D2C, robot warehouses, Picnic & start ups, death of 1st generation pureplay, micro players (2/3)

(IV) Small online grocers try social media, D2C, marketplaces

Smaller online grocers are also quite active. This includes attempts at selling via social media, subscription models, and D2C models. Especially in Asia, social media selling has taken off. The health & beauty category might lend itself best to this in conjunction with influencers. Many FMCGs are buying digital businesses to jump on the D2C band waggon. (Unilever/Dollar Shave club, Graze, Mars/Foodspring, Nestle/tails.com). However in the greater scheme of things, most of this remains quite small scale.

Right now many online fashion players (H&M, Zalando, Asos etc) are trying to become marketplaces and platform players for fashion. Some smaller niche food operators are trying to replicate a marketplace in food. In a way this mirrors the organic box schemes, only on a much bigger scale. We are not convinced this will be successful. These newish cooperations are unlikely to become as big as in the clothing sector. The reasons are obvious, much lower margins and average price points of food product than in fashion and issues around shelf life and storage.

(V) Tech – the robot warehouses – mini fulfilment centres or out of town sheds?

Innovation is coming from two other angles too. A new breed of tech players are trying to crack online grocery. Both – service provider and online grocer – claim to be tech companies first.

New warehousing services providers such as Takeoff or Alert/Alphabot are offering new solutions. These companies bet on micro fulfilment centres on store premises and could be seen as an upgrade of the Instacart offer.

We see a battle looming between micro fulfilment centres and the Ocado solution. The new start ups are attacking the weak spots of the Ocado robot operated sheds model. These include set up costs, set up time, large space requirements and an inability to serve rapid/rushed deliveries. In a way this battle follows on from the one raging between home delivery and click and collect/drives. A relatively stable equilibrium will emerge only after a couple of years and the market finding a mixed solution. For now grocers have Instacart and the various clones as a bridging solution to this future.

In our view Amazon’s robotics are a better solution than Ocado’s Hive. Ocado stores too much air in their pods (due to standardised sizes of the bins) and the sheds are too big and too expensive. Moreover should market demand change, it is not easy to see how these sheds could be used for something different.

(VI) New tech entrants like Picnic and start ups

The other challenge in online grocery comes from online grocery start ups such as Picnic. The company focuses on new customer journeys (app only) and new logistics models. Picnic is pioneering a new model – by radically reducing delivery time/window choice for shoppers and operating a milk round principle based on AI and machine learning. In exchange for reducing delivery options these new start ups offer free deliveries and great reliability.

The concept of reducing choice is also explored by new start ups in the D2C space. These companies try to reduce range choice by focusing on niches such as health & beauty, CBD products or sustainability. This approach, currently employed by Move and Hungryroot, is very difficult to execute and scale. And – as the historic record suggests – often doomed to failure (see Brandless).

(VII) death of the first generation pureplay, rise of the micro players

Another reading of the evolution of online grocery suggests that we have entered a new phase. As the major players have moved from in store picking to dark stores and robot operated warehouses, there has been a separation between well capitalised grocers able to afford a multi and omni channel transformation and those who were not. (The latter group have had the recourse to Instacart like operators).

This means two things: the big beasts have defended their turf reasonably well. Amazon is not nearly as dominant in food as in other categories and it’s still unclear where Amazon is going to end up in grocery.

Secondly, in many cases, the days of the first generation pure plays look numbered. Leshop in Switzerland is treading water, Peapod is being shut down, FreshDirect has been struggling, some of the smaller scale German online players have disappeared (Gourmondo, allyouneedfresh). Even Ocado is focusing on becoming a service provider – despite the M&S tie-up.

This could mean that the online grocery space is fragmenting into even smaller product category niches. Examples for a fragmenting in online grocery would be (micro) niche specialists only offering one product category. This includes coffee/tea (blue bottle) or the “ancient” MyMuesli and other D2C models for proteins/meal replacement such as Huel/Soylent. Then again, as growth rates are so strong and forecasts still get progressively widened, there will be growth outside the niche too.

A multitude of standardised ecomm platforms to establish and build a business on top will help micro players and new entrants. This in itself will drive greater niche and fragmentation and innovation. That said, at least in non food this space is now increasingly crowded and growth hard to achieve. (Ask any Amazon seller and their experience of competing with Chinese companies on the platform).