Europe's Quick Commerce Startups: Are They Overhyped?

The Rise of Instant Grocery Delivery in Europe

Currently, over ten companies are vying for market share in Europe's rapidly expanding instant grocery delivery sector. A significant portion, approximately half, were founded in 2020, coinciding with the onset of the global pandemic.

To date, these businesses have collectively secured over $2 billion in funding, demonstrating substantial investor confidence.

Competition from Established Players

Established online food delivery services, such as Delivery Hero, are also entering the instant grocery market with specialized offerings. This intensifies the competitive landscape.

However, insights from China, the world’s largest online grocery market valued at $400 billion, suggest that instant delivery alone won't be sufficient to challenge the established dominance of European supermarket chains.

Lessons from the Chinese Market

In China, instant delivery services – including Dingdong Maicai, Miss Fresh, and Meituan Maicai – operate alongside a diverse array of other online grocery models.

These include Pinduoduo, JD’s Super, and Alibaba’s Taoxianda, contributing to a total market penetration exceeding 20%.

Profitability and Consumer Demand

Quick commerce typically experiences thinner profit margins when contrasted with alternative models.

Furthermore, consumer demand in China has been lower than current projections for Europe and the United States indicate.

A Broader Range of Business Models

Considering China’s experience – a market five to seven years ahead of Europe in online retail development – a variety of B2C business models are more likely to successfully disrupt traditional grocery retailers.

This suggests that a diversified approach, rather than solely focusing on instant delivery, will be crucial for long-term success in the European market.

Is Quick Commerce Finally Set to Succeed?

The concept of rapid grocery delivery – obtaining goods online and receiving them within the hour – isn't novel. During the peak of the dot-com era, Kozmo.com pioneered this approach. Established in 1998, the company secured over $250 million in funding (equivalent to approximately $400 million presently).

Kozmo.com pledged to deliver food and other products to customers within 60 minutes, without imposing delivery charges. Despite generating $3.5 million in revenue in 1999, it incurred a loss of $1.8 million.

Ultimately, the board of directors decided to close the business in 2001, concluding that the business model was unsustainable at a larger scale. Approximately fifteen years later, a new entrant emerged.

Gopuff was founded in Philadelphia in 2013, initially focusing on serving the student population. Beginning as a hookah delivery service, it quickly broadened its offerings to encompass a wider range of convenience store items.

Deliveries were completed in around 30 minutes. Gopuff’s most recent valuation reached $15 billion, following a total of $3.4 billion in funding raised, with 75% of that capital arriving within the last year.

The company experienced substantial revenue growth, increasing from approximately $100 million to $340 million last year. Kozmo.com ceased operations after only three years.

Conversely, Gopuff faced initial rejection from numerous venture capitalists, and its rapid growth in fundraising didn't occur until the onset of the pandemic. Neither company anticipated inspiring a new wave of entrepreneurs across Europe.

A History of Attempts

The failures of Kozmo.com highlight the challenges inherent in quick commerce. Maintaining profitability while offering rapid delivery and waiving fees proved difficult.

Gopuff's Trajectory

Gopuff’s success, particularly during the pandemic, demonstrates a potential shift in market conditions. Increased demand for convenience and a willingness to pay for speed contributed to its growth.

European Inspiration

The experiences of both Kozmo.com and Gopuff have served as a catalyst for a new generation of quick commerce startups in Europe, indicating a renewed interest in this business model.

A $2 Billion Investment in Europe’s Instant-Grocery Sector

Significant changes have occurred in the two decades since Kozmo.com’s operation. While substantial technological advancements impacting instant commerce businesses have been limited, consumer behaviors have undergone considerable evolution.

Firstly, the global number of internet users has experienced exponential growth, increasing from under 500 million to over 4 billion. Furthermore, mobile internet usage has become dominant. Secondly, the COVID-19 pandemic spurred a notable increase in demand for online grocery delivery, as consumers prioritized at-home retail purchases for safety. Finally, consumers are now readily accepting delivery fees, typically around $2 per order, a practice Kozmo previously avoided.

Numerous online grocery business models currently exist, but the instant grocery, or quick-commerce, approach has garnered significant attention from European entrepreneurs and venture capitalists over the past year and a half. The core concept of this model is relatively straightforward.

These companies curate a focused product selection, generally ranging from 1,000 to 2,000 Stock Keeping Units (SKUs) – items commonly found in convenience stores or pharmacies. Products are sourced directly from manufacturers or via distribution networks and stored in strategically located, company-operated microwarehouses.

Marketing strategies are often aggressive, frequently utilizing introductory vouchers worth up to $12 (representing 50% of a typical order value). Many startups also price their products at supermarket levels, or even offer discounts of 10% to 15%. Deliveries, typically made by bicycle, e-bike, or scooter, are completed within 10 to 30 minutes of order placement, with a delivery fee of approximately $2 and no minimum order requirement.

Leading companies in this space include Getir, originating from Istanbul (total funding of $1 billion, most recent valuation of $7.5 billion), and Gorillas, based in Berlin (total funding of $335 million, last valuation of $1 billion). Gorillas achieved unicorn status – a valuation exceeding $1 billion – remarkably quickly, just nine months after its launch, following its $290 million Series B funding round in March 2021. The company is currently reportedly seeking Series C funding at a $2.5 billion valuation.

Currently, over 10 companies across Europe operate with similar business models. These include Flink, established in 2020 and based in Germany ($300 million raised), Zapp (U.K.-based, $100 million raised), Dija (U.K.-based, $20 million raised and subsequently acquired by Gopuff), Jiffy (U.K.-based, $7 million raised), and Cajoo (France-based, $6 million raised).

JOKR also represents a significant player, founded by the creator of Foodpanda. Established in the first quarter of 2021, JOKR quickly secured one of the largest initial seed funding rounds ever recorded (estimated at $100 million), followed by a $170 million Series A investment in July to expand the model into Europe, Latin America, and the United States.

Furthermore, established food delivery companies are extending their reach into this sector, securing additional funding in recent months. Notable examples include Delivery Hero through Dmart and Glovo through SuperGlovo, mirroring trends observed in the U.S. with companies like DoorDash.

Can Instant Grocery Services Achieve Profitability?

As companies in the instant grocery sector seek further funding, scrutiny will increase regarding their potential for profitability. This is a challenging question, mirroring the difficulties faced by early pioneers like Kozmo.com, within an industry characterized by exceptionally slim profit margins.

Current financial data indicates a recurrence of past trends. Gopuff, for example, recently reported a negative EBITDA of $150 million despite generating $340 million in revenue, resulting in an EBITDA margin of -45%. A study conducted by Manager Magazine in Germany further revealed that Gorillas is experiencing negative unit economics of -6%. Additional expenses, including operational overhead and technology investments, could substantially worsen this figure.

However, this outcome isn't unexpected. Traditional grocery stores typically operate on net margins of only 1%-3%, and many have struggled to achieve profitability even with slower, supermarket-to-doorstep delivery services.

The diminished unit economics of quick-commerce (q-commerce) startups stem from the commitment to deliveries within ten minutes. Meeting this promise necessitates complete control over the entire process – encompassing warehousing, staffing, and a dedicated delivery fleet. This approach incurs significant costs and presents challenges related to securing expensive real estate and managing rapid employee recruitment and labor relations.

The delivery process itself is inefficient, as personnel generally complete a single order per trip before returning to the warehouse. Effectively covering a city like London, extending to Zone 4, would require over 20 “dark stores” for each startup.

Given the competitive landscape and the pursuit of venture capital, certain growth strategies were predictably implemented in 2021 and 2022:

• Aggressive promotions and exceptionally low prices (positioning themselves as the most affordable).
• Claims of the fastest delivery times (emphasizing speed).
• Rapid expansion into new markets (establishing dominance in size).

Unfortunately, these tactics are unlikely to improve margins and may inadvertently set unfavorable expectations among consumers.

As competition intensifies and current practices prove unsustainable given the industry’s narrow margins, a broader assessment is necessary. The success of instant-grocery companies hinges on a substantial market size – but is the European online grocery market truly as large as often suggested? Profitability also depends on significant market penetration – but is q-commerce the optimal solution for online grocery shopping?

Considering these questions, examining developments in China, a more mature e-commerce market, is crucial. China is at least five years ahead of Western markets in terms of e-commerce evolution.

The Scope of Europe’s Online Grocery Sector

With a total value of $5.7 trillion, China possesses the world’s largest retail market. A significant increase in online shopping, reaching 25% penetration in 2020—a 4-percentage-point rise—resulted in a Chinese online market exceeding $1.4 trillion. This positions China considerably ahead of the United States, the second-largest online market globally, valued at just under $800 billion.

While these overall figures are substantial, online adoption varies considerably across different product categories. In China, apparel and electronics are predominantly purchased online, but consumer behavior regarding fresh food (15% online) and fast-moving consumer goods (25% online) demonstrates different patterns.

These two categories collectively represent a 20% share of China’s $2 trillion grocery market, translating to an online grocery market of $400 billion last year. Although this figure may seem modest within the broader Chinese market, it appears quite significant to European observers.

Europe’s total grocery market, at $2.2 trillion, slightly surpasses that of China. However, due to considerably lower online penetration rates—such as 2% in Germany and 10% in the U.K.—Europe’s online grocery market was estimated between $75 billion and $125 billion in 2020.

Challenges to Growth Compared to China

While these numbers suggest potential for growth, mirroring China’s trajectory, the conditions for online grocery businesses differ substantially. Chinese online competitors benefited from a lack of scale within the traditional retail landscape.

In China, established grocery retailers have never achieved the same level of market control as their European counterparts. For example, Sun Art, the leading Chinese grocer, holds only an 8% market share, and the top five grocers collectively control 25% of the market, according to Kantar data.

Conversely, Europe’s grocery market is characterized by consolidation among traditional retailers. Germany’s Edeka Group, encompassing Edeka and Netto, commands a 25% market share, with the top five grocers collectively holding 75%.

Similar dynamics are observed in the U.K. and France. Tesco in the U.K. maintains a market share exceeding 25%, and the top five grocers account for 75%. Carrefour leads in France with 20%, and the top five grocers collectively control 80% of the market. This strong position of established European grocers presents a greater challenge for online competitors.

In China, online players readily displaced traditional grocers, often through acquisitions. However, in Europe, it is anticipated that existing players—including Amazon, Ocado, and the online platforms of supermarket chains like Edeka24, Tesco Online, and Carrefour—will offer robust competition and retain a dominant market share as the European market expands.

Alternative B2C Online Grocery Approaches Show Greater Potential

Delivery Hero’s management projected, during a late-year investor conference, that q-commerce could ultimately represent 25% of the total online grocery sector within a decade. However, this prediction has yet to materialize in China, despite the country’s e-commerce landscape being considerably more advanced – by five to seven years – than Europe’s.

Data from Goldman Sachs indicates that q-commerce currently constitutes the smallest segment of China’s online grocery market. Its gross merchandise value (GMV) reached approximately $20 billion last year, representing only about 5% of the overall $400 billion Chinese online grocery market.

Instead, the Chinese online grocery sector is characterized by a diversity of five distinct B2C business models. These are outlined below:

• Marketplaces (held a 60% market share in 2020).
• Online Supermarkets (captured a 20% market share in 2020).
• Store-to-Home Delivery (accounted for less than 10% of the market in 2020).
• Community Group Buying (represented under 10% of the market in 2020).
• Quick Commerce (maintained a 5% market share in 2020).

The relative underperformance of q-commerce in China suggests that other models are proving more successful in meeting consumer needs.

A Diversified Landscape

The Chinese market demonstrates a preference for models beyond rapid delivery. Online supermarkets and marketplaces, in particular, have established significant footholds.

This contrasts with initial expectations regarding the dominance of q-commerce, highlighting the importance of adapting business strategies to specific regional contexts.

1. Online Marketplaces

Several significant companies dominate the marketplace landscape, including Alibaba, which boasts a market capitalization exceeding $500 billion, and Pinduoduo, valued at over $100 billion.

Market Dominance and Future Trends

In 2020, these marketplaces collectively held a 60% market share. However, projections indicate this share will decrease to below 50% in the coming years.

Operational Model

These platforms operate on an asset-light model, leveraging a substantial pre-existing customer base. Brands and agricultural producers establish their own stores and independently manage most operational aspects.

Revenue streams are diversified, encompassing platform operation fees, sales commissions, and supplementary services like advertising.

Consumer Benefits

A key advantage for consumers is access to an exceptionally wide range of products, including many unique items, offered at competitive prices. This affordability is often achieved through direct sourcing from farmers.

Purchasing Behavior

Customers typically include a substantial number of items in each transaction, resulting in a large average basket size.

Delivery Times

Delivery services generally ensure products reach customers within 1–3 days.

2. Online Supermarkets (Megawarehouse-to-Home)

JD.com is a leading force in this sector, boasting a substantial market capitalization of $110 billion.

Market Position and Future Outlook

In 2020, JD.com commanded a market share exceeding 20%. Current projections estimate a continued market share of approximately 20% in the coming years.

Business Model

The company operates on an asset-heavy retail model. This encompasses complete control over procurement, warehousing, and delivery services within cities.

Profitability is generated through the margin between wholesale acquisition costs and retail selling prices.

Consumer Benefits

JD.com’s value proposition centers around an extensive product selection, including numerous hard-to-find items and a wide array of imported goods.

The self-operated model ensures consistently high product quality. Stockouts are infrequent, and delivery is notably swift.

Order Characteristics

Customers typically purchase a large average basket size when shopping with JD.com.

Delivery Speed

Deliveries are consistently completed within 24 hours, often on the same day. This speed is frequently offered with no additional delivery fees, thanks to the high average order value.

The Rise of Online-to-Offline and Store-to-Home Delivery

The online-to-offline (O2O), also known as store-to-home, delivery sector is experiencing significant growth. It represents a new channel for consumers to access goods from local retailers.

Key Players in the Market

Several companies are currently leading this trend. These include Meituan, which boasts a substantial market capitalization of $180 billion. JD.com Daojia, with a market cap of $5 billion, is another significant competitor. Alibaba Taoxianda also holds a prominent position.

Current and Projected Market Share

In 2020, the combined market share of these platforms was less than 10%. However, projections indicate a substantial increase. Future forecasts suggest the market share will exceed 10% as adoption grows.

Underlying Business Model

This model operates on an asset-light principle. Platforms integrate with existing brick-and-mortar stores, effectively bringing their inventory online. Delivery is facilitated through platform-employed staff or crowdsourcing.

Benefits for the Consumer

The primary appeal for consumers lies in the convenience and selection offered. Customers gain access to a wide and familiar range of supermarket products, delivered quickly to their door. This provides a compelling alternative to traditional grocery shopping.

Order Characteristics

Typical orders through these platforms tend to be of a medium-to-large size. This suggests consumers are utilizing the service for regular grocery replenishment rather than small, impulse purchases.

Delivery Timeframes

Delivery times are generally swift, averaging between 1 and 2 hours. This rapid fulfillment is a key differentiator and a major driver of customer satisfaction.

Community Group Buying Landscape

A significant trend in e-commerce involves community-based group buying. This model is currently dominated by several key companies.

Key Players and Market Share

Notable companies in this space include Xingsheng Youxuan, which has secured $4 billion in funding, Shihuituan with $1.3 billion raised, and Meituan Selected. In 2020, this sector represented less than 10% of the overall market.

However, projections indicate a substantial increase in market share, potentially reaching approximately 20% in the future.

Operational Model

The core of this business relies on recruiting individuals, often store owners, as “captains.” These captains manage community-focused WeChat groups.

They earn commissions, typically around 10%, for facilitating sales. Captains function as localized sales representatives, gathering orders until 11 p.m. for the following day’s delivery.

Marketplace vendors then prepare and deliver products overnight to designated captain pick-up points by 4 p.m. Customers subsequently collect their purchases from these locations.

Revenue generation follows standard marketplace principles.

Value Proposition for Consumers

The appeal to consumers centers around the social factor, the benefit of free delivery, and the inclusion of recipes alongside product offerings.

This model proves particularly effective in areas outside major metropolitan centers, and often doesn't require a high minimum order value.

Order and Delivery Characteristics

Average basket size tends to be relatively small. Delivery is scheduled for the day after ordering, with pick-up available after 4 p.m.

5. Q-commerce

Several key companies dominate the Q-commerce landscape, including Meituan Maicai, Dingdong Maicai (having secured over $1.5 billion in funding), and Miss Fresh (also with over $1.5 billion raised).

In 2020, Q-commerce held a 5% share of the overall market.

Projections suggest a future market share of approximately 5%.

The core business model centers around an asset-heavy retail approach.

This involves maintaining strategically located dark warehouses and operating a self-managed delivery network.

Profitability is generated through the margin between wholesale purchasing costs and retail selling prices.

Consumer Value Proposition: This model is particularly well-suited for fresh food items and caters to the demand for extremely fast delivery of impulse purchases.

Average Basket Size: Orders are typically small in value.

Delivery Times: Customers can expect delivery within 15 to 60 minutes.

Variations in Business Models

These five distinct models each present a unique combination of product range, pricing strategies, and delivery speeds.

Consequently, they offer varying benefits to consumers, tailored to the specific nature of their shopping needs – whether planned or spontaneous.

While many of these business models also exist within Europe, a strong emphasis on the Q-commerce grocery delivery model is, in my assessment, misplaced.

The Trade-off Between Speed and Order Size

A crucial consideration when evaluating these models is the inverse correlation between delivery speed and average order size.

To facilitate rapid delivery, online grocery platforms are often constrained to offering a more limited product selection.

This restriction naturally leads to smaller typical order values.

From both a platform operator's perspective, regarding profitability, and a consumer's perspective, depending on the purchase scenario, the slower models often prove more appealing.

Price Sensitivity and Unit Economics

A significant portion of consumers prioritize price savings over the convenience of rapid delivery.

However, Q-commerce businesses, to achieve positive unit economics, struggle to match the pricing offered by alternative online and traditional retail channels.

This is due to the substantial costs associated with maintaining their extensive physical retail infrastructure.

Market Share Limitations

Consequently, Q-commerce startups in China have been limited to capturing only 5% of the online grocery market.

The reality is that the self-operated, rapid-delivery model doesn't address the majority of consumer demand.

European Market Potential

Our analysis indicates that Q-commerce could potentially represent 5%-10% of the European online grocery market.

This translates to a current market size of approximately $5 billion to $10 billion.

Eventually, companies will likely recognize that while the total addressable online market appears substantial, the total serviceable market for instant grocery is considerably smaller.

The Future of Online Grocery Competition in Europe

For Europe to achieve substantial growth in online grocery penetration – reaching figures like 10%, 20%, or even 40% – a significant increase in competition, innovative concepts, and investment in diverse business models is essential.

Success will depend on European entrepreneurs possessing expertise in retail, e-commerce, and logistics. A willingness to explore alternatives beyond the currently popular instant commerce model will be crucial for gaining market share from the established supermarket chains.

Here's a potential breakdown of how the competition among online grocery businesses might unfold:

Key Competitive Strategies

• Marketplace Dominance: Large online marketplaces are poised to maintain a leading position, particularly if they can bypass distributors and provide appealing customer engagement features alongside competitive pricing.
• Full-Scale Online Supermarkets: Companies like Ocado, offering same-day delivery and exceptional customer service, still possess considerable growth potential. They can draw inspiration from JD Super, which excels in unique product offerings – including exclusive deals – and has developed large-scale, efficient cold-chain operations.
• Opportunities for Specialized Retailers: Given European consumers’ increasing environmental consciousness and preference for locally sourced products, there remains a viable space for specialized online supermarkets.
• O2O (Online-to-Offline) Integration: Models like Wolt demonstrate promise, as evidenced by successes in other markets. The key lies in platforms developing systems that supermarkets can integrate to provide real-time inventory data online. This enables dual functionality, utilizing space for both retail and warehousing.
• Community-Based Group Buying: This sector is currently underdeveloped in Europe. The achievements of platforms such as Xingsheng Youxuan could serve as inspiration. While Picnic incorporates some elements of this approach, it currently lacks robust social engagement and convenient third-party pickup locations.
• Leveraging Existing Delivery Networks: Established food delivery services, like Delivery Hero, can significantly impact the online grocery landscape through various models. Utilizing existing rider networks, as demonstrated by Meituan, presents a considerable advantage. Meituan’s successful expansion into online grocery from food delivery, employing diverse strategies like supermarket-to-home delivery, community group buying, and quick commerce, provides a strong example. DoorDash’s rapid emergence as a competitor to Gopuff in the U.S. further illustrates this potential.

In China, many traditional retailers struggled to capitalize on the shift to online grocery shopping. Consequently, most opted to partner with online players, often resulting in the internet companies acquiring them.

However, European supermarket chains hold a much stronger position, boasting advanced logistics infrastructure and long-standing, robust relationships with brands and suppliers.

Moreover, many of Europe’s leading grocery retailers experienced substantial revenue growth last year – frequently in the double digits – and are currently more financially secure than ever before.

Their strength should not be underestimated. Ultimately, acquisition may represent one of the most favorable outcomes for prominent European online grocery startups. The recent strategic investment by Germany’s Rewe in Flink’s latest funding round could be an early indication of this trend.