Last month, Woolworths made a tectonic shift in the grocery delivery sector in Australia with a new announcement: “rapid deliveries for $5” via its new Metro60 app. The move will see approximately 4000 products, from fresh produce to cleaning supplies, available to customers within the hour.
Up until now, startups like SEND, VOLY and Milkrun have stepped in when the big supermarket-power-players have fallen short. But now that Woolies is firmly on the rapid delivery scene, what will happen to the little guys who came speedily from the rear to rescue consumers when they needed them most?
With the demise of SEND in May, and VOLY showing signs of weakness in June, does Milkrun have what it takes to maintain pole position in the grocery delivery race? As the little guys continue to navigate two sectors which have been hit hard in recent months — grocery and tech — there could be more to blame than external factors, as to why things haven’t worked out.
Delivery sector or not, all businesses should be watching this power play very closely, as there are basic business lessons to be learned by all.
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The three contenders
SEND, VOLY and Milkrun all provided consumers with new, fun and extraordinarily fast ways to get groceries delivered to front doors, when lockdowns and isolation stopped their weekly shop.
As consumers piled into these brands’ apps to try out what appeared to be too good to be true, investors in turn poured millions of dollars into each, with the expectation that one may win the lion’s share of the $100 billion annual grocery market and would be around for years to come.
After its collapse in May, SEND, which had raised less than its competitors in funding, blamed a number of external factors for putting on the brakes, from the war in the Ukraine to the sharp fall in listed tech stocks.
Just last week, it was reported that Voly had also slashed operations while up against the ‘currently tough tech sector’, laying off over half of its office staff in a rapid wave of job cuts.
Which leaves us with Milkrun, founded by Dany Milham, the highly successful serial founder of mattress brand Koala, and which received the most funding of all. So it’s the winner, right? Not necessarily.
In a recent turn of events, Milkrun has now too had to apologise for delays on what was its signature selling point: speed. Failing to admit defeat, however, Milham maintains Milkrun has a “far superior delivery experience” and that large scale retailers “fail to make e-commerce profitable”. And despite the startup recently putting its hand out for more funding, it says pleads its explosive growth in the sector is proof that his customers are here to stay.
Business models have to make money
Anyone with sound business knowledge of the Australian market will know that what works overseas may not work in Australia. Australians are culture-rich but also culturally isolated. They like what they like and will quickly decide if something isn’t ‘for them’. When it comes to the CBDs, we are also dealing with a different playing field to the likes of the US, the UK and India.
CBDs are often seen by founders as petri-dish-style hubs of tech startup success, made up of cheap products, low wages and, for the delivery sector, quick and convenient delivery routes. This may be the case overseas, but not here.
Wages are higher, a tub of strawberries can fluctuate between $3 and $12, depending on the week, and not forgetting, Australia is huge. Routes, even in the cities, are much further spread apart. If you base your Australian delivery model on some of the successes overseas, your business is already flawed.
Rewind to 2018, when a similar battlefield was drawn between food delivery services UberEats, Deliveroo and Foodora, and which ultimately led to Foodora departing Australia. Foodora claimed that this was to “focus on other markets where the company sees a higher potential for growth”. A reason which was then contradicted by the brands’ delivery drivers who claimed the company “had so many problems” and were happy to leave.
It might sound like stating the obvious, but businesses need a clear understanding of how they will make money. Those built on the ability to raise investor’s money are always going to be at risk of crashing, hard.
This route isn’t adding up
We are past the point of using the COVID-19 pandemic as an excuse. An unreliable market and unprecedented times do not erase the fundamentals behind business success. If your business model is not making a profit, it is not sustainable. Yes, there can be a period of awareness, investment (and in SEND’s case, giving away millions of dollars for months on end to consumers just to get them to try the technology), but long term, it isn’t sustainable.
Simple maths will tell you that this 15 minute delivery model does not work economically in the long term, taking into account rising prices of product, Australia’s minimum wage increase and the fact that Woolworths have come in with a competitive 4000-piece product range. Milkrun has been able to keep going by burning through a significant amount of investor’s cash. Even if it proceeds with adding alcoholic beverages to its arsenal, something has to give.
It’s simple, business maths
Let’s say the driver is paid $30 an hour (which is on the lower side in today’s market). Most 15 minute delivery services currently charge around $2.99 for delivery, plus a service fee of $1.99, so say $4.99 per delivery.
So if we take $30 per hour for the driver (excluding costs like uniforms, bike hire, insurance etc) a driver will need to complete a minimum of six deliveries per hour. That’s 10 minutes per delivery. Think about what’s involved to make that happen if you are offering a 15 minute delivery service.
On top of this, 15 minute delivery services will make money on the items they sell, but my current guess is that it’s not substantial, and likely leads to a lot of waste on fresh foods.
Woolworths’ one hour service, on the other hand, will consolidate the orders so a driver can turn up and pick up multiple orders in one go. This will allow the driver to go from one hour to the next to deliver the goods in the most efficient way possible. The driver still needs to do six deliveries an hour, but it’s certainly more possible.
Retailers like Woolworths have an additional advantage in that they can use their existing retail stores as micro warehouses, so they don’t need any additional warehouse or new stock: they simply turn these retail stores into dispatch centres. Retailers are playing catchup, but the race is on now to see how they can compete with these startups, and do so in a profitable way.
A balanced bike is a balanced business
The real imbalance here comes down to basic business acumen: money raised versus services offered. The pandemic paved a way for tech entrepreneurs to come up with easy-to-action ways to win the hearts and minds of consumers, and to become relevant, but perhaps without looking at the bigger picture.
Focus has been placed on competing with others to rise up the ranks — who can raise the most capital, and who can claim the most suburbs, rather than focusing on building a sustainable business which isn’t reliant on investors’ capitals.
Now the investor climate has changed, Milkrun and VOLY will be raising to make sure their unit economics become profitable. The only way they will be able to do this is to reduce the speed of the delivery, once they do this it will be hard to see how they can compete with the likes of Woolworths.
Every retailer who offers or wants to offer delivery should be watching this saga closely, keeping an eye out for the winning formula to achieve fast delivery in a cost effective manner. The key to profitable success will be batching orders into time windows so the driver can pick up many orders at once, driving down the total cost of delivery. Woolworths has the business basics down, and the rise and fall of the little guys may have even paved the way for the supermarket giant to perfect a long-standing ‘fast grocery delivery’ model. So long, and thanks for all the (speedily delivered) groceries.
That being said, a lot will vary depending on the type of goods you sell. If you’re selling an iPhone for $1200, a $30, 15-minute delivery will make commercial sense! If you’re a grocery delivery service… Only time will tell.