The digitization of grocery shopping — Zoom on the European opportunity
Clipperton is a leading investment bank dedicated to technology and growth companies: we provide strategic and financial advisory to entrepreneurs, corporates and top-tier investors in Europe willing to execute transactions such as strategic M&A, private equity transactions and private placements. We therefore have a privileged vantage point on the transformative trends in technology.
This analysis comes with a dynamic database that gathers European players active in the tech-enabled grocery space. You can access the Notion page by filling out a quick form.
We’ve been talking about buying groceries online for a while, but the 2020 pandemic highlighted how little digitized still was the European offering when it comes to food shopping. Incumbent retailers have strengthened their omnichannel operational capabilities but still struggle to offer a streamline & efficient customer experience. Foodtech giants active in Europe have mostly focused on their core value proposition so far, i.e. meal delivery, and have hardly penetrated the online groceries market at all. On their end, customers have shifted their consumption habits and are more and more eager to buy anything online, from cars to eggs. This gap between consumers expectations and the current offering opens up huge opportunities all along the value chain to tech players willing to participate in the building of a best of breed customer experience. Let’s take a step back and deep dive into the European multi-trillion market opportunity to understand where we stand.
The slow rise of online food shopping in the last 20 years
Traditional retailers carried out first attempts early
Naturally, traditional food retailers were the first to engage in food e-commerce with initiatives that emerged as early as in the 2000’s. In the first years, internal diverging interests between the different distribution channels, lack of IT investments and heavy organizational structures did not help to build a customer-friendly shopping experience. Incumbents literally uploaded their inventory on their website, hoping for customers to browse for hours through thousands of SKUs like they would do in the physical world — needless to say it didn’t match users’ expectations who quickly gave up the idea of shopping groceries online. Later on, retailers rethought their digital strategy and understood how crucial it was to shift towards an omnichannel organization mode and provide a seamless UX not to lose customers in the purchasing funnel. Likewise, another big challenge was the home delivery which retailers thought could threaten their profitability. To avoid last mile delivery, retailers implemented hybrid models built on top of their traditional infrastructure such as “Curbside pickup” (better known as “Click&Collect” or “Drive” in Europe). Those models have been extensively rolled-out since the 2010’s and remain very popular in Europe, particularly in France where they account for the vast majority of total online grocery sales. However, the UX is still far from being optimum as well as far from the values commonly associated with the Internet: speed, clarity, convenience, etc. In the end, food retailers have mostly used the online channel to maintain if not increase the turnover of their brick-and-mortar stores but have not yet managed to fully redesign their organization so as to provide an enhanced UX across all channels.
The gig economy: a great mental shift with the development of online delivery services
Later in the 2010’s, the rise of meal delivery options participated in the promotion of the broader segment of food delivery. Since their inception 10 years ago, global gig economy players such as Postmates (2011), Deliveroo (2013), Doordash (2013) or Uber Eats (2014) among others, have strongly contributed to the evangelization of the market. Meal delivery is now commonplace in urban areas and is progressively expanding to most remote places. However, those players are mainly focused on their initial value proposition and therefore have remained mostly aloof from grocery delivery so far.
Today: more and more products and services to digitize groceries
After many attempts by different kinds of players whose core business was not grocery delivery, new types of tech or tech-enabled companies decided it was time to build relevant solutions to bring groceries online for good and seize a share of a multi trillion industry. Given the size of the market, companies are likely to be focused on a specific type of consumer need:
- “Stock-up” refers to the recurring needs of dry products (8–10 times per year). Players positioned on this segment compete directly with traditional large retailers but need less stressed operational models than other groceries segments. Examples in France: Greenweez, La Fourche.
- Weekly or bi-weekly groceries needs: companies in this segment aim at digitizing everyday food shopping, including fresh groceries. Requires top notch execution to face the many challenges attached with the positioning. Example in Italy: Cortilia.
- Emergency needs: consumers’ everyday needs delivered in minutes / hours. Players focused on this segment compete with small convenience stores. This quick-commerce model comes with smaller baskets, a number of SKUs likely to be more limited and excellent logistics / delivery capabilities. Examples: Gorillas in Germany, Weezy in the UK.
Depending on the market segment targeted and the long-term vision of players in the space, online grocery companies adopted different business models to fulfill their promise. Today, 3 types of players stand out from the crowd:
Personal shoppers: With the rise of meal delivery services combined with the generalization of the gig economy, some companies started developing online grocery services based more or less on the Uber model (e.g. in Europe we can cite Everli, Lola Market, Zakaz, etc.). This Instacart-like model relies on partnerships tied with traditional food retailers to bridge the distance between supermarkets and consumers’ homes. Despite a lighter model than traditional or integrated online retailers, this Instacart-like “Personal Shopper” approach is hard to optimize in terms of margins and operational efficiency as it suffers from the usual supermarket cost structure on which solutions are built atop. Besides, players are under constant regulatory threat due to the status of the workers involved. Nevertheless, these actors are gradually posing a challenge to traditional retailers that partner with them as they are now the ones that collect and own user data on transactions processed through their platforms.
Integrated online retailers: Some players developed integrated models based on a proprietary network of warehouses (e.g. Cortilia, La Belle Vie, Picnic, Rohlik, etc.). Those players own their inventories and operate a purely online service designed specifically for grocery delivery. This inventory-led model, far from being new, is having a new lease of life with numerous players determined to seize a share of the market opportunity. Those companies tend to combine streamlined logistics with a premium version of the legacy full-stack model. Often focused on localized procurement, they target an urban well-off target consumer group and are likely to charge significantly more than conventional supermarkets. The positioning of such players, clearly in line with nowadays consumers expectations in Western countries cities, combined with data-driven operations, generate improved unit economics paving a way towards profitability. Having control over the end-to-end customer experience is a solid advantage vs. other models but implies a more capex intensive model, which could limit the ability of such players to become mass-market rapidly.
Meal kits & prepared meals: Although they do not supply groceries under the same format, players such as Hello Fresh, Gousto or Quitoque (which Clipperton advised on its sale to Carrefour in 2018) have been highly successful so far. Those companies developed subscription-based business models to deliver either meal kits (groceries & recipes) or prepared meals on a regular basis. Those offers can be highly convenient for end-consumers but are also fraught with different challenges: limited assortment, customer weariness, expensive pricing, etc. that can lead to significant churn rates and threaten the economic equation at the end of the day if those points are under-addressed. Interestingly, Nestlé agreed to acquire prepared meals leader Freshly for a consideration up to $1.5bn in early November 2020. Freshly is a full prepared meal service: customers just need to put the food into the microwave to get a full meal, which works very well in the US. Such a landmark transaction further demonstrates the relevance of the subscription model in a society where consumer habits are evolving at a fast pace as well as brands’ consciousness that they could be highly affected by these new lifestyles if they do not move forward.
The elephant in the room: In addition to those models, a major player is at the center of the competitive landscape: Amazon. As a logistics specialist, the Seattle-based ecommerce giant has been strengthening its positioning in the food retail segment in recent years. After the takeover of brick-and-mortar chain Whole Foods in 2017, the group rolled out its cashierless stores Amazon Go in the US and keeps developing its online groceries service Amazon Fresh.
May it be personal shoppers or integrated online grocers, very few of the players willing to bring groceries online (since Ocado) managed to become big enough to be a serious threat to incumbent food retailers so far. In parallel, companies disrupting the way we eat at home (e.g. meal kits or prepared meals companies) have received significant interest from both investors and corporates.
In this article, we’ll focus on players willing to replace or upgrade the traditional supermarket. So far, mainstream customers were lacking efficient options when it came to ordering groceries online. Either the experience was far from seamless, or the service was too expensive, or it was not even available outside big cities, or the products were not appealing & fresh, and so on. While innovative services tried to disrupt the food retail market in Europe, they did not yet find their critical mass to reach an optimum model. Will they find their way into most people’ consumption habits or are they bound to remain exclusive to privileged people living in urban areas? Will they manage to build scalable business models and become global?
A huge untapped opportunity strengthened by a shift in consumption habits
Since eating is a primary need for each of us, grocery shopping represents a massive and global market opportunity that is set to stay. The European grocery retail market is expected to be worth c. €2.3 trillion in 2022 according to the IGD with 70% of the population buying online by 2024 according to the IMF and Nielsen in a pre-covid analysis. And it’s yet to be digitized: online grocery sales in the region are estimated to account for only 2%-8% of total grocery sales, depending on the country (compared to 33% for consumer electronics and ~16% for fashion) in 2020 (Source: Nielsen).
The spring & autumn 2020 lockdowns are reminders of the crucial role retailers can play in our societies and put the spotlight again on the existing and yet-to-be-captured online grocery market. During the first lockdown, consumption behaviors suddenly changed with the online ordering channel for groceries reaching unparalleled levels (close to 10% in selected European countries). This trend is expected to keep rising sharply in the coming years.
In addition, the quarantine was an occasion to put the spotlight on other underlying changes in consumption habits: enhanced awareness on nutrition and consumers willingness to limit their impact on the planet by favorizing short supply chains and local products.
The existing models offered by traditional retailers and ecommerce players hardly respond to this current paradigm shift among consumers towards intuitive, practical, healthy and sustainable solutions for online grocery shopping. In this context, the emerging innovative players testing new models in this field are gaining momentum.
It’s disruption time: digital grocery is having its momentum
In an attempt to seize this growing market opportunity, investors and corporates are scouting more than ever for performing and best positioned players in the segment.
Outside Europe, numerous tech companies are already heavily financed and therefore well-equipped to fight in a highly competitive industry — traditionally characterized by low margins. For instance, Chinese players Missfresh and NiceTuan raised ~€1.2bn+ and ~€300m respectively. Also in Asia, BigBasket raised close to €1bn in equity and debt financing with a view to corner the Indian market. In the US, Instacart cumulates close to €2bn in funding and is preparing to file for an IPO in 2021 to become the go-to grocery delivery partner for retailers.
The European playground is significantly different, with smaller and less dense cities than Asia or the US, a less prominent digital culture and disparate relationships with food among the different countries. In addition to these characteristics, the challenges historically attached with the model such as high customer acquisition costs, operational complexities, tight margins and poor customer loyalty did not help lure investors into the space. Today, European pure players of online groceries are slowly emerging but remain mostly local, meaning there is no obvious playbook to draw from.
However, while the lack of heavy financing in Europe prevented most companies from scaling fast and conquering market shares at the continent level until now, we expect things to evolve dramatically in the coming years.
The demand for delivered-at-home groceries keeps rising as the population is more and more digital aware, translating into a drop in customer acquisition costs. On the back end side, players in the space are more and more equipped to adopt efficient and data-driven operational approaches. The combination of the two should enable the best in class players to scale faster and achieve positive unit economics in a shorter time horizon than before.
In parallel to the growing interest from investors, traditional food retailers and large foodtech players seem to be showing appetite for grocery delivery add-ons.
For instance, we supported the sales of both organic food specialist Greenweez and fruit & vegetable delivery startup Potager City to Carrefour, respectively in 2016 and January 2020. Those acquisitions highlight the increasing demand from incumbents for advanced capabilities in the delivery of fresh groceries. Also in Europe, food delivery giant DeliveryHero agreed to acquire Greece-born grocery delivery company Instashop and announced its willingness to strengthen its LATAM leadership with the acquisition of Glovo operations on the continent in September 2020. Across the Atlantic, Uber paid a 3-digit amount to acquire a majority stake in LATAM digital grocery pure-player Cornershop as well as $2.65bn to acquire on-demand delivery platform Postmates. In China, Alibaba acquired restaurant and grocery delivery player Ele.me at a $9.5bn valuation in 2018.
However, e-commerce titans like Amazon or Alibaba already developed advanced skills over the years that provide them with significant competitive advantages. On their side, traditional food retailers such as Carrefour or Walmart managed to significantly improve their digital capabilities since their early failures in food ecommerce. Without necessarily competing with those incumbents, players willing to disrupt the grocery industry should focus on developing solutions that solve issues under-addressed by the different types of legacy players: great and fun online experience, data-driven offerings, warehouse optimization, seamless delivery logistics, etc.
The recipe to build a successful player in grocery delivery
A healthy mix of the best of both the physical and online worlds
Given the challenges in the retail industry that constantly threaten margins, players that aim at seizing a significant share of the market opportunity will manage to offer an awesome customer experience while performing flawlessly on the execution side. Basically, those challengers will combine the best of traditional retail and tech players to make cost per decrease over time and be in a position to thrive.
Back end, operational excellence and process innovation are key to stand out
The retail industry is widely known for its low margins. When it comes to food retail, those margins are even harder to maintain since the segment faces extremely strict rules and processes. Whether it is the management of fresh and/or frozen products, compliance with health standards, the ability to deliver on a particular slot and cover a broad territory, there are many factors that make grocery delivery particularly hard to operate well. In addition to these challenges, we observe a rising demand for quick commerce: articles bought online and expected to be delivered in less than an hour at customers’ doorsteps.
To address the numerous challenges attached to grocery delivery and tackle the shifting consumer needs, online grocery companies need to disrupt the current economic equation and stop relying on the traditional infrastructure designed for offline sales. To reduce their dependence on the existing stack, remain competitive and thrive in the coming years, they have more than one string to their bows: may it be sourcing, manufacturing, warehousing or delivery, the whole operational workflow could be step-up to match market requirements.
UK-based internet-only retailer Ocado is commonly cited as a successful example in the space. The company has managed to streamline its warehouse operations via significant investment in warehouse automation. Thanks to faster and reliable warehouse processes and reduced assembly costs, the company can handle the ever-increasing demand while maintaining a consistent service quality and preserving unit economics. The software-led model, specifically built for e-groceries, is highly scalable and expected to be adopted or leased (Ocado Smart Platform) by leading players in the industry. For instance, the company signed a partnership with French retail group Casino to automate its warehousing operations in the region of Paris.
While this software-led model has been successful for the big warehouse model of Ocado, it is more and more leveraged by players willing to address higher frequency purchasing needs. On other continents, integrated online grocers such as Mexico-based Jüsto or China based Missfresh are successfully building micro-warehouses model (mini logistics hubs located closer to city centers than traditional warehouses) for weekly and daily groceries thanks to strong tech capabilities. In Europe, building such micro-warehouse models is an even greater challenge given the lower order density vs. emerging markets. But smooth execution powered by bespoke tech can enable those models to find their path towards profitability: PicNic in the Netherlands and Cortilia in Italy are compelling examples of expanding players. Another player that has been able to reach operational excellence thanks to powerful algorithms is Czech Republic-based Rohlik. The tech developed in-house combined with streamlined processes allow for outstanding levels of shrinkage (below 1%) with profitable economics after all variable costs, including logistics and delivery. Being highly tech-driven enabled the company to expand gradually in CEE and to reach a critical size despite limited equity raised so far.
In addition to optimizing warehousing and fulfillment, online food retailers will face the challenges of improving planning, reducing days of inventory, improving assortment, etc. If such know-how cannot be built in-house properly, players may leverage solutions which can contribute a great deal towards profitability: in Europe, numerous startups and tech companies are on it: among many others, we can cite Relex, Scandit or Spacefill.
Downstream in the value chain, last mile delivery might be one of the greatest barriers to providing a high-quality and affordable service to everyone. The combination of micro-warehouses closer to end-customers with advanced routing algorithms can help limit the negative impact of home delivery on the bottom line. If not internalized, online grocers can use 3rd party advanced software solutions to address last-mile inefficiencies (e.g. Milkman, Paack, Stuart). Other innovative solutions like robot & drone delivery (e.g. Manna, Starship Technologies) or group buying features like the ones developed by Chinese players (read after) could be ways to address the challenges associated with last mile delivery.
Front end, a seamless online purchase experience
In addition to extremely well-run processes, mastering the front-end is an essential part of building a sticky model. Until today, we observed a gap to be filled between consumers’ expectations and available e-grocery options when it comes to UX. While some digital native players managed to deliver flawless online experience, traditional retailers were more likely to struggle on this side of the business.
Given the type of products involved, there is a significant challenge for online grocers to make their offering look more attractive vs. competitors and gradually build a trustworthy relationship with their clients. In the US, GoPuff has been pioneering the approach, managing to make the grocery experience fun again thanks to gamification. In terms of product discovery, AI could be of great help to reduce consumers’ frictions and build personalized experiences. Such product curation features could be even more relevant at a time when people are increasingly embracing specific diets. Today, very few online grocery companies are known to have adopted Netflix-like solutions to tackle this pain point.
We expect tech companies capable of offering powerful front-end layers to attract significant interest from investors as well as consolidators in the space. Indeed, the players best positioned on the front end will be the ones who collect user data. They can therefore identify patterns and benefit from high-value information to constantly optimize their service.
In France, Jow developed a seamless solution to enhance the overall online grocery UX. The startup acts as a curator for its users, capable of suggesting products they need to cook personalized recipes. The company can plug its interface into any retailer’s system and deliver the requested products. For retailers, it’s an opportunity to focus on their initial know-how, i.e. logistics, and leave the front end to the players who know how to build awesome online experiences.
At the end of the day, grocery shopping being more or less commoditized, players unable to offer a differentiated tech-enabled experience at a reasonable price might be in danger vs. e-commerce giants and most solid digital natives in the long run.
While some players will succeed in building efficient full-stack models themselves, opportunities remain to be seized by tech players working on reducing specific friction all along the value chain.
Next: the return of proximity shopping?
Although it is probably possible to achieve profitability with a 100% digital model in the long run, we observe that tech companies in the retail space tend to develop a physical footprint at some point of their development. The intertwined approach has already been adopted by tech giants like Amazon with the acquisition of Whole Foods in 2017 or Alibaba with the roll-out of Hema Fresh since 2017 in China. Same rationale for the acquisition of same-day delivery company Shipt by traditional retailer Target in 2017. The shift towards O2O (online to offline) and fully omnichannel models could be an efficient way to decrease costs per order and the overall operational pressure. It is also a manner to establish deeper relationships with the customer base and further develop branding.
May it be collaboration with brick and mortar retailers, development of own infrastructure or close collaboration with local producers, it appears that online grocery players could be leaning against the wind: instead of participating in the desertification of city centers, they could contribute to restore the former dynamism of local communities.
The multiplication of point of sales and logistics hubs
To fulfill the promise of quick commerce while maintaining unit economics at healthy levels, bringing operations closer to end customers is essential. This could be done via dense networks of physical locations that satisfy consumer demand within a limited perimeter. The legacy infrastructure deployed by food retailers in city centers could be leveraged in that sense to process online orders. However, processes might need to be fully redesigned to fit ecommerce requirements. On top of the existing retail infrastructure, micro-warehouses are expected to emerge in areas that guarantee a satisfactory level of profitability. More specifically, they will first be located in densest areas and should expand gradually to most remote locations as people jump online to buy groceries.
In France, Potager City and TOTEM both built digital services, developed strong capabilities in logistics and warehousing and then leveraged existing local shops and workplaces to reach their end customers. Those players are compelling examples of businesses combining the best of both physical and digital to disrupt the traditional economic equation attached to retail business models.
Also in France, Storelift just unveiled its mini automated convenience store to provide a 24/7 service to populations underserved when it comes to shopping. Other models such as La Ruche Qui Dit Oui optimize the sale of fresh products thanks to technology while generating physical interactions.
Local ecosystems more and more involved
To serve local populations efficiently, some players have decided to thoroughly review their procurement model. For instance, Italy-based Cortilia leverages a network of local producers to reduce the number of intermediaries and guarantee tasty, fresh & local products to end-customers. Such a model is appealing insofar as it releases pressure on producers while providing customers with a solution more aligned with their values. However, localized procurement is even more complex and could become a bottleneck if not handled properly.
In parallel, some players developed digital solutions to help brick and mortar local shops launch and operate online sales channels. For instance, Epicery’s marketplace supports independent shops receiving and processing online orders. Thanks to the platform, people can easily buy online from their favorite neighborhood merchants.
Other innovative solutions are rising to guarantee inclusion in online groceries: for instance, China-based social commerce specialist Pinduoduo and meal delivery Meituan are both pushing their group buying features. Such services allow neighborhoods to order food together, driven by community leaders. Those solutions are thriving in China as it empowers communities while enabling online grocers to broaden their coverage and reduce costs associated with order processing and delivery, making it possible to achieve positive unit economics at lower average basket value.
Overall, we observe the emergence of players willing to have a positive impact on the way we eat. May it be on sourcing, delivery, operational set-up, many bricks are being redesigned to fit changing customer needs. A telling example is France-based La Fourche, which has developed an original model to promote organic products: the company proposes a subscription program to be granted access to discounted dry organic products that can be ordered online. While it does not primarily target the demand for quick & fresh food, La Fourche addresses monthly groceries with higher average basket value.
Online grocery shopping is a massive opportunity yet to be seized. Large players already involved in the space, may it be traditional retailers (Carrefour), meal delivery giants (Deliveroo) or e-commerce veterans (Amazon), have all been making inroads into the space but did not develop suited and scalable solutions so far. As customers’ habits are shifting at a fast pace, there is great room for disruptors and tech companies to build improved online grocery experiences. We expect the market size to allow for a fragmented market at least for the next couple of years, before moving towards a consolidation phase that will bring to an end the development of the less efficient models. Given the low margins of the industry, players that manage to streamline execution while offering an unrivalled customer experience are the most likely to attract investors and become mass-market. However, there is no European success story strictly speaking so far. It is clear that new leaders will emerge but it remains hard to tell which business models and corporate strategies will become the next billion dollar companies.
In the end, online grocery shopping is a fundamentally different business for all players involved, may it be traditional retailers (Walmart), meal delivery giants (Uber) or e-commerce veterans (Amazon). Disruptors and tech players willing to participate in the digitization of food retail will need to develop singular solutions specifically designed for omnichannel grocery challenges. It is clear that the segment is having strong tailwinds, opening up great opportunities all along the value chain but who knows which models will be successful?
Clipperton has been supporting numerous players in the foodtech space in the last years. Our track record in the segment includes the sale of Potager City to Carrefour, the sale of Foodchéri to Sodexo, financing round & sale of Greenweez to Carrefour, the sale of Quitoque to Carrefour and Glovo’s €30m financing round among others.
Interested in the topic? Feel free to contact the author Ghislain de Buchet and the rest of our dedicated team: Thibaut Revel and Olivier Combaudou.
We conducted numerous interviews with knowledgeable people about the industry to issue this paper. Special thanks to the entrepreneurs, investors and experts who took part in the discussions related to this research.
Click here to get access to our database of the European online groceries landscape.
About Clipperton
Clipperton is a leading investment bank dedicated to technology and growth companies: we provide strategic and financial advisory to entrepreneurs, corporates and top-tier investors in Europe willing to execute transactions such as strategic M&A, private equity transactions and private placements. Founded in 2003 and with offices in Paris, London, Berlin, Munich, New York and Beijing, Clipperton has completed over 300 M&A and private placement transactions with fast-growing technology start-ups, blue-chip corporates and renowned financial investors.
This post was also published on www.clipperton.net
