Are rapid grocery delivery companies profitable?

How about having your groceries delivered at home within 10 minutes after placing your order? German company Gorillas is one of many rapid grocery delivery startups worldwide that provide this new type of shopping service. Competitor Flink is also making a name for itself, and several other parties are expected to launch similar services soon. Investors are eager to jump on the fast-delivery train: they consider these companies the greatest grocery disruptors and invest billions in them. High time for a closer look!

Receiving groceries within 10 minutes… really?

The other day, I wanted to make lunch and discovered I'd run out of margarine. A perfect moment to test Gorillas' service. At 10:21 am, I ordered margarine and a few other lunch products. I paid a total of 10.77 euros for my groceries. The delivery costs were 1.80 euros. At 10:25 am — 4 minutes later — the delivery girl was at my door and handed me my groceries. It's safe to say Gorillas' slogan, "Faster than you," is more than accurate! However, some believe the concept is just a hype, and it will never be profitable. Are they right? Or are we dealing with an innovative, lucrative business model?

Minimum order value: let's do the math!

First, let's calculate the required revenue per order.

• Total cost per delivery is 5.50 euros

Let’s assume it takes 15 minutes on average to pick an order, deliver the items, and return to the warehouse. That means a delivery person can deliver up to 4 orders per hour. So, wage costs amount to 5 euros per delivery. We shouldn't forget to add the costs of an e-bike, which are an estimated 0.5 euros per delivery. Consequently, total cost per delivery is 5.50 euros.

• 15 cents of each euro of revenue can be used to pay delivery costs

The average gross margin (the difference between a product's purchase and sales prices) of a Dutch grocery store is 24%. As Gorillas' prices are 5-10% higher than those of a grocery store, I believe its average gross margin is approximately 30% — which should also cover a range of other costs: sales (marketing), dark stores and their employees, and overhead. I estimate these to be 15% of revenue. That means Gorillas can use 15 cents of each euro of revenue to pay delivery costs.

• The minimum order value should be 25 euros to cover costs

The customer pays delivery costs of 1.80 euros per order. So, another 3.70 euros should be paid from revenue. Gorillas can accomplish that if the minimum order value is 25 euros (since 25 x 0.15 = 3.75 euros).

The million-dollar question: is it a lucrative concept?

There are 3 factors that determine whether a business model is profitable:

1. Revenue per order

To make profit, Gorillas requires an average order of 25 euros. Whether that's feasible depends on the type of customers the company will attract. On the one hand, its customer base will consist of people who forgot to buy 1 or 2 lunch or dinner products at the grocery store. They will spend far less than 25 euros. But Gorillas claims to aim for another audience as well: people who order an entire lunch or dinner, or a set of (party) snacks. If, for example, a family of 4 places this type of order, they will spend a lot more than 25 euros. That said, a threshold value of 25 euros per order on average seems pretty high for the service we're dealing with.

2. Delivery people

In my above calculation, I assumed a delivery person will deliver 4 orders per hour on average throughout their working day. But chances are demand will fluctuate. More orders will likely be placed around lunch and dinner, which means delivery people probably won’t be fully occupied outside these peak hours. The results: a delivery person will deliver less than 4 orders per hour, and the total cost per delivery will increase. That means the minimum order value should increase accordingly.

3. Sales costs

Although I've assumed sales costs will be similar to those of grocery stores (2% of revenue), the aggressive growth strategy and fierce competition will likely result in significantly higher sales costs in the coming years. In 2020, for example, Take Away spent 18% of revenue on marketing.

Here’s the conclusion we can draw from all this: based on its current prices, Gorillas doesn't seem to have a lucrative business model. Does that mean the concept isn't interesting? Not at all. The most likely scenario is that Gorillas will first try to increase the average revenue per order and improve the utilization of their delivery people by encouraging customers to order during off-peak hours. It probably won’t suffice, and higher prices or delivery costs will be required to make the service profitable.

Even if I had to pay a bit more for Gorillas, I would continue to use the service. It's extremely quick and convenient — and if I'm having friends over, I’m happy to spend a few extra euros on dinner and snacks!

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