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Why Grocery Delivery Services Could Challenge Storefronts

Exploring the surge in app-based grocery delivery services, and why their business model revolves around data and logistics rather than merely delivering groceries.

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You may have seen the tremendous growth of app-based grocery delivery services during the last year. Supermarkets were initially not involved because the industry does not typically grow rapidly. The margins are narrow, but they are predictable.

However, something unusual has happened: interest in and investment in app-based grocery delivery has exploded, with several fast-track firms promising goods at your door in a certain amount of time. Weezy is the market leader in the United Kingdom, although you may also be familiar with Fresh Direct or Sainsbury’s Chop Chop 60-minute grocery delivery service. The grocery industry is a multibillion-pound business that appears to be undergoing enormous change.

The story of Webvan is one of the most well-known business cases in this area. It was one of the earliest grocery delivery applications in the United States, having launched in the late 1990s, but it also serves as a cautionary story. Massive investment fueled it, as was all too frequent in the dotcom era. In order to become a digitally enabled supermarket delivery network, it developed large warehouses and purchased trucks, delivery vehicles, and machinery. It raised $800 million before going bankrupt three years later.

So what makes this latest app fad any different? Onlookers may be forgiven for assuming that while some of the companies have reported big losses, they are all moving in the same direction. Simultaneously, you may be perplexed by the continued infusion of ever larger sums into them. You’re not alone if you’re perplexed as to how this is feasible.

To understand why this is happening, you must first realize that supermarket delivery apps are not in the business of delivering groceries. They work in the fields of data and logistics. Apps for grocery delivery are becoming “four-sided marketplaces.” The client and the grocer are the two “sides” that most people are familiar with. If you’ve ever had a particularly awful or really wonderful grocery delivery experience, you’re likely also familiar with the third, courier “side” of the market, while food producers/manufacturers make up the fourth.

All of these market participants profit from grocery delivery apps. Customers pay for delivery, service fees, and, in most cases, a markup on the groceries they buy. Each item sold earns the grocery stores a commission. The food producers/manufacturers pay for client data and advertising within the apps, while the couriers, who are often categorized as contractors, “pay” by foregoing the regular benefits of an employee, thus subsidizing the cost of delivery.

Because supermarket companies like Tesco, Walmart, and Aldi are so much bigger and have a correspondingly enormous scale, you may think they’re better positioned than food delivery applications. However, it’s worth noting that supermarket chains’ scale is partly a result of their poor profit margins, and hence does not always provide a competitive advantage. Because competition has decreased their profitability to a meager 2% to 3%, they have extensive operations, supply chains, and storefronts. They need a large scale not because they are thriving, but because it allows them to survive.

Which goes to the heart of why these delivery apps vary from Webvan — and why supermarket stores may struggle to compete with them. The economics of the two firms are vastly different: supermarket chains sell groceries, while these delivery apps sell access to supermarkets (and also to supermarket customers and their data). So, while supermarket delivery apps continue to offer food on their platforms, they lack the infrastructure costs involved with the food sector, such as workers, warehouses, vehicles, and expensive stores. To power their website and coordinate legions of contractors, they merely have to pay for transferring electrons.

To understand why there has been such a surge in grocery delivery applications, consider that growth-oriented investors aren’t banking on the supermarket industry’s development. Rather, investors believe that food delivery apps are a completely new form of business with fundamentally different margins and economics than supermarkets.

Attempting to launch their own grocery delivery services, supermarket chains are similar to Webvan, a low-margin food store whose business model is only complicated by costly logistics and delivery. Attempts by grocery chains to enter this market, like Webvan, are likely to fail. Grocery stores will have to develop their own distinct strategies for providing customer convenience without jeopardizing their own experience, supply chains, storefronts, or infrastructure.

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Step 1: Select Orders

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Step 3: Share/Deliver

Share your routes with your drivers or use our mobile-friendly driver view to go out do your own deliveries.

Get EasyRoutes Grocery Delivery Route App on the Shopify App Store
Get EasyRoutes on the Shopify App Store

Learn more at Roundtrip.ai.

About Roundtrip

Roundtrip's mission is to equip every business with the software tools they need to deliver products to their customers in a delightful way. Thousands of Shopify merchants worldwide choose EasyRoutes to power their local deliveries across dozens of product categories, from meal kits and groceries to coffee, cupcakes, kibble, and so much more. Our easy-to-use route planning and delivery optimization app is certified Built for Shopify, a two-time Shopify staff pick, and the top rated local delivery app on the Shopify App Store.

"The app has simplified our delivery workflow significantly and allows us to be significantly more efficient in our delivery and also reduce human error thanks to its direct integration with our Shopify Store. We deliver to a large geographical area and the routing works well with our large list of delivery locations. The drive app that pairs with this is simple, clean and easy to use. Our customers have already expressed how much they love having tracking information and estimated arrival times."
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