Authors: Jordan Allan and Jonathan Curtis
Q-commerce has never failed to entertain - headline after headline has highlighted its tempestuous nature. However, the past few months have seen stormy skies gather over the space.
Sentiment among both investors and consumers is stark (read our latest consumer sentiment survey). With venture capital money drying up, startups are pivoting rapidly towards a focus on profitability.
Getir, GoPuff and Gorillas have cut large swathes of staff with the latter also retreating from half of their markets are courting major competitors over potential mergers. Another big player, Jiffy, has withdrawn from operating its own dark stores to focus on selling its software.
During the height of the pandemic, startups surged toward unicorn and even decacorn status; taking them outside the grasps of both big retail and private equity for acquisition. Some of the froth may have come off these valuations now, if an investor can be persuaded that a route to profitability exists, there may be deals to be done.
Have no doubt that this rollercoaster of activity will continue throughout 2022 and beyond.
Despite considerable doom and gloom, demand for rapid grocery delivery does exist. With an estimated 82 million transactions and an average basket size of £29.50, we expect the UK q-commerce market in 2022 to be worth >£2bn.
Source: PwC Analysis (April, 2022)
With a rapid pivot toward profitability and consumers looking to tighten their purse strings this estimate may dampen somewhat...
PwC analysis suggests that 42% of UK adults have used a q-commerce service in the past year and that 83% of those intend to use it again at least ‘every so often’. Of those who have never used a q-commerce service (or hadn’t in the past 12 months), 27% cited that they preferred shopping instore and 19% claimed that delivery was too expensive.
What is your awareness of q-commerce? If you have used the service do you intend to use it again? If you haven’t, what dissuaded you?
Source: PwC Analysis (April, 2022)
And it’s worth noting who is making use of q-commerce. While the largest segment of users are younger and more affluent consumers, we are seeing cut through at all ages and income groups. Which is encouraging (or not) for both premium and discount retailers alike.
Penetration and awareness of q-commerce by demographic
Source: PwC Analysis (April, 2022)
The three groups in the race to turn q-commerce into profit…
Q-commerce players fall into one of three categories, each with a different operating model, motive, and path to profitability.
Source: PwC Analysis
Startups
Offering the quickest delivery times, the startups use dark stores deep in high-density residential areas to deliver grocery orders in 10 to 25 minutes. They use their own platform and network of full-time employees (as opposed to the gig economy - however, this is under review by a number of players). Despite challenging profitability prospects, venture capital and other investors have previously been eager to invest. Over $7.6bn has been poured into the four largest western q-commerce startups (GoPuff, Getir, Gorillas and Flink); funding entry into new markets, tech development and customer acquisition.
Source: Crunchbase (in reference to the >$7.6bn)
Aggregators
Deliveroo and Uber Eats are clear front runners in the market; 88% of q-commerce consumers have used both Deliveroo and Uber Eats for rapid grocery delivery in the past year. These players partner with grocers and retailers to take orders on their platforms which are then wired to their partners who assemble the order ready for collection and delivery by the aggregates’ delivery rider to the customer, usually in 20 to 60 minutes.
Source: PwC Analysis (April, 2022)
Retailers
In addition to partnering with aggregators, larger grocers have launched their own q-commerce platforms (e.g. Tesco's Whoosh, Sainsbury’s Chop Chop) typically offering delivery in c.60 minutes. However, despite their national infrastructure, the route to profitability for these players is far from clear. It has only been in recent years that standard multi-day eGrocery has become profitable, predominantly down to growth in average basket values (upwards of £100). This is not possible in the q-commerce space due to the type of customer mission and weight/volume constraints on riders’ bikes.
Huge potential awaits… but only if players can find the path to profitability
While stormy skies are gathering (especially for the startups), there is substantial demand for q-commerce. The sector will persevere and continue to grow over a longer term horizon.
The major investment in customer acquisition (e.g. large discounts on first orders) alongside consumers returning to more chaotic on-the-go lifestyles post-pandemic may leave many consumers very well hooked on the convenience of sub-60 minute deliveries.
For startups a period of accelerated consolidation will likely occur among small and large players alike. If they can endure the macroeconomic challenges of the coming years there will be space for two or three players per market. Alongside this, startups will turn toward partnerships with major grocers to gain access to their existing national infrastructures (e.g. Tesco and Gorillas, Jumbo and Gorillas, GoPuff and Morrisons, Flink/Cajoo and Carrefour). Whoever survives will be rewarded with a less congested marketplace with more legitimate profitability prospects. Six drivers that may propel players into profitability:
- Strategic retail partnerships in each active geography
- Substantial investment in technology and automation
- Operational excellence to reduce the cost base
- Franchising to drive organic growth and achieve scale
- Fully leveraging media and data estates
- Driving loyalty to reduce switching
Aggregators are sitting prettiest as it stands. With the easiest path to profitability (i.e. accurate cost to serve plus markup) they will likely withstand the coming storm best due to their very light capex business models. With Uber Eats and Deliveroo active in q-commerce the major question mark is over whether Just Eat will join the game and dilute both revenues and profits.
Grocers with their own dedicated q-commerce operations will continue to absorb losses in order not to lose revenue. Big grocers like Tesco and Sainsbury’s will perform well given their national infrastructure. Ocado may well be able to pull away with the market via their more tech enabled Zoom proposition if they can scale it. Also pay heed to Amazon who are currently relatively quiet in this space and with an 11% stake in Deliveroo they’re likely biding their time in the wings to see which way the wind will blow.
Technology innovation will be a key driver over the mid- to long-term for all players. Improvements in automated fulfilment and autonomous delivery, (i.e. drones and bots), will reduce costs and dependency on scarce labour.
We have followed the q-commerce space closely for some time, talking with both retailers and investors in the space. Get in touch for more detail on the challenges and opportunities that we see facing players in this rapidly evolving market.
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