Covid-19: Will grocers and delivery app companies continue to be a match made in heaven?

The challenges to businesses created by Covid-19 are very apparent and discussed nightly on our news channels. However, out of adversity comes opportunity, and we have seen some unlikely partnerships develop to go after those opportunities. Could we have predicted six months ago that businesses such as McLaren, Rolls Royce or Dyson would enter into partnerships to produce ventilators? Marketing potential aside, the notion of re-tooling Formula 1 or Jet Engine production lines to produce medical devices would have seemed too far-fetched. On the other hand, we are also seeing partnerships borne out of Covid-19 that are perhaps surprising by their newness. The recent tie-ups between supermarkets and delivery app companies seem like a natural fit. Grocers are challenged by the costs of last mile delivery and the likes of Deliveroo, Stuart and Uber Eats have optimised the process. Is this a match made in heaven?  

Covid-19 has sped up the adoption of digital solutions across the value chain. Companies across all sectors have had to accelerate their multi-year digital transformation programmes and deliver them in a matter of weeks. Grocers saw an explosion in online orders, which they didn’t have the capacity or capability to deliver. In parallel, many of their customers were self-isolating and social distancing restrictions meant that footfall in stores dropped by 20% to 60%, depending on location. This was potentially disastrous, so supermarkets have been scrambling to put in place solutions to scale digital and optimise in-store. As this was happening, the bottom fell out of the delivery gig economy. Delivery app companies suddenly had thousands of drivers and delivery workers without work.  

The opportunity for partnership was clear. By joining forces with delivery app companies, supermarkets are able to leverage the gig economy to extend their delivery reach. A simple delivery service will not impact significantly on their existing operations and if the cost can be passed on to the consumer, it won’t impact margin. More consumers can get deliveries, more drivers are in employment and more grocery orders are fulfilled. It seems like a perfect solution to the crisis created by Covid-19.  

But will the partnership sustain once the crisis is over?  

To answer this, we must first look at the economics. What problem will these delivery partnerships solve? Simply put, the main costs in the grocery supply-chain sit in the stocking, picking and delivery of a basket of goods. Traditionally, supermarkets get their customers to do the picking and home delivery, thereby removing this cost. Online shopping has changed this, and supermarkets now employ pickers and drivers to perform these tasks. The impact on margin is well documented and supermarkets have been struggling to make their online channel profitable. Longer-term, it is difficult to see how adding a third party into the equation will improve things. Customers have been notoriously unwilling to pay a fair cost for picking and delivery. The delivery app companies will need a margin if they are going to continue to provide the service.

Secondly, grocery delivery is a complicated business. In today’s context, customers are more accepting of compromise and willing to live with limitations. Aldi is trialling a Deliveroo services with 150 products, Marks & Spencer (M&S) offers 60, and in France and Spain, Uber Eats partners to deliver from a limited assortment. For these delivery partnerships to sustain longer-term, they need to scale up to include ambient, fresh, and frozen products. When life returns to normal, customers will want a wider range, requiring specialised equipment, which is not practical for an Uber driver let alone a Deliveroo cyclist.  

Finally, the delivery app drivers make their money from frequency and rapid turn-around. In busy times, Uber drivers have picked up the next passenger before you have even left the car. When life returns to normal, lockdown eases and we start travelling again, the drivers will return to the more profitable, quick turn-around restaurant and passenger delivery services. They will not have patience for lengthy loading and unloading of grocery and the impact that this will have on their income.

However, this is not to say that the gig economy doesn’t offer a viable, long-term delivery channel for supermarkets. There is a large segment of customers that has adopted home delivery during the crisis and like many things, we expect this to sustain post-Covid. Supermarkets need to find a profitable way to leverage these services and to manage peaks in demand for home delivery.

Partnerships with pure play providers (Deliveroo, Lyft, Uber Eats, etc.) will likely struggle due to the economic challenges of the model. The future lies in retailer-owned or white-label solutions. Savvy grocers can see the power of extending their delivery workforce to include the gig economy. They are trialling the model today, with limited investment. When the model proves itself, we can expect the larger ones to develop their own solutions, with closer integration with inventory, better management of substitutions and enabling retailers to keep hold of orders and customer data.

What’s Hot on Essential Retail?