Technical Support

Grocery retailers are facing a tougher time, and they’re turning to tech startups for help.

 

🕰 Recap

  • Grocers like Tesco saw their revenue jump when the pandemic took hold and consumers rushed for its essentials.
  • Online retailers benefited too, with Amazon reporting better-than-expected results through 2020.
  • But that had come to an end by last month, when grocery giant Walmart announced a weaker-than-expected update.
  • And on Wednesday, DoorDash announced plans to team up with Canada’s biggest grocery chain.

 

✍️ Connecting The Dots

Grocers were relative winners throughout the pandemic. Demand for their essentials – food, toiletries, and anything to keep kids occupied throughout lockdown – shot through the roof and boosted their revenues. And while the pandemic also brought higher costs in the form of extra hiring and measures to keep shoppers and workers safe, investors eventually got on board: they’d sent the shares of the likes of Walmart, Tesco, and Amazon soaring by the end of 2020.

All that’s changed: higher pandemic-related costs are falling away, sure, but grocers’ product costs are rising, putting pressure on their profits. And it’s not as simple as raising the prices they charge customers, who are struggling with record high inflation themselves. Consider too that the grocery industry is fiercely competitive: even giants with billions of dollars worth of sales generate just a 4% operating profit margin on average. Every dollar matters, and there’s always a rival ready to undercut a retailer’s pricing to win over their customers.

So teaming up with tech and logistics platforms makes sense for grocers. In Europe, the likes of Deliveroo, Getir, and Gorillaz are taking customer orders, passing them onto grocery stores to prepare, and then sending couriers to deliver the orders – usually all in under 30 minutes. In North America, it’s largely the same process, with DoorDash and Instacart leading the charge, though couriers may bag up groceries themselves. As for the grocers, the hope is that it brings in more sales and provides a new avenue for growth that’ll keep investors on side.

 

🥡 Takeaways

1. More sales are great, as long as they’re “incremental”.

DoorDash, Instacart, and the rest pitch their services as a valuable source of “incremental revenue” to grocers – that is, sales grocers wouldn’t have otherwise made. And since people who shop from the comfort of their homes don’t have to worry about carrying their shopping home, they’re more likely to buy more than they otherwise would. All grocers have to do, they pitch, is pay a commission on each sale. But the risk is that these sales won’t be incremental over time: online grocery sales were 10% of the market last year, and they’re expected to be 20% by 2026. At that point, the logistics platforms will begin to act as a revenue tax on grocers, charging them for sales they’d have otherwise made fee-free and putting more pressure on their already-narrow bottom lines.

2. The business models aren’t as attractive as they seem.

Tech logistics platforms seem promising when you consider that the US grocery industry is worth as much as $1.3 trillion. But that market slims down real fast when you’re at the bottom of the food chain: Instacart, for instance, picks up groceries for delivery after the retailer has stocked the shelves and after it’s paid its workers. In other words, after the retailer’s made its notoriously low profit. That leaves Instacart with a market worth just $50 billion, and makes it difficult – if not downright unlikely – that it’ll be able to earn enough profit to justify even its now-lower valuation.

 

🎯 Also On Our Radar

SoftBank is thinking about where to list British chip designer and former stock market darling ARM Holdings in its forthcoming initial public offering (IPO). Ordinarily it’d be a pedestrian decision, but investors are watching the decision closely given that IPOs have dropped almost entirely off the map in the UK – not entirely surprising given its recent flops. UK-focused investors will be hoping ARM lists in London despite this recent track record, and that the move will encourage more companies to take the plunge.

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