Deliveroo part 2 - So what about groceries delivery?
Deliveroo part 2 - So what about groceries delivery?
Deliveroo delivers for Waitrose. Doubt it’s profitable but it improves the density so helps increase drops per rider overall. Wouldn’t be surprised if they are start doing some form grocery delivery.
Why doesn’t $TKWY have exactly the same opportunity to sell new categories through their last mile infrastructure?
Deliveroo is also trailing grocery in the UK. Why isn’t Jitse increasing density with grocery delivery? Wouldn’t it be an important piece to reduce the total cost of delivery for food in the long run?
Investors have always debated whether online food delivery platforms should do groceries delivery as well (RE:Jefferies). Frankly, I don’t understand why. Jitse has a clear and simple explanation as to why he doesn’t like groceries – there is no margin in it. Of course, he could do a better job at explaining his point of view. In this post, let me take a stab at elaborating what he meant by that.
Online groceries delivery is a small market
First off, how big is the grocery market?
For groceries delivery, each courier takes more time to fulfil the order (picking and assembling the basket of items), which leads to lower drops/hour, and hence a higher cost of (groceries) delivery as compared to food. To compensate, the basket size per order for groceries should hence be higher than food. For simplicity, let us assume that the basket size is twice that of food delivery.
Deliveroo mentioned that their groceries delivery category is 10% of its UK revenue. Based on our above logic, this should translate to ~5% of UK orders. That translates to about ~350,000 monthly orders in Dec 20 using the data $TKWY provided us.
350k monthly orders sound amazing… until you compare it with the overall UK food delivery market — 36 million monthly orders, which makes online groceries just 1% (which probably is the peak of its demand) the size of the food delivery market. Yes, the numbers used above might not be precise. Maybe it’s 2%, or maybe its 4%, the point is that the market is insignificant. Now, why should $TKWY allocate its resources to go after this market, especially when it just grew monthly orders by 3 million in December?
On-demand groceries delivery is unsustainable and not competitive
Not only is the market small, the way Deliveroo does it is unsustainable and not cost competitive to existing players.
The idea of online grocery delivery is not new. UK has one of the highest groceries ecommerce penetration in the world (h/t Ben Evans), and this was before Deliveroo entered the market – i.e. Deliveroo isn’t offering anything new. However, the way incumbents done it is always on a scheduled model (as compared to Deliveroo’s on-demand model).
Here’s how a typical online grocery delivery process in the past looks like:
Its Sunday and groceries at home are running low, I look up Ocado/Tesco to order groceries for the coming week
Ocado/Tesco received my order from their warehouse and assemble it
Come the scheduled delivery day, Ocado/Tesco would pack a bunch of these pre-assembled orders (say 20 baskets) into the delivery van, which would deliver the goods in one single trip
Note: Ocado automates the picking process while Tesco picks the item manually in a dark1 warehouse
As the picking process is more efficient (automated/optimize for picking), and deliveries are batched (point-to-multipoint delivery), the cost/order is actually fairly low. In fact, there are instances where purchasing via Ocado cost you lower than buying it directly from the store. The scheduled model works.
However, Deliveroo does it on an on-demand basis – i.e. they begin the grocery delivery process the moment you order it from their app. This model has no economics of scale – once the customer orders, the allocated courier has to rush into the grocery store, build a 25-item basket, queue to check out, before cycling like a madman through the dense city area to deliver it to another person (60% of people who orders through Deliveroo expects goods to arrive as soon as possible / instantly2). This is of course, not a sustainable way to operate (especially for the courier’s heart). My estimates put Deliveroo to be ~20% more expensive, at the least.
Another thing. The range of items offered on Deliveroo’s platform is ridiculously limited (couple hundred of items on the app vs. tens of thousands on Tesco and Ocado), and often goes out of stock. What’s more annoying is that Deliveroo tend to substitute the item that is out-of-stock with another item.
So why do people still use Deliveroo when it is more expensive and offers way less.
The prevailing thought is that people really want their groceries on-demand, which I believe is a tenuous argument. Purchasing grocery is not an emotional purchase like food. Most people do not all of a sudden think: “Oh man, I really would love some milk and eggs!”, then heads to the nearest grocery store to purchase them. People plan around it — i.e. having weekly recurring Ocado orders.
Here is why I think people use Deliveroo — You simply can’t get groceries from Ocado or Tesco UK right now because they are at maximum capacity (Link 1, Link 2). People are using Deliveroo because Ocado and Tesco UK aren’t available at all (i.e., no delivery slots).
Putting aside them being the delivery filler for Ocado and Tesco UK, another viable rationale could be that Deliveroo is serving a (really) premium market segment – A segment that really do not want to wait for their groceries, or can choose not to go out at all and risk getting the rona. They could be much less price-sensitive – I know friends in the banking sector that got groceries credit instead of meal credits during WFH, which I bet are funnelled (in the short-term) to Deliveroo’s pocket.
It is easy for $TKWY to replicate Deliveroo’s model
Alright, let’s assume for instance that there are a bunch of people in the UK that really want their milk and eggs, and are willing to pay a big premium for that service.
So what? Jitse can probably replicate Deliveroo’s model with a snap of a finger.
The top 5 groceries outlet in the UK represents 80% of the market (Link), many of whom already offer their own delivery service. Jitse could simply work with these 5 or 10 stores and get all their inventory. In fact, these big guys will be way happier as $TKWY has 100% coverage. Deliveroo doesn’t.
Unlike Deliveroo, which has to allocate tremendous amount of resources to acquire 10,000 independent restaurants in the UK (many of whom derive a lion share of their revenue from $TKWY), $TKWY goes after a very concentrated and sophisticated supplier base (the grocery retailers) that gets a small % of their revenue from on-demand delivery, and are more than happy to have competition in the on-demand grocery delivery space.
Lastly, if it ever becomes profitable, the retailers will simply renegotiate to capture a larger piece of the pie. Why? Because they own the key asset here: inventories. Mcdonald’s UK has roughly £1.8 billion sales, or less than 5% of UK food service market (~£50 billion). But the fact that it is able to exert high bargaining power against the platforms tells us something (Link 1, Link 2).
Now, think of the bargaining power grocery retailers have. The top 5 players in the UK collectively make up ~80% of the market. To make things worse, Deliveroo is really negotiating with 1 player (maybe 2) in any particular city. Why? Grocery retailing is all about the local network effect, there is likely only 1 grocery store (2 at max) in any given city. This is unlike dealing with restaurants, where there are likely to have about 100 - 200 restaurants in any given city.
Why groceries?
Now let’s play the devil’s advocate and think through some reasons why Jitse might move into the groceries market:
He has enough logistical capacity now, and going to groceries is no longer much of a distraction
The investment community somehow falls in love with the idea and he wants to break Deliveroo’s narrative
He is using it for customer acquisition, which is likely why Deliveroo is doing this anyway
Back to Deliveroo
To my dear investors that are evaluating Deliveroo, please be mindful that 10% of its revenue and a higher % of its GMV is basically profitless, and should fade. It is simply a distraction from what really matters. As a $TKWY investor, I am happy with Jitse decision to focus on what truly matters.
I’m glad there are actually people reading my stuff (honestly thought nobody cared), and have received interesting inputs. Also, thanks to those that sympathize with my student loans situation. I’m adding a donation button below. If you find value in my work, help out by buying me shares in $TKWY (or wine as I write these posts at night with several glasses of wine).
Links to other related parts:
Deliveroo part 4 - Hell is coming. Gross profit might decline by more than 50%
Deliveroo part 3 - How did Deliveroo managed growth in the past
Links to other related companies:
Dark warehouses = warehouses optimized for picking and not to maximize consumer basket size
CMA report, page 208