Europe’s quick-commerce startups are overhyped: Lessons from China

More than 10 companies currently compete across Europe with an instant grocery delivery business model. Half of them were established in 2020, the year of the pandemic. These companies have raised more than $2 billion to date.

Existing and well-funded online food-delivery service players like Delivery Hero are also joining the race by launching dedicated grocery offerings. However, if lessons from the world’s largest online grocery market, China ($400 billion), matter, then it’s clear that instant delivery is not the magic bullet to crack the dominance of Europe’s incumbent supermarket chains in the overall $2 trillion-plus flat market.

Instead, China’s quick-commerce equivalents (like Dingdong Maicai, Miss Fresh and Meituan Maicai) compete alongside a wealth of other online grocery models (such as Pinduoduo, JD’s Super and Alibaba’s Taoxianda), which have helped bring total market penetration to 20% and beyond.

Quick commerce suffers from narrower profit margins compared to competing models and is addressing lower consumer demand in China than anyone in the West is expecting it to achieve in Europe and the U.S. If the performance of online grocery platforms in China (a market five to seven years ahead of Europe in terms of online retail) is anything to go by, a range of B2C business models would be more likely to displace the traditional grocery retailers.

Third-time lucky for quick commerce?

The idea of ordering groceries online and having them delivered to consumers in less than an hour is nothing new. Back in the heyday of the dot-com bubble, a company attempted to do just that: Kozmo.com. Founded in 1998, it raised more than $250 million (around $400 million in today’s dollars) from investors, promising to deliver food, among other items, to consumers within an hour, while charging no delivery fees.

In 1999, it had revenues of $3.5 million and a loss of $1.8 million. However, in 2001, the business was shut down by its board after the company could not make the business model work at scale.

Some 15 years later, another company had a go. Gopuff was established in Philadelphia in 2013 and originally targeted students. What started out as a hookah delivery service soon expanded into a much broader convenience store offering and delivered to customers in approximately 30 minutes.

Gopuff was most recently valued at $15 billion after raising a total of $3.4 billion — 75% of which occurred in the past 12 months. Last year, Gopuff grew revenues from around $100 million to $340 million.

Kozmo.com went out of business after just three years. Meanwhile, Gopuff was turned down by several VCs in its early days, and it wasn’t until the pandemic that it saw a rapid acceleration in fundraising. Little did teams at either company know that they would later become the inspiration for a whole generation of founders in Europe.

Europe’s $2B instant-grocery gamble

Has anything fundamentally changed in the 20 years since Kozmo.com? Indeed, we’ve seen little technological progress that would hugely affect the operations of an instant commerce business. However, there have been much larger shifts in consumer habits.

Firstly, the number of global internet users has skyrocketed (from below 500 million to beyond 4 billion), and mobile internet has taken over. Secondly, demand for online grocery delivery has grown significantly due to the COVID-19 pandemic, as consumers have preferred to make retail purchases from home for safety reasons. Thirdly, consumers are now accustomed to paying fees for delivery services, typically around $2 per order, which Kozmo notoriously did not do.

While many online grocery business models exist, the instant grocery, quick-commerce approach has been the favorite of European entrepreneurs and VCs over the past 18 months. The model itself, also referred to as q-commerce, is not that hard to understand.

Companies maintain a small product offering of around 1,000–2,000 SKUs that consumers would otherwise find in convenience or drug stores. These products are purchased directly from brands or through distributors and are stored in self-operated microwarehouses close to customers’ locations.

Marketing tactics are aggressive, often employing vouchers for first-time users of up to $12 (50% of an average shopping basket), and many startups offer their products at supermarket price or even at a discount of 10%–15%. Delivery usually happens by bicycle, e-bike or scooter, within 10-30 minutes of an order being placed, for a fee of around $2 with no minimum order value.

Companies like Getir from Istanbul (total funding: $1 billion, last valuation: $7.5 billion) and Gorillas from Berlin (total funding: $335 million, last valuation: $1 billion) are leading the way. When Gorillas announced its $290 million Series B in March 2021, it became the fastest European startup to achieve unicorn status (nine months after launch). The company is already rumored to be seeking Series C financing at a $2.5 billion valuation.

There are more than 10 companies across Europe with more or less the same business model. Those include the 2020-established Flink (Germany-based, $300 million raised), Zapp (U.K.-based, $100 million raised), Dija (U.K.-based, $20 million raised and just acquired by Gopuff), Jiffy (U.K.-based, $7 million raised) and Cajoo (France-based, $6 million raised).

There is also JOKR, which was started by the founder of Foodpanda. JOKR was only established in Q1 2021, but right after incorporation raised one of the largest ever initial seed rounds (rumored to be $100 million) and subsequently a $170 million Series A in July to bring the model to Europe, Latin America and the U.S.

Likewise, companies coming from food delivery have pushed further into this space and received additional funding in recent months, notably Delivery Hero through Dmart and Glovo through SuperGlovo, following role models in the U.S., such as DoorDash.

Does instant grocery stand a chance of becoming profitable?

As these companies approach later-stage financing sometime in the future, questions will be asked about the path to profitability in an industry of notoriously thin margins. Indeed, this is an uncomfortable truth that hasn’t changed since the early days of Kozmo.com.

The available figures show that old patterns are repeating. Gopuff recently reported an EBITDA of negative $150 million on $340 million in revenue (EBITDA margin: -45%). Furthermore, an analysis by the German business monthly Manager Magazine concluded that Gorillas was operating at negative unit economics of -6%. Additional costs, such as overhead and technology, might push this number up significantly further.

Yet, this all comes as no surprise: Traditional grocers often only achieve a 1%-3% net margin, and many of them have been unable to turn a profit with the (much slower) supermarket-to-home delivery models in recent years.

The even poorer unit economics of the q-commerce startups can be explained by the extremely tight delivery times of less than 10 minutes. In order to fulfill this promise, they need to self-operate everything — including warehousing, warehouse personnel and delivery staff. This comes at a high cost and with additional challenges such as renting in expensive locations and managing the rapid ramp-up of headcount, as well as labor relations.

Delivery is inefficient, with staff completing one order per ride before returning back to the warehouse. To cover a city like London all the way to Zone 4, for instance, each startup would easily require more than 20 of these “dark stores.”

While it’s a hard enough model to operate as it is, with so many q-commerce startups competing for follow-up venture funding, we will see the inevitable deployment of certain rapid-growth strategies in 2021 and 2022:

1. New promotions/rock-bottom prices (we are the cheapest).
2. Claiming the shortest delivery times (we are the fastest).
3. Rapid-pace expansion (we are the biggest).

Worryingly, none of these activities will improve margins, and they might inadvertently educate consumers in the wrong way.

So as competition heats up, and with current practices unsustainable in an industry of such narrow margins, we need to sense check the bigger picture. The success of the instant-grocery unicorns relies on a huge market — but is the European online grocery market really as large as many claim? The path to profitability is also dependent on high market penetration — but is q-commerce even the best solution to serve online grocery?

With these questions in mind, we should take a look at developments in China, an e-commerce market that’s at least half a decade ahead of the Western world.

How big is the potential of Europe’s online grocery market?

China is home to the world’s largest retail market with a total size of $5.7 trillion. Following a 4-percentage-point jump in 2020, online penetration reached 25%, bringing the size of China’s online market to over $1.4 trillion. This puts China way ahead of the world’s second-largest online market, the United States, which comes in at just under $800 billion.

Indeed, the top-line number is impressive, but online penetration remains unevenly distributed across categories. While apparel/accessories and electronics/appliances are now majority-online industries in China, we notice that consumer habits with fresh food (15% online) and fast-moving consumer goods (25% online) are quite different.

The two combine for a 20% share of China’s $2 trillion grocery market, which put the online grocery market at $400 billion last year. This appears low in the overall Chinese market context — however, to Europeans, these numbers still look impressive.

Though Europe’s total grocery market slightly exceeds China’s at $2.2 trillion, given its much lower online penetration rates (Germany: 2%, U.K.: 10%), its online grocery market currently sits somewhere between $75 billion and $125 billion as of 2020.

Looking toward China, we might mistake these figures for a sure sign of future growth; however, online challengers in China were always in a more favorable position because traditional retail lacked scale.

In terms of market structure, China’s incumbent grocery retailers have never matched the market dominance of Europe’s supermarket chains. For instance, Sun Art, the leading Chinese grocer, currently holds an 8% market share, while China’s top five grocers stand at 25%, Kantar data showed.

The situation in Europe is very different — traditional grocers have consolidated the market. Germany’s Edeka Group (Edeka, Netto, etc.) achieves 25% market share, and the top five grocers sit at 75%.

The situation in the U.K. and France is the same. Tesco in the U.K. stands at more than 25%, and the top five grocers at 75%. Carrefour is the dominant leader in France with 20% and top-five grocers at 80%. With the much larger dominance of Europe’s incumbent grocers, the task for online players seems even more challenging.

Instead, the online Chinese players ousted traditional grocers with ease — oftentimes acquiring the existing business. However, in Europe, I predict existing players like Amazon, Ocado and the online offerings of supermarket chains (Edeka24, Tesco Online, Carrefour) will provide much stiffer competition and maintain a dominant share as the European market grows.

Other B2C online grocery models are more promising

At the end of last year, during an investor call, the Delivery Hero management team estimated that q-commerce would eventually capture 25% of all online grocery within the next 10 years. Yet, this vision is not even close to coming true in China, despite e-commerce being five to seven years ahead of Europe and the Chinese grocery market being more prone to disruption due to weaker incumbents.

According to Goldman Sachs, q-commerce is actually China’s smallest online grocery business model, accounting for around $20 billion in gross merchandise value (GMV) last year, or around 5% of the total $400 billion Chinese online grocery market.

Instead, we find that q-commerce is just one of five B2C business models in the Chinese online grocery space. These models are as follows:

• Marketplaces (2020 market share: 60%).
• Online supermarkets (2020 market share: 20%).
• Store-to-home (2020 market share: <10%).
• Community-based group buying (2020 market share: <10%).
• Quick commerce (2020 market share: 5%).

1. Marketplaces

• Major players: Alibaba (market cap: $500 billion+), Pinduoduo (market cap: $100 billion+).
• Market share 2020: 60%.
• Future market share prospect: <50%.
• Business logic: Asset-light marketplace with a large existing customer base, brands/farmers open stores and manage operations largely by themselves. Revenue is generated through platform operations fees, sales commissions and services, including advertisements.
• Consumer value proposition: Incredibly large product selection with many unique products and reasonable prices (due to direct sourcing from farmers).
• Average basket size: Large.
• Delivery: 1–3 days.

2. Online supermarkets (megawarehouse-to-home)

• Major player: JD.com (market cap: $110 billion).
• Market share 2020: 20%+.
• Future market share prospect: ~20%.
• Business logic: Asset-heavy retail model with full operations of procurement, warehousing and inner-city delivery. Profits come from the difference between wholesale and retail price.
• Consumer value proposition: Huge selection with many rare products (including a huge range of imported goods), high product quality due to self-operation model, rarely out of stock, fast delivery (often free due to high average order value).
• Average basket size: Large.
• Delivery: <24 hours (same day).

3. Online-to-offline (store-to-home)

• Major players: Meituan (market cap: $180 billion), JD.com Daojia (market cap: $5 billion), Alibaba Taoxianda.
• Market share 2020: <10%.
• Future market share prospect: >10%.
• Business logic: Asset-light plug-in for existing stores to bring inventory online. Instant delivery via delivery staff employed by platforms or crowdsourcing.
• Consumer value proposition: Comprehensive and familiar supermarket product selection with fast delivery.
• Average basket size: Medium–large.
• Delivery: 1–2 hours.

4. Community-based group buying

• Major players: Xingsheng Youxuan (raised: $4 billion), Shihuituan (raised: $1.3 billion), Meituan Selected.
• Market share 2020: <10%.
• Future market share prospect: ~20%.
• Business logic: Platforms recruit “captains” (individuals or store owners), which operate community-based WeChat groups and receive a commission-based payment of around 10%. Captains serve as local sales agents and collect orders by 11 p.m. for a certain day. Marketplace sellers provide products overnight and products are delivered to captains’ pick-up points by 4 p.m. Customers collect goods from the pickup location. Profits come from typical marketplace income streams.
• Consumer value proposition: Social factor, free delivery, recipes. Suitable for regions outside of the major cities. Low average order value requirement.
• Average basket size: Small.
• Delivery: Next day after 4 p.m.

5. Q-commerce

• Major players: Meituan Maicai, Dingdong Maicai (raised: $1.5 billion+), Miss Fresh (raised: $1.5 billion+).
• Market share 2020: 5%.
• Future market share prospect: ~5%.
• Business logic: Asset-heavy retailer model, maintain dark warehouses and self-operate delivery. Profits come from the difference between wholesale and retail price.
• Consumer value proposition: Most suitable model for fresh food, ultrafast delivery for impulse purchases.
• Average basket size: Small.
• Delivery: 15-60 minutes.

These five models involve different combinations of product offerings, pricing and delivery speed, and bring different value propositions for consumers, depending on the nature of purchase (from impulse to planned).

The majority of those business models exist in Europe, too. However, it’s my belief that Europe’s strong focus on the q-commerce grocery delivery model is misguided.

When comparing models, it is important to note the inverse relationship between delivery speed and average basket size. In exchange for a quick delivery, online grocery platforms are restricted to offering a smaller product selection, and therefore typical order sizes are far smaller, too. Not only does this make the many slower models far more attractive from a platform operator and profitability point of view, but also from a consumer perspective depending on purchase scenario.

Many consumers are also highly price sensitive and value savings more than convenience. Yet, in order to operate on positive unit economics, q-commerce players can’t afford to meet prices offered by other online and offline channels since their overall physical retail infrastructure is far more expensive to maintain.

This is why I believe China’s q-commerce startups have been limited to a 5% share of the online grocery market. The uncomfortable truth is that the self-operated rapid-delivery model is not what solves most consumer demand.

According to our comparison, q-commerce could account for 5%-10% of the European online grocery market, and thus at present around $5 billion to $10 billion market size. At some point, companies will realize that, while the opportunity in the total addressable online market seems huge, the total serviceable market for instant grocery is much smaller.

How Europe’s online grocery battle could play out

If Europe really wants to go to 10%, 20% or even 40% online penetration in the grocery space, it needs much more competition, ideas and funding for alternative business models.

It will require European entrepreneurs with experience in retail, e-commerce and logistics — and a willingness to look beyond the hyped instant commerce business model — to capture market share from Europe’s dominating supermarket chains.

Here’s how I see the fight between online grocery businesses playing out:

1. Large marketplaces will continue to dominate in the future, especially if they are able to cut out distributors and offer attractive customer engagement tools and prices.
2. Large full-scale online supermarkets with same-day delivery and outstanding service (such as Ocado) still have substantial untapped potential and can learn from JD Super, which has a unique product selection (including many exclusive offers) and has built operations, including efficient cold-chain capabilities, at scale. With Europeans’ environmental awareness and desire for local sourcing, there is still room for specialized online supermarkets, too.
3. O2O models (Wolt) are certainly very promising, as Taoxianda and others have shown. The key will be for platforms to build suites that supermarkets can plug into their system to bring real-time availability data about inventory online. This will allow the dual usage of space: as a supermarket and as a warehouse.
4. The community-based group-buying model is a space largely underpopulated by Europe’s startups. However, the success of platforms like Xingsheng Youxuan might inspire Europe’s entrepreneurs. Picnic is deploying elements of this playbook but lacks social engagement and third-party pickup points.
5. Traditional food-delivery players like Delivery Hero can play a big role as well in the online grocery space through a variety of models. Leveraging existing riders, as Meituan does, may prove to be a great advantage. In fact, Meituan successfully penetrated deep into online grocery from food delivery by deploying a wealth of business models, including supermarket-to-home, community-based group buying and q-commerce. DoorDash demonstrated just that in the U.S., where it emerged into a formidable competitor of Gopuff within a short time.

Chinese traditional retailers were largely unable to benefit from the shift to online in the grocery space. Most of them decided to team up with online players — with the internet companies being the acquirer.

However, Europe’s supermarket chains are much more dominant, have advanced logistics systems and have established strong bonds with brands and suppliers over many decades.

Furthermore, many of Europe’s leading grocers themselves experienced significant revenue growth last year (often even reaching double digits) and are more resourceful than ever.

They should not be underestimated, and an acquisition, in the end, might be one of the few favorable scenarios for Europe’s leading online grocery startups. The strategic investment of Germany-based Rewe as part of Flink’s latest fundraising round might just be a first sign of what is to happen.