Online grocery startups like HappyFresh, which "uberise" grocery shopping by delivering products from big retailers to consumers' homes, may be in a delicate strategic situation with giants like Tesco and Big C implementing their own online grocery offerings.
Grocery delivery services trace a narrative of established players competing and cooperating during a digital transition. On the one hand, big-format retailers like Tesco and Big C have been building their own robust delivery platforms, but services such as HappyFresh often offer superior customer experiences while delivering products from these same retailers.
While retailers welcome third-party platforms to expand their sales, the question is how much longer they will allow them to profit at the expense of their own offerings.
"The natural winners in the online delivery space are the existing grocery players because they already have scale and a physical network, and it is very easy for a place like Tesco to prevent third-party-app drivers from picking up items in its aisles," says Ali Potia, head of McKinsey's Asia Consumer Insights Centre and core leader of the firm's consumer goods and retail practice in Southeast Asia.
Guillem Segarra, chief executive of HappyFresh, says the company takes "pride in its relationship with the big retailers. We are partners, not competition. Traditional retailers have decades of experience in sourcing and maintaining an inventory. We, on the other hand, have deep expertise in e-commerce, logistics, digital storefronts and personalisation".
Startups like HappyFresh don't conflict with retailers' platforms, Mr Segarra says, because their on-demand, same-day delivery and flexible delivery complement the supermarket's less-flexible offerings.
"They see us as a great addition, and less of a threat," he says.
Segarra: We are partners, not competitors
Years ago, online grocery delivery seemed to be one of the last frontiers of the digital age. Unlike books and electronics, food is bulky, has to be delivered instantly and is hard to make a profit from. The grocery business has traditionally had very slim margins, and adding the strain of delivery to individual homes at different times can become a burden on the bottom line if not executed efficiently.
Grocery delivery, however, has become commonplace in both developed and developing markets, especially among the young and wealthy.
"As of today, we serve urban consumers whose lives are naturally interwoven with mobile technology, over 75% of whom are female," Mr Segarra says.
According to to the Boston Consulting Group, the global online grocery market in 2018 will be worth US$100 billion (319 billion baht). Developing and emerging markets will represent close to 35% of the market.
"Anyone that tells you that consumers will never buy groceries online is lying," Mr Potia says. "There are no demand-side problems, even in emerging markets."
Large-format retailers were slow to launch robust online delivery platforms in part because they were unwilling to disrupt themselves, but also because they were unwilling to invest enough to build robust digital offerings.
"Either because they haven't got their act together, or because they don't have access to large amounts of digital capital, you have startups that are filling that gap," Mr Potia says. "It's a classic story."
Online grocery startups follow two basic models. On the one hand are players like Ocado, with warehouses and inventory. Making this capital-intensive model viable is hard because these startups have to build scale, just like their brick-and-mortar counterparts, in order to secure favourable terms with suppliers.
"In order to make it work, you have to have an efficient warehouse that is highly automated, and you need to have extremely robust dynamic route optimisation," Mr Potia says.
On the other hand, asset-light players are more common in Southeast Asia: Honestbee and HappyFresh provide grocery delivery by hiring a large army of drivers to pick up orders from the shelves of big retailers. These models can scale quickly, just like Uber or Airbnb did, but they are hard to run at a profit and occupy a vulnerable strategic position.
Potia: Key is diversifying from pure grocery
HappyFresh has seen double-digit growth month-to-month over the past year, according to Mr Segarra. The company reached profitability in early 2017, nearly two years after its founding. Asked about how low delivery fees can go while still turning a profit, Mr Segarra says it depends on "the scale and technology" of the company.
Mr Potia, who surveyed more than 400 food entrepreneurs in Southeast Asia, thinks "it's nearly impossible to make a profit if the only thing you are delivering is groceries. As long as you get funding you can keep going, but successful players diversify into other sectors, just like the Singapore-based Honestbee".
"These startups can survive only as long as supermarkets like Tesco and Big C allow them to," he says. "This should push them to diversify away from a pure grocery model."
Mr Segarra says HappyFresh's competitive edge over Honestbee is precisely its focus on groceries.
As grocery sales move online, large-format stores are adapting by offering more sophisticated ready-to-eat and ready-to-go food services, Mr Potia says.
In supermarkets like those in Britain, where online grocery has arguably penetrated the deepest, some retailers have transformed part of their real estate into living space.
Moving forward, supermarkets may not be just where people pick up ingredients to cook at home, but venues that emphasise the experience as a whole.
Mr Segarra doesn't think retailers will disappear: "Shopping is, especially in Asia, a social experience. However, retailers that stay will have to provide a better experience for their customers."