Quick Overview of the Market Over the past three years, we have all witnessed the remarkable growth of the grocery delivery industry. Just five to six years ago, the sector was vastly different, characterized by longer delivery times, limited time slots, few service providers, and issues with product and delivery quality. However, a , which I recall discussing with friends during the launch of Yandex.Lavka, a service that promised to deliver groceries in a mere 15 minutes. revolution emerged around 2019 Following that, the COVID pandemic took hold in 2020, and investments flowed like a river, resulting in the enormous development of the industry. Nonetheless, the landscape for q-commerce startups took . Factors such as the tightening of monetary policy, the gradual resolution of the pandemic, and the global economic crisis triggered by Russia's invasion of Ukraine led to a decline in investor enthusiasm. a turn for the worse in 2022 As a result, 2022 became a year of widespread disappointment: most businesses faced negative margins, growth figures proved to be heavily reliant on lockdowns, and traditional retailers accelerated their own online channel development. numerous online market players exited the industry, were acquired by larger competitors, or had to downsize and withdraw from less promising markets: Consequently, In 2021, Gorillas was considered one of the most promising players but was acquired by Getir in 2022. Getir had to let go of 14% of its workforce and abandon aggressive expansion strategies. UK-based Jiffy shifted its focus from dark store operations to offering software solutions. Yango Deli opted to shut down its operations in London and Paris (however, operations in CIS countries kept growing profitably). The majority of American Q-commerce companies, such as Fridge No More, Food Rocket, and Buyk exited the market due to a lack of financing. Additionally, 2022 marked a year when European governments took a keen interest in the development of and implemented stringent regulations, making it increasingly difficult for these ventures to operate. dark store businesses For instance, Barcelona completely prohibited the dark store format, while Amsterdam and Rotterdam imposed strict rules governing the operations of such establishments. Consequently, it appears that merely offering 15-minute delivery times no longer surprises the audience and is no longer sufficient for success in the Q-commerce sector. To survive and secure a more significant presence in the grocery retail market, these businesses must evolve and substantially improve their efficiency. The question remains, however: how can they achieve this? In this article, I will not present any detailed insights on how to derive some model or how to structure an operational process but rather share my strategic understanding of efficiency and how it is deeply interconnected with growth. Efficiency Basics Here, I would like to introduce my personal view of the problem. If you do not agree with it, I would greatly enjoy having a discussion and hearing your comments. First, let's clarify what efficiency entails. In simplified terms, there are two primary dimensions that investors and company managers typically prioritize: growth and unit economics. While customer service quality, employee satisfaction, and ESG factors are also crucial, they primarily serve as the foundation for success in growth and unit economics. Figure: What is efficiency in terms of growth and unit economics? “ Enhanced efficiency signifies that the company has achieved a more favorable balance between growth and unit economics compared to its previous state. Capitalizing on opportunities: A company cannot attain higher growth without compromising unit economics, or vice versa.” Examples: Reduction in write-offs through improved assortment and supply chain management - a direct positive impact on unit economics without significantly affecting sales Increasing the Infull percentage (the proportion of orders delivered with all requested items) - a clear influence on growth due to enhanced customer satisfaction without an increase in costs . Navigating trade-offs: “The company possesses a clear understanding of the trade-offs between growth and unit economics, including the impact of various levers (such as delivery fees, pricing, availability, etc.) on their target metrics” Furthermore, the current settings of these parameters align with the company's overarching objectives, whether focused on growth or unit economics. Examples: Raising the delivery fee is an action that typically has a strong negative effect on sales but significantly improves unit economics due to an increased average bill and delivery fees. Discounts for new customers have a direct positive impact on customer acquisition, accompanied by a considerable negative effect on unit economics. Capitalizing on Opportunities Quick Commerce has recently emerged, with a primary focus on expansion, which has led many companies in the sector to struggle with optimizing internal processes. Examples: A client is unable to complete an order as payment is not being accepted or a client is unable to change the account phone number, which is causing difficulties for a courier (those are the issues I am facing with Getir in Istanbul). Product: Replenishments are primarily manual and non-digitalized, which leads to larger overheads due to the necessity to maintain large supply chain departments, increased write-offs, and overwhelming stores with excessive stock. Store Supply Chain: Order picking is carried out manually without the use of barcode readers. Moreover, the in-store layout lacks digitalization, resulting in SKUs not being assigned to specific shelves. Order Picking: Order dispatch is done manually or based on a FIFO approach. This leads to inefficient routing, inability for orders batching, and low OpH (orders per hour). Order Delivery: When done effectively, optimization can yield substantial improvements in overall performance. However different the markets and companies might be, gaining efficiency on this step should imply the following: The enlisted tools and approaches are not exhaustive and will be detailed in separate articles on the matter. Nonetheless, it's crucial to acknowledge that the 80-20 rule frequently plays a role in this scenario: seizing low-hanging fruits can considerably improve efficiency, whereas tackling the remaining 20% might demand significant resources and effort. This is why, at a certain stage of development, enhancing efficiency is primarily driven by skillfully navigating trade-offs. Navigating Trade-Offs Capitalizing on opportunities can be challenging, but navigating trade-offs is often more complex and basically implies quantifying the business: Assessing the impacts of various levers on business performance in terms of growth and unit economics. A company must identify its primary levers and understand the current exchange rate between growth and unit economics for different geographies and types of business. In other words, to successfully navigate the trade-off, it needs to be able to answer the question: “If I change this particular lever (for example: delivery fee), how many additional orders will I get in this particular geography vs. how much money will I lose (due to an average bill and delivery fee drop in this case)?” Here is a non-exhaustive list of potential levers that can be implemented: Delivery Fee & Minimal Basket Delivery Time Pricing Level Discounts for New Customers The exchange rate (elasticity at each point) should be assessed using AB tests or other identification methods and then aligned with the company's strategic goals at the time. If a company has a target margin and is currently focused primarily on growth, an appropriate combination of instruments should be identified. For example, if reducing the delivery fee in one city and decreasing delivery time in another promises the largest impact on growth with the least effect on margins, this is the strategy that should be implemented. Efficiency and Growth While improving business efficiency, a company needs to understand that the target margin and the composition of the audience are highly interconnected: Targeting specific margins directly defines the income level of your target audience: Decisions such as raising prices or delivery fees can lead to the churn of lower-income users and their migration to competitors. At the same time, being a premium service might imply significantly higher margins, as high-income users generally exhibit better unit economics, as they are less sensitive to price and fee increases and tend to shop with higher average bills and superior commercial margins. Consequently, expanding the target audience, which is essential for boosting orders, primarily hinges on the overall efficiency of business processes: A company with minimal write-offs can avoid substantially raising delivery fees, which in turn helps maintain a broader range of income levels within the target audience. Still, the level of demand and the size of the target audience within each range of target margin depends mostly on the value of the client proposition, which, in this notation, defines the exchange rate and the elasticity of demand to the changes in target margin. Companies with higher shopping costs need to provide a unique and compelling offering to ensure that even affluent customers remain loyal. If a business is more expensive but offers no added benefits compared to competitors, there is no incentive for customers to shop there. While it may seem obvious, it appears that this concept has not been fully leveraged by existing market players. Most of the market players I have tried (with the exception of Yango Deli) currently offer nothing more than super-fast delivery to their customers, as their assortment mostly mirrors that of local grocery shops without any unique categories such as Ready-to-Eat or Hot Coffee. This lack of differentiation places the existing players in an even more challenging position when it comes to navigating the trade-off between future growth and unit economics. Sources: https://techcrunch.com/2022/05/25/getir-the-12b-instant-delivery-startup-plans-to-axe-14-of-staff-globally-and-cut-aggressive-expansion-plans/ https://techcrunch.com/2022/05/25/getir-the-12b-instant-delivery-startup-plans-to-axe-14-of-staff-globally-and-cut-aggressive-expansion-plans/ https://www.pwc.co.uk/industries/retail-consumer/insights/q-commerce-success-not-matter-time.html
