2022 Will Be The Year Of Reckoning For Delivery Economics
15 March 2022Retail Prediction Tracker: The Reckoning Of Delivery Economics Will Lead To Consolidation As Consumer Usage Declines
As part of our 2022 Retail And Retail Technology Predictions, we are tracking the updates that either confirm or refute our predictions. Here is a list of articles about the reckoning of delivery economics and you can read the full prediction below.
The Reckoning Of Retail Delivery Economics Tracker
Aldi has cancelled its contract with Deliveroo to focus on Click-and-Collect, where it can offer a service that shoppers are willing to pay for and still make money. (1-23-22)
Instacart has rolled out a suite of new tools to help picker productivity including in-store navigation featuring interactive maps, which has been trialed in over 80 stores so far. (3-10-22)
Fridge No More on Buyk both close down in one week because funding dries up. Britain Ladd concluded: “Fridge No More lost a massive amount of money on every order they fulfilled. The model was flawed, and the unit economics were never going to improve. It couldn’t raise more capital and the company was forced to shut down.” (CNN 3-11-22)
Instacart has announced that it has slashed its valuation from $39 billion to $24 billion or down 39% YoY. (RetailDive 3-28-22)
Instacart Shoppers have reported to the WSJ that work is getting harder and less lucrative. (WSJ 5-1-22)
Delivery service Jokr leaves the US amidst mounting losses (Retail Dive 6-16-22)
Ultra-fast delivery startup Gorillas is back-tracking with deep cuts as venture funding has dried up. Last year, delivery services raised $4.5 billion and this year - just $248 million. (Bloomberg Checkout 6-20-22)
McKinsey estimates that the metaverse could create $5 trillion in value by 2030 (Retail Dive 6-22-22)
Why the party’s over for rapid delivery. Great graphs on why ultra-fast delivery is too expensive and differentiates on a level of speed the consumer just doesn’t care about. (The Grocer UK 7-17-22)
It’s pretty clever actually. Somehow delivery apps like Instacart, Seamless/Grubhub, UberEats, DoorDash/Caviar and others have convinced us that a $30 order should be $50. There’s a delivery charge, a service charge, taxes and don’t forget that tip. It’s magic and poof, there goes your money.
Flush with additional cash injected into the economy and wanting to indulge in a pandemic world of forced deprivations, consumers accepted the charges. And VCs have pumped in so many dollars to the delivery business leading startups to spend ungodly amounts of money in subsidizing prices - unbelievably these prices are actually low.
Even at these prices most lose money with Instacart paying $15-20 per hour for shoppers who have to complete both shopping and delivery at an average rate of 1 per hour. But don’t worry, they will make it up in scale, right? Right?!? (Note: Instacart claims they made $3 per order in April 2020 but raised $265 million in Q1 2021 and $232m in Q4 2021). No wonder Chris Walton named Instacart the retailer most likely to struggle in 2022. For grocery delivery, the delivery economics don’t work because margins are already razor thin.
But the cost of labor is increasing and both fiscal and consumer budgets are tightening. 2022 is when the “Great Delivery Reckoning” will be felt. The writing is already on the wall. Larger delivery players are adapting business models to search for profitability. For example, Instacart acquired FoodStorm to help grocers turn into catering kitchens, but more importantly to offer their platform as a software subscription at software margins. It’s becoming harder and harder to keep raising money without improving profitability. Shipt is opening up consumers to pick “personal shoppers,” a stepping stone to new concierge services as it struggled to keep share with Instacart despite the Target advantage.
Rapid delivery startups will thrive in 2021, drunk on billions in VC funding, but will only take hold in large and dense cities like New York (which is why NYC is the battlefront of the ultrafast retail delivery war). But the costs will be astounding both in real-estate and labor. Everyone is looking to the hope of autonomous delivery to reduce labor charges. Last year we covered so many stories of drone and robot delivery in This Week In Retail. But nothing remotely at scale. Yes Walmart, Kroger and even regional groceries tried drone delivery. And Numo robots are apparently delivering Domino’s. But automation at any meaningful scale is several years to even a decade away.
So what’s the end game here? Similar to Uber, which raised prices 40% in the last year (Ouch!) It will be all about consolidation to a couple key winners with physical retail and microfulfillment networks that favor large incumbents like Kroger, Target, Gopuff/Bevmo and Walmart, which launched it’s GoLocal delivery service to offer other retailers (see below on unbundling).
Success will also require service diversification. Few people realize how important Uber’s acquisition of Postmates was in saving their business and redirecting ride-share capacity to delivery. As delivery usage subsides, competition will get more cutthroat. As several vendors fail, they will be gobbled up for customer purchase data and geographical strength. Capacity has to be able to be redirected to changing service needs, delivery back to ride share, and even some new services that hasn’t been offered (B2B messenger delivery, in store shopper marketing services like Survey.com, price comparison research, secret shopper, etc.).
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