Quick commerce or operational excellence as a business model

While many industries suffered immense sales losses during the Covid-19 crisis, supermarkets and discounters posted record revenues. However, disruptive competitors lurk here and can massively change the ecosystem.

A cutthroat competition is raging in the food trade. The traditional, stationary trade, where the margin is only about two percent, is being squeezed by delivery services, especially in large cities. A rapidly growing number of providers are competing to win customers with the promise of super-fast delivery, also known as quick commerce.

Grocery delivery company Gorillas, for example, promises to deliver to customers within 10 minutes and online food ordering business Delivery Hero, is returning to Germany with the promise of bringing food to customers within seven minutes in Berlin and some other cities.

Huge hype has arisen around these fast delivery services. Delivery Hero has been listed in the DAX segment, Germany’s primary stock index, since 2020, although they have yet to show any profits. Grocery providers like Cajoo or Gorillas have reached a unicorn valuation in a very short time while Ocado in the UK has a higher stock market value than supermarket giant Tesco.

The differentiation of many providers happens through speed advantages. The business model is essentially based on the superior operational excellence of the delivery companies. How should the business processes be designed in order to fulfil the delivery promises on the one hand and be able to offer the services profitably, at least in the medium term, on the other?

The suppliers are mainly technology companies that are perfecting their core processes. On the one hand, the customer's view (i.e. the touchpoints with the customer) must be very well understood. Many providers permanently measure the satisfaction of their customers and achieve a Net Promoter Score far above the values of stationary retailers.

On the other hand, the processing of orders has to be extremely efficient in terms of time, costs and quality. In principle these providers are powerful process engines packaged as delivery services.

The core problem of almost all delivery services is that they are still taking losses with their services. The promise to deliver in 10 minutes or even faster tends to result in too many drivers being assigned and thus the personnel costs unbalance the cost structure. Even in countries where drivers are paid per order, and often earn very little per hour, the business remains in deficit.

To counter this, the providers try to attract many customers in a very narrowly defined inner-city area, thus reducing delivery costs with short distances. Most providers rely on many micro-depots (hyper-local ‘dark stores’) to keep distances short. However, this cutthroat competition also leads to an increase in marketing costs and some suppliers now waive a fixed delivery fee to be more attractive to customers.

It is clear that forecasting demand is of elementary importance in estimating the number of drivers needed as accurately as possible. Machine learning algorithms play a central role in considering all relevant factors that are influencing demand.

The basis for learning from past data is the monitoring of all order processing, also known as process mining. Only if one understands which parameters, including time, day of the week and temperature, influence the ordering behavior and the delivery times can one learn from this and adapt and optimize processes.

Other suppliers put less focus on super-fast delivery and more on a large range of goods. This requires large warehouses that also have to include different cooling zones. Ocado, one of the few delivery services that operate profitably, offers significantly more choice than classic supermarkets, with over 50,000 products, and relies on automated picking and packing using robots.

Another food delivery company, Picnic, follows an approach that always delivers to the same street at the same time, meaning customers have hardly any time flexibility here but are rewarded with better prices. Picnic achieves seven to 10 deliveries per hour through shorter routes compared to a maximum of three deliveries by many competitors.

Traditional retail has not remained inactive. For example, German supermarket Edeka has secured shares in the startup Picnic and ReWe, another German supermarket, is in discussion with the delivery startup Flink.

Brand manufacturers are also trying to establish a direct line to the customer, for example, global food production company The Oetker Group, has taken over the beverage delivery service Flaschenpost. This takeover suggests that the threat has been recognized, as it is obvious how important platforms have become in other industries where customer relationships are being transferred to platform providers, meaning customers are more likely to remain loyal to the delivery service than to the retail company. This is certainly not the future that traditional retailers want.

If we assume that the customer desire for delivery is a long-term trend, in the end operational excellence, or the ability to optimally manage processes and adapt them on demand, will decide who will emerge victorious from this competitive battle.

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