What’s next in e-grocery in Europe? 🛒
At Five Seasons Ventures, we were lucky enough to back two great e-grocery companies in Europe: Cortilia in Italy and La Fourche in France. But far from satiating us, their amazing performance made us even hungrier to invest further in the $2.1T European grocery market. Here are the key findings from our research 🤓
A grocery market led by online, convenience and discount in Europe
This graph from Bain focusing on the French, UK and German market clearly shows that the next 10-year growth is expected to come from discount, online and convenience. The profits generated by these three categories will represent more than 75% of the profits generated by the industry, while hypermarkets are predicted to lose €1.4bn per year by 2030.
New comers entering the European market at full speed with different business models to cater to all customers’ need
The mapping below of the European e-grocery startups shows that everyone wants a piece of the cake! The good news is that online penetration for the $1.2T European grocery market is growing fast (now c. 5%) and that there is space for more than one category and for more than one winner.
The within-minutes players
This category has been flourishing in Europe in the past 12 months with more than €794m raised so far (incl. Getir which started raising earlier). These players are perfectly positioned to benefit from the growth of the online and convenience grocery market (in line with the shifting consumer behavior accelerated by Covid) and their integrated vertical model allows them to offer much better economics at scale (c. 23% CM2). However, they will have to deal with a surge in acquisition costs linked to the growing competition which, combined with their low AOV, will force them to operate with negative margins for a long time. Ultimately, the winners (because there will be more than one) will be the ones that are the best at raising 💰💰💰 and the most technologically obsessed with operational efficiency.
The within-hours grocery marketplaces
Despite the huge success of Instacart in the US, this category has not encountered much enthusiasm from VCs in Europe. Everli’s recent fundraising in Italy made us reconsider the segment. This model has several advantages as it is asset-light and offers three revenue streams (from consumers, retailers and brands). However, as with any marketplace, to make this model work, you need to crack the offer! And this is where it gets difficult as the upside offered to retailers is mitigated and short-term. Retailers want to be able to offer express delivery to their customers but not at any cost. As shown in this article from Bain, margins of orders delivered through “third party pick from stores” are substantially low, not to mention the fact that retailers lose control over customer experience. Once a partner is signed, real difficulties start as the data is not always available and structured. The second big pitfall of this model is the gig economy on which it relies, both from an operational point of view (the onboarding of drivers) and from a regulatory perspective. Now think for just one second that you remove the second problem by not offering the delivery while enabling B2B customers to have more online visibility (given they already have internal delivery capabilities). As always, the US is ahead of us as Mercato just raised $26m on that value proposition.
The farm-to-table model 🐮
The farm-to-table model is very attractive as there are few serious competitors in that space and consumers are ready to pay a premium for fresh and local products. However, the other side of the coin is that this model is much harder to operate than others as fresh food increases costs linked to food waste, pick & pack and delivery. The key to limit these costs is tech and more specifically warehouse management system. The other key to success is to create an integrated supply chain with small producers that normally do not have access to big retailers. Sharing real time demand data with them allows efficiency maximisation, food waste reduction and product freshness improvement. This model, in our opinion, is the most sustainable from an environmental point of view.Very few players have succeeded in that space and our portfolio company Cortilia is one of the few exceptions.
The staples-only players
An alternative not to touch fresh food is not to sell fresh food. This is the strategy of the staples-only player which our portfolio company La Fourche is a part of. The use case which they cater to is the stock up use case (once a month), in contrast to the top up use case (once a week) or the quick trip (once a day/week). Despite not handling fresh food, but only shelf stable products, it remains a difficult business from an operational point of view as everything is done in house and growth is constrained by the size of the warehouse. Some players, like Thrive Markets in the US and La Fourche in France have further refined the business model into a membership club with an annual fee offset by material discounts on every item purchased (imagine Costco, but fully online). The benefit, when the product assortment is focused on organic products, for instance, is to substantially lower the annual budget of groceries for the average family looking to adopt a ‘bio” lifestyle.
The online discounters
For a long time, this model has not generated a lot of enthusiasm as it’s a though business: margins are thin and customer loyalty is low. However, this is compensated by the fact that the total addressable market of these players is much larger as they cater to the largest segment of the market (those for whom price elasticity matters). Being able to source directly from brands and producers is decisive to improve gross margins, as brand building is to boost customer loyalty. MatSmart is also services a very valuable role in reducing the amount food waste in the system and for that they stand out against competition.
Conclusion
Over the last 4 years we have built a conviction that the e-grocery market is only at the beginning of its growth. The multi-trillion demand services by traditional retailer and hypermarkets is moving in one direction only: online. The worst use of the family Saturday mornings is to drive to the nearest supermarket and spend 2 or 3 hours buying items they could order online and have delivered at home. The Covid restrictions made this trade off a necessity and propelled the transition a few years ahead. We are looking for further investment opportunities in e-grocery in Europe where we still see white spaces when it comes to the non-urban areas (whereas the build of the capital went to satisfy the big city demand), to sustainability and circular economy (think of the amount of packaging that could be reduced and the positive impact on the environment), and further convenience and technology (did any one dare to say drone-delivery? well Manna in Ireland did).
