By Pat Schuetz, Associate Director, MorrisAnderson & Associates Ltd.
While the COVID-19 pandemic wreaked havoc on many industries in the global economy, e-commerce usage among everyday consumers skyrocketed during this unprecedented time. The increase in online purchasing was a direct result of the pandemic, as consumers opted to stay at home and rely on the increasing number of e-commerce providers to source, procure, and deliver their goods.
Pandemic e-commerce purchases ranged from everyday household items, such as toilet paper, paper towels, and laundry detergent, to retail items, such as electronics and clothing, to large one-time luxury purchases, such as fitness and music equipment. One of the largest beneficiaries of this surge in e-commerce activity were operators within the now booming online grocery delivery industry.
Grocery delivery services emerged in the early 1980s, as phone-operated delivery services such as Grocery Express (1981) attempted to break the mold and satisfy consumers’ desire to eliminate weekly trips to the grocery store. This continued into the mid-1990s, as the likes of Webvan (1996) and HomeGrocer.com (1997) launched their platforms. Webvan and HomeGrocer.com collectively raised more than $1.2 billion in funding; however, after consolidating, both were shuttered in 2001 after having built expansive warehouse fulfillment centers prior to establishing a dedicated customer base. Throughout this time frame, the only surviving entrant was Peapod (1989).
After the initial emergence and subsequent failure of many of these grocery delivery services, the industry faded in consumers’ rearview mirrors, as many venture capital and private equity investors shunned the concept and industry as a whole.
Fast-forwarding to 2010-2020, advancements in technology in combination with the increased accessibility of mobile applications led to the reemergence of online grocery delivery services. Consumers not only became accustomed to ordering products directly through a mobile device but also came to expect near instant gratification. New entrants, such as Gopuff (2013) and Instacart (2012), capitalized on these trends, becoming recognizable brands and establishing significant market shares in the process.
Prior to the pandemic, these companies were experiencing sustained growth via an increasing customer base. Delivering products in a matter of minutes or at a preset time appealed to consumers. It removed the hassle of a traditional trip to the grocery store: dealing with traffic, fighting for a parking spot, navigating a crowded store during an after-work rush, finding that items on their list were out of stock, etc. As the pandemic intensified, the industry grew exponentially as new consumers flooded into the space.
Industry revenue has grown dramatically in recent years, increasing from less than $5 billion1 in 2011 to $27 billion in 2020 (Figure 1). The growth from 2011 to 2019 was largely driven by the spread of mobile devices, e-commerce applications, and a widespread increase in online shopping. From 2011 to 2020, industry revenue grew at a compound annual growth rate (CAGR) of 21.4%. However, revenue increased nearly 73% in 2020, as the pandemic accelerated the shift to grocery delivery services.
The number of enterprises also increased dramatically during this time frame. From 2015 to 2020, the number of enterprises grew by 19.3%, from just under 1,800 to more than 4,200.
Products typically purchased consist of “other foods,” such as bakery products, pasta, cereals, canned foods, and other nonperishable goods, and “nonfood items,” like paper towels, laundry detergent, and cleaning supplies (Figure 2). Consumers remain hesitant to purchase fresh produce or meat through these services, as a typical shopper prefers to inspect and select those items personally.
Additionally, while millennials are typically associated with online shopping, they only represent 21% of the overall market, while Generation X and baby boomers lead, at 45% and 28%, respectively (Figure 3). However, as the millennial demographic matures and begins to generate additional disposable income, they are expected to make up more of this market.
Despite the grocery delivery industry’s rapid growth, it still accounted for less than 5% of total grocery sales of $656 billion2 in the U.S. in 2020. However, with the surge in popularity and larger operators establishing themselves in the space, online grocery delivery services are anticipated to transition from small fish in a big pond to significant influencers of the industry.
Industry revenue is projected to increase from $27 billion in 2020 to $35 billion in 2025 (Figure 4). Currently only 23% of U.S. adults have made a general food purchase online, but as consumers become more accustomed to the trend and more comfortable relying on third parties to purchase basic food items on their behalf, this number is expected to increase. Additionally, as large players like Amazon and Walmart continue to develop their own offerings, their immense customer bases will filter into the increasingly popular online grocery delivery service.
Operators in the online grocery delivery service industry handle operations in one of two ways. They either source products directly from retail grocery stores or utilize independent warehouse fulfillment centers.
Instacart, for example, has strategic partnerships with more than 500 individual retailers from which it sources products. The company relies on employees, who are deemed “in-store” or “full-service” shoppers, to select, purchase, bag, and deliver items directly from store shelves. The retail partnerships are instrumental and were key during the pandemic. These partnerships attract consumers who are dedicated customers of a particular retail store and provide them with the ability to have their favorite items delivered directly.
Instacart’s in-store shoppers work at a particular retail location where they are responsible for receiving the orders, retrieving items from the shelves, and staging the order for delivery. In-store shoppers are part-time employees, work full shifts at a respective location, and do not perform any delivery services. Instacart’s full-service shoppers, in contrast, are classic “gig workers.” They are responsible for driving to a location after receiving an order, selecting and purchasing the items, and delivering the order to the consumer.
Gopuff, on the other hand, relies on more than 400 individual “dark stores,” which are fulfillment warehouses that contain more than 2,500 products and range from 8,000 to 12,000 square feet. Gopuff employs nearly 10,000 workers, who are either staffed at their warehouse where they fulfill orders or are drivers who pick up and deliver orders from the warehouse to the customer.
Amazon Fresh employs both models. After acquiring more than 500 Whole Foods locations in 2017, Amazon Fresh is capable of sourcing products directly from these retail locations or picking up non-Whole Foods branded grocery items from its fulfillment centers.
External competition to the industry is from classic retail grocery stores. Competition in the industry is based on price, product selection, delivery fees, and time. Convenience is key.
Capital Raising Boom
Since the beginning of the COVID-19 pandemic, more than $14 billion of capital has been raised in the grocery delivery industry, with more raised in the first three months of 2021 than in all of 2020. This surge in investment, particularly in the early months of 2021, can largely be attributed to the impact of the COVID-19 pandemic, as investors saw the opportunity available within this space as consumers became more reliant upon these services due to mandated lockdowns.
The investment boom in grocery delivery services isn’t limited to the U.S. Particularly in Europe, a number of new start-ups have emerged and have raised large amounts of capital. Collectively, these eight new European startups have raised more than $2.3 billion since November 2020, according to Crunchbase.com:
- Getir, a Turkish-based delivery startup founded in 2015 and promising 10-minute grocery delivery, raised $550 million in Series D funding in June 2021, bringing its valuation to $7.5 billion; $300 million Series C funding in March 2021; and $128 million in Series B funding in January 2021.
- Glovo, founded in 2015 and based in Barcelona, Spain, is a courier service that purchases and delivers restaurant take-out meals and grocery pick-ups, to customers through a mobile app. The company raised 450 million euros ($618.9 million) in Series F funding in March 2021, bringing total funding to $1.2 billion over last 12 rounds.
- Gorillas, founded in May 2020, is a Berlin-based grocery delivery provider. It raised $290 million in a March 2021 Series B funding round, following a $44 million Series A funding round in November 2020.
- Flink, founded in late 2020 and based in Berlin, is an on-demand grocery delivery services operating through dark stores. It raised $240 million in Series A funding in June 2021.
- Zapp, founded in 2020 and based in Kent, UK, is another dark store operator, but one that employs all riders directly as opposed to relying on the gig economy. The company raised $100 million in a March 2021 Series A funding round.
- Dija, founded in November 2020 and based in London, provides grocery delivery services to customers in under 10 minutes. The company raised $20 million from Blossom Capital in December 2020 without even being incorporated, based on the strength of its founders, who had backgrounds/experience at Deliveroo and other “logistics ventures.” In early August, Dija was acquired by Gopuff. Terms of the deal were not disclosed.
- Jiffy, also founded in November 2020 in London, is an online grocery and household essentials delivery service operating through dark stores. The company raised $6.6 million between two seed funding rounds in March and April 2021.
- Weezy, founded in 2019 and based in London, enables users to have favorites from supermarkets delivered. The company raised $20 million in a January 2021 Series A funding round.
With the industry swimming in capital and considering the increasing number of new entrants in the space, consolidation is inevitable. The amount of fresh capital combined with the number of new start-ups begs an additional question: Will any of the European newcomers, particularly those that have achieved astronomical valuations, be capable of competing with the likes of Instacart, Amazon Fresh, and Gopuff in the United States?
Risk for Retailers
Instacart and other operators that partner with existing brick-and-mortar retail stores provide a valuable service by opening the door to a digital storefront that most retailers lack the capital to create or maintain. However, while this opportunity is large, there are lingering risks for these retailers that could be significant in the long term.
By partnering with Instacart, retailers risk losing control of their customer relationship. Eventually, Instacart will accumulate as many retail partnerships as possible and search for new avenues of revenue growth. With the immense amount of customer data the company has at its disposal, across multiple shopping categories, it is not out of the realm of possibility to consider Instacart creating its own independent fulfillment centers. While Instacart has stated that it has no plans to cause disruption by becoming an online retailer, many are skeptical.
Therefore, it is imperative that retailers that partner with Instacart make an effort to maintain their customer relationship. They can do so by actively working with Instacart to customize their offerings and leverage consumer data to adapt to preferences accordingly.
It’s likely that retail grocery operators will be able to co-exist with third-party online grocery service providers in the near future. As the likes of Instacart, Gopuff, and Amazon Fresh continue to expand their reach and the adoption of mobile e-commerce applications continues, smaller operators will be able to partner with these newcomers and generate additional revenue outside of their core customer base.
However, the long-term path remains unclear. If operators do not adapt and recognize the influence these newcomers have and will continue to generate, they risk losing their dedicated customer base. Further, as Instacart and Gopuff continue to generate new users, the immense amount of customer data they collect will only grow, increasing the risk that they will be able to displace the traditional grocery store industry.
Additionally, a keen eye should be kept on the emergence of new start-ups, increasing valuations, and capital raises. As excitement around the industry grows, consolidation seems inevitable, which will further impact the current landscape.
1 Hiner, J. (2020). IBISWorld Industry Report OD5085, “Online Grocery Sales,” retrieved June 10, 2021.
2 Fernandez, C. (2020). IBISWorld Industry Report 44511, “Supermarkets & Grocery Stores in the U.S.,” retrieved June 10, 2021.About The Author
Pat Schuetz, an associate director at MorrisAnderson, uses his extensive background in the valuation and accounting industries as a basis to structure practical solutions through comprehensive financial analysis. He assists clients by providing a broad range of the firm’s financial and operational advisory services, including performance improvement, turnarounds, workouts, litigation support, and insolvency services and wind-downs for distressed and bankrupt companies. Schuetz previously was an associate at Stout, where he was a member of the valuation disputes team.