Growing competition in the online food trade

Growing competition in the online food trade

According to a recent study by Bain & Company, the global market volume in online food retail will continue to grow strongly over the next five years. How can challengers and traditional trading groups cope with the high growth in this segment? […]

Billion-dollar investments, aggressive newcomers, profitability dilemma: The online grocery trade is booming, but at the same time it is characterized by disruptive changes. In 2021 alone, investors worldwide have invested around 14 billion US dollars in quick-commerce providers such as Gorillas, Getir and Gopuff. In addition, aggregators such as Deliveroo and DoorDash are increasingly blurring the boundaries between food deliveries and food orders.

Both the challengers and the traditional trading groups have to expand their capacities in order to cope with the high growth in this segment. For example, the German market is expected to grow to 14 billion euros by 2026, which corresponds to 2.1 times the previous peak value during the pandemic. In the same period, the volume is even expected to increase to $ 178 billion in the United States and more than $ 628 billion in China. This is what the study “Online Grocery Strategy: A Reality Check for Disruptors and Incumbents” by the international management consultancy Bain & Company reveals.

“The online grocery trade has developed into a billion-dollar growth market around the globe, because more and more people are using the delivery services even after the corona-related lockdowns,” explains Miltiadis Athanassiou, Bain partner and co-author of the study. “However, the recent investments in instant delivery services do not mean that the new providers will necessarily gain the upper hand.“ Rather, all market participants would face the same challenge: to assert themselves in the competition and to be profitable in the long term.

Face the facts

The Bain study outlines three topics that neither established omnichannel retailers nor quick commerce providers should turn a blind eye to. The reason: they will significantly influence the business model of all companies engaged in online food retailing in the future.

1. Omnichannel providers benefit from economies of scale and customer proximity

Despite the conveniences of the Internet, most online shoppers continue to buy in parallel in the classic food retail trade. In France, this applies to 93 percent of customers, and even in the highly developed online market of China, it is still 89 percent. The established retail groups that have an omnichannel profile therefore benefit from their economies of scale and close customer loyalty. They know the needs and shopping habits of consumers, as they offer them a wider range of products.

According to the study, omnichannel customers in the United States spend an average of $ 131 a month on groceries – pure online shoppers shop for $ 79. On the other hand, if you only use brick-and-mortar retail, you will only leave an average of $ 63 per month there. In addition, the customer loyalty measurable with Bain’s Net Promoter ScoreSM (NPS®) in the omnichannel segment is significantly higher than that of pure online or offline buyers.

Another advantage is the close business relationships that consumer goods manufacturers have with the major omni-channel providers. They generate more sales with them and profitability is also better – the profit margin (EBITDA) of 17 to 22 percent is about twice as high as for pure sales via online channels.

2. All market participants need to improve their profitability

The rapid growth of the online grocery trade is causing a profitability problem for the established retail chains. This is because profit margins are significantly lower in this sales channel than in brick-and-mortar retail. Here, the traditional market leaders can learn from the challengers, because they now demand a minimum purchase volume or charge fees for their online services.

For example, at Amazon in the USA, each food delivery from the “Whole Foods Market” offer costs just under ten US dollars – in addition to the annual Prime subscription. But the quick-commerce providers also need stricter cost management. Their Darkstore models, i.e. direct sales from the warehouse, are still not profitable across the board. And the expenses for the acquisition of new customers remain at a high level through discount campaigns.

Against this background, the instant delivery services need to increase sales per order, increase their darkstore sales and delivery frequency, as well as further improve the quality of service. In addition, they could expand their range of products to the non-food sector and think about cooperation with established retail chains or aggregators.

3. Efficient order processing and delivery remain a core issue

In the coming years, all market participants will have to significantly expand their supply capacities in view of the rapidly increasing demand. In addition, the traditional omnichannel providers could cooperate with delivery service apps to create additional capacity at short notice and to get the high costs of transport to the front door under control. However, they would have to accept disadvantages such as the loss of margin and direct customer contact.

Act quickly and courageously

“Even if all companies active in the online food trade have to solve the most pressing challenges for them individually, they should not delay the necessary strategic decisions just because they fear the risk of bad investments,” emphasizes Bain partner Athanassiou. “The imperative of the hour is to invest boldly in new services and high-tech solutions and thus stand out from the competition.“ Cooperation and participation are also conceivable in important markets. “And in the context of a wave of consolidation,” he adds, “acquisitions could also be on the agenda of the major trading groups.“

*Elisa Krisper is Junior Project Manager at the communication agency MOMENTUM Vienna and editor of the trade media portal INTERNET WORLD Austria and com!professional.

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