Why fast-track grocery delivery apps could soon leave supermarkets on the shelf | Collin Wallace

Over the past year, you may have noticed the rapid growth in all kinds of app-based delivery services. For a while, supermarkets weren’t involved: traditionally, the industry does not grow very much. The margins are small, but predictable.

But something strange has happened: interest and investment in app-based delivery has exploded, with various fast-track services offering to have groceries at your door within a specified number of minutes. Weezy is the market leader in the UK, but you may also have heard of Fresh Direct or Sainsbury’s 60-minute delivery option, Chop Chop. Grocery is a multibillion-pound industry that appears to be in the midst of a massive disruption.

One of the most famous business cases here is the story of Webvan. It was one of the first grocery delivery apps, started in the late 1990s in the US, but it also offers a cautionary tale. It was fuelled by massive investment, all too common for the dotcom era. It built massive warehouses, and bought trucks, delivery vehicles and machinery in a bid to become a digitally enabled grocery delivery chain. It raised US$800m, and ended up bankrupt three years later.

So why is this rash of apps any different? Onlookers could be forgiven for seeing the massive losses posted by some of the companies, and thinking they could be heading in the same direction. Simultaneously, you may also wonder at the even larger investments that continue to pour into them. If you are confused about why this is possible, you’re not alone.

To understand why this is happening, you have to understand that grocery delivery apps are not in the grocery business. They are in the data and logistics business. Grocery delivery apps today are “four-sided marketplaces”. Most people are only familiar with two of these “sides”: the customer and the grocer. If you have had a really bad, or really good, delivery experience, then you are probably also familiar with the third, courier “side” of the market – while food producers/manufacturers make up the fourth.

Delivery apps make money from all of these market participants. Customers pay the delivery cost, service fees and usually a mark-up on the groceries they purchase. The grocery chains pay a commission for each item sold. The couriers, typically classified as contractors, “pay” by forgoing the usual benefits of an employee, thus subsidising the cost of delivery, and the food producers/manufacturers pay for customer data and advertising within the apps.

You might think chains such as Tesco, Walmart and Aldi are better positioned than grocery delivery apps, because they’re so much bigger and have correspondingly large scale. However, it’s important to note the scale grocery chains have is largely a response to their low margins, and so doesn’t necessarily provide a competitive advantage. They have large operations, supply chains and shopfronts because competition has reduced their profits to a meagre 2% to 3%. They have to have tremendous scale not because they are thriving, but because it keeps them alive.