the heavily increased bike traffic that the companies generate in the neighborhoods. With batching the couriers would not come back after every order, but they could deliver 3-4 orders per route. That would cut dramatically the number of times they have to drive to and from the Dark Store. That would also increase the efficiency of the couriers’ time and thus they would not be hanging around the depot as much. Thing that seemed to irritate many in the Netherlands.

Rohlik and Missfresh as examples?

Rohlik (Czech Republic) and Missfresh (China) are companies that have combined elements from the Quick commerce as well as the traditional online grocery models. Rohlik offers two hour deliveries with 15 minutes delivery slots, but still offers a 17 000 SKUs assortment, which can easily cater for all the needs of a weekly shopper. That is almost ten times the number of products than many Quick commerce company offers.

Rohlik does this by using bigger warehouses that are not located in the central regions of the city. It will be interesting to see how they can combine the fast delivery value proposition with a bigger delivery radius.

Missfresh on the other hand serves a small delivery radius of approximately 3 km. But they do not try to compete with too fast deliveries, there average delivery time is 36 minutes. Which is really fast compared to traditional online grocery models, but still gives the opportunity for the couriers to deliver more than one order per route.

Changing the expectations of the customer

Like with any other industry or innovation, the birth of an industry sees a big variety of players coming in to the market and trying to win the race to become the biggest. Over time many companies fade to the side and the varying business models merge to one or handful of “dominant designs” as it is called in the academic jargon.

The idea is that the handful of companies that manage the first turbulent years learn from mistakes of the others and adapt their business models to become more efficient and profitable.

This is playing out currently in the Quick commerce space. Regardless of the outcome of the race to become the biggest, the most probable outcome is that the customer expectations for all online grocery retailing will change.

Already before the pandemic there was a lot of discussion around the importance of faster delivery times, from next day to same day.

The speed of delivery will continue to become ever more important for online grocery.

It remains to be seen whether the same day delivery will become the norm for online grocery. As Jeff Bezos famously said while launching the first Kindle “Anytime you make something simpler and lower friction, you get more of it”. This is something that has characterised many of the most important Amazon innovations from One Click purchase to Kindle and from biggest assortment to fast delivery times.