How much is too much when investing in grocery delivery?

Investors have plugged billions into grocery delivery startups this year — and that might not be as bananas as it seems.

Nicolas Colin

By Nicolas Colin

The year 2020 saw a spectacular acceleration in the deployment of venture capital in European startups, with more than €40bn invested according to Atomico’s State of European Tech report. No sector, however, has inspired as much interest lately as grocery delivery — whether it’s online supermarket players such as Oda, Rohlik and Farmdrop, or the 10-minute convenience grocery players such as Gorillas, Weezy, Dija and Getir. Over the first quarter of 2021 alone, literally billions of euros have been invested in European startups serving this particular market.

Some of this is just how the startup world works. Once a sector is deemed hot, the prophecy is self-fulfilling: more founders decide to jump in; more potential customers realise they have access to a new, useful (and cheap) product; more investors want to secure exposure to what appears to be the next big thing; in turn, that inspires even more founders to jump in; and so on and so forth.

But as far as grocery delivery goes, there’s also a long experience curve whereby VCs can feel they’re on firmer footing while deploying those billions of euros.

History lessons

One interesting precedent is ride-hailing. A long time ago, when Uber was on the rise, there was the idea that it would become a global, dominant business — an app that would be to mobility what Google is to search and WhatsApp is to messaging. But we know things turned out differently: Uber called it quits in China (by selling to Didi), southeast Asia (by selling to Grab) and Russia (by selling to Yandex). It had numerous regulatory problems all across Europe, and then had so many PR-related problems in the US that its local competitor Lyft staged a comeback and became a strong contender again. Today, Uber is still around, but it’s far from being the global juggernaut that some envisioned back in the day.

“The network effects in a local, tangible, labour-intensive tech business are never enough to compensate for the many frictions, obstacles and other negative aspects of operating such a business.”

What’s the lesson from a grocery delivery standpoint? Simply that the network effects in a local, tangible, labour-intensive tech business are never enough to compensate for the many frictions, obstacles and other negative aspects of operating such a business. Therefore it’s difficult for one player to take most of the global market, and as a result there’s room for many, many startups across the globe. National or local markets will be home to different companies. And in each of these markets, even the dominant player will have to coexist with both domestic and foreign competitors.

Another precedent is meal delivery. This is more recent and there are lingering doubts as to the ability of players in this field to reach profitability. But we’ve learned two things. First, at some point there will be consolidation, whereby everyone, whether acquirer or target, can generate liquidity (the latter by way of acquisition, like Grubhub, and the former by going public, like DoorDash). And second, even once the market is consolidated, there’s still room for many players, including those specialising on different markets (think Uber. Eats focusing on dense cities while DoorDash thrives in suburban areas in the US) and those embracing different business models on the same segment (which, by the way, is difficult in ride-hailing because it’s so tightly regulated — but in meal delivery, there’s Deliveroo vs. Just Eat). 

The fact that there’s room for many successes is what VCs have in mind as they invest in grocery delivery startups. From one firm’s perspective, at best, one of those startups will become the Uber of the sector: a strong brand with operations in several countries. A mid-range outcome would be the startup securing a dominant position in their domestic market by kicking out foreign contenders or by nailing a niche by way of clever strategic positioning, like HungryPanda. At worst, the startup will be successful enough at growing its business so as to become an acquisition target when the market starts consolidating, as when the likes of Delivery Hero and Lieferando were acquired by Just Eat Takeaway in Germany. This might be what happens to some of the more geographically-focused fast grocery delivery startups, like Blok in Spain or Cajoo in France.

If valuations are inflated and it’s a bubble, then when it bursts, more than one investor will lose their shirt.”

Still, are the mind-blowing valuations justified, especially considering the fact that such startups are not exactly differentiated by the underlying technology? This is where the view will differ between the individual investors who have backed one of these startups and the collective public. If valuations are inflated and it’s a bubble, then when it bursts, more than one investor will lose their shirt, and the tech world as a whole will have to explain why it went through another WeWork episode.

But at a more macro level, those few years of using grocery delivery services heavily subsidised by VCs, private equity firms and corporate investors will create a new habit whereby ordering groceries from an app will become as normal as going to the supermarket to stock the fridge for the week. And that is exactly how innovation happens at a societal level — demand follows supply, not the other way around.

Cheese and wine

Two additional factors also need to be considered here. First, grocery delivery is a field ripe for European domination. When I ask Americans what they admire about Europe, they often point out our ability to design and manage well-functioning cities, with all the amenities and infrastructure to make life easier and more convenient for inhabitants. And having meals and groceries conveniently delivered to your door when you don’t have time to go shopping certainly seems to fit into the optimal urban experience! 

The other factor is Covid-19. We just spent an entire year thinking that the pandemic would have a transformative effect on the world and that there would be no return to normal. These days, however, the pendulum seems to have swung back to the other extreme. Enthused by the success of the vaccine campaigns and the lifting of various restrictions, many people are looking forward to the old normal returning, whether that means working in an office or going shopping in stores and supermarkets again.

“The curve of grocery delivery is going up and to the right on a very large addressable market.”

It’s likely that we will collectively end up somewhere between those two extremes. Overall, most of our buying and dining experiences will happen in stores and restaurants, just like in the old days. But everyday services like grocery delivery are still bound to grow in importance now that households have had a taste of their convenience and affordability. In short, it means the curve of grocery delivery is going up and to the right on a very large addressable market — and we shouldn’t be surprised that investors are willing to deploy a great deal of capital in such a context.

Nicolas Colin is cofounder of VC firm The Family. He writes a regular column for Sifted.

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