A cutthroat competition is raging in the food trade: Traditional retailers are being challenged by providers offering super-fast delivery, especially in cities.
Gorillas, for example, promises to deliver to customers within 10 minutes, and Delivery Hero is returning to Germany with the promise of bringing food to customers within seven minutes in Berlin and some other cities.
A huge hype has arisen around these (fast) delivery services. Delivery Hero has been listed on the DAX exchange since 2020, although it has yet to show any profits. Providers like Cajoo or Gorillas have reached a unicorn valuation in a very short time. Ocado from the UK has a higher stock market value than Tesco.
These providers are trying to differentiate through delivery efficiency and speed advantages. The business model is reliant upon cutting edge operational excellence. But how can the business processes be designed to fulfil delivery promises and still profitable – at least in the medium term?
Competing on many levels
On the one hand, they must thoroughly understand the customer’s view and their touchpoints with the customer. Many providers measure the satisfaction of their customers over time to achieve a Net Promoter Score that is far above the values of traditional retailers.
On the other hand, the processing of orders must be extremely efficient in terms of time, costs and quality. In principle these providers are powerful process engines packaged as delivery services.
The biggest issue of almost all delivery services is that they are still taking losses. The promise to deliver in 10 minutes or even faster tends to result in too many drivers being assigned, and thus the personnel costs unbalance the cost structure. Even in countries where drivers are paid per order (and often earn very little per hour), the business remains in deficit.
To counter this, the providers try to attract numerous customers in a very narrowly defined inner-city area, thus reducing delivery costs with short distances. Most providers rely on many micro-depots (hyper-local “dark stores”) to keep distances short. However, this cut-throat competition also leads to an increase in marketing costs; some suppliers now waive a fixed delivery fee to be more attractive to customers.
Efficiency is key
Forecasting demand is important in order to accurately estimate the number of drivers needed. Machine-learning algorithms play a central role in considering all the relevant factors influencing demand. The basis for learning from past data is the monitoring (process mining) of all order processing. Only if one understands which parameters (e.g. time, day of the week, temperature) influence ordering behavior and delivery times can you learn from this and adapt and optimize the processes.
Other suppliers focus less on super-fast delivery and more on a large range of goods. This requires large warehouses that also have to include different cooling zones. Ocado, one of the few delivery services that operate profitably, offers over 50,000 products – significantly more choice than classic supermarkets – and relies on automated picking and packing using robots. It is now launching Ocado Zoom, with one-hour delivery, in selected regions in the UK.
Startup Picnic follows an approach that always delivers to the same street at the same time (customers have hardly any time flexibility here but are rewarded with better prices). Picnic achieves 7-10 deliveries per hour through shorter routes compared to a maximum of three deliveries by many competitors.
Traditional retail has not remained inactive. For example, Edeka has secured shares in Picnic, REWE is in discussion with Flink. Brand manufacturers are also trying to establish a direct line to the customer. The Oetker Group, for example, has taken over the beverage delivery service Flaschenpost. The threat has been recognized, as it is obvious how important platforms have become in other industries. Customers are transferring to the platform providers and could be more likely to remain loyal to the delivery service than to the retail company. This is certainly not the future that traditional retailers want.
Assuming that the customer desire for really fast delivery is a long-term trend, operational excellence and the ability to optimally manage processes and adapt them to demand will decide who will emerge victorious from this ultra-competitive battle.
This article originally appeared on OPEX.