Remember when waiting a week for a delivery to arrive was perfectly acceptable?
In the last decade, companies have wowed us with next-day delivery, blown our minds with one-hour shipments, and now, you can order groceries and have them at your door within 15 minutes. The product of this evolution — and consumers’ soaring expectations — is quick commerce.
While not a new concept, quick commerce (or q-commerce as it’s also known) has leapfrogged forward as a result of the pandemic. The global market is now estimated to reach a value of €448 billion by 2030, and q-commerce is set to become one of the defining ecommerce trends of 2022.
However, competition in the space is fierce, and the stakes are high. Scores of companies have entered the market, but the scale required to run a profitable operation means that only the largest two or three players will achieve the necessary market penetration.
So if you’re new to quick commerce, here’s a rapid delivery (pun intended) of everything you need to know about this fast-growing sector. We’ll look at the current quick commerce market, dominant business models, and what you can expect for the future.
What is quick commerce?
We’ve touched on it above, but let’s start with a quick commerce definition. Quick commerce — also known as q-commerce or on-demand delivery — refers to the delivery of small orders of goods, often groceries, to urban customers in under an hour, though some deliveries take as little as 15 minutes. A natural evolution of ecommerce, the market has grown in response to consumers’ rising expectations and shifting behavior, particularly during the pandemic.
Quick commerce offers a range of benefits.
Local businesses can reach a wider customer base, while customers enjoy guaranteed availability of products and the ability to shop around the clock since most services operate 24/7.
At the same time, q-commerce has a positive sustainability impact as customers tend to buy only what they need for a day or two, which lowers food waste.
Making 15-minute delivery possible
Companies have achieved radical progress in reducing delivery times by optimizing every part of the process for speed and efficiency. Advances in technology have enabled improvements in logistics solutions and simple automation. Additionally, machine learning has created intelligent operations, such as optimizing routes and enabling drivers to deliver several orders simultaneously.
Many companies also use networks of strategically located micro-fulfillment centers or dark stores that stock relatively small product offerings.
An overview of the quick commerce market
The quick commerce market grew significantly in 2020, spurred on by the pandemic and consumer preferences shifting towards home delivery for safety reasons. Now, the market in Europe alone comprises over a dozen companies that specialize in instant needs, such as Gopuff, JOKR, and Zapp.
Some incumbent retailers are responding to the challenge by investing in their own q-commerce offerings, including Coles in Australia and Żabka in Poland. Others are forming partnerships with on-demand delivery experts. Carrefour has joined forces with Uber Eats and Cajoo to launch Carrefour Sprint, while Walmart is working with Spain’s Glovo.
Existing online food-delivery service giants like Delivery Hero are also making moves to capture market share.
“We’re only getting started with quick commerce. There’s so much innovation coming up in this space that will transform the business in the next five to ten years.”
VP Commercial Quick Commerce at Delivery Hero
Despite operational challenges and rather low profitability, funding levels and company valuations have skyrocketed since the COVID-19 crisis began. Gorillas became the fastest European startup to reach unicorn status in March 2021 when it announced its $290 million Series B round, less than a year after launching. In September 2021, the company raised a further $1 billion in a Series C round led by Delivery Hero and is currently valued at $3.1 billion.
Another giant in the instant-needs space, Philadelphia-based Gopuff was founded in 2013 and became a unicorn in August 2020. The company has raised a total of $3.4 billion in funding in the last six years and, although unconfirmed at present, it’s rumored that Gopuff is planning an IPO in 2022.
Quick commerce business models
On the surface, it may seem like quick commerce companies compete purely on delivery speed, with many operating in the ten to 15-minute range. However, some companies also differentiate themselves based on the variety of products they stock, with some offering unique products like premium groceries produced locally.
Currently, companies in the space follow two quick commerce business models:
- Delivery only services — Companies like Delivery Hero, DoorDash, and Uber Eats partner with third-party retailers, such as convenience stores, supermarkets, and pharmacies, to deliver products ordered via their delivery platform.
- Vertically integrated operators — Companies like Gorillas, Zapp, and Gopuff stock their own inventory in micro-fulfillment centers or dark stores that they have strategically located close to as many customers as possible. Typically, each dark store carries a curated range of around 1,000–2,000 SKUs that companies can adapt to meet the needs of the areas they serve, though some are beginning to push these limits higher.
Margins in the grocery sector are notoriously thin, and quick commerce is no exception. Companies can earn profit on the delivery fee, product margins on the goods they sell, or a hybrid of the two approaches. Although the vertically integrated model requires greater effort and operators have higher costs due to warehouse rental fees, in theory, it should also yield higher returns.
Critical KPIs to ensure success
Given the high level of competition and low profit margins characteristic of the market, companies must remain hyper-focused on optimizing their businesses.
As many companies’ value propositions are based on delivery speed, arguably the most important KPI they can monitor is average delivery time.
Similarly, achieving close alignment between customer demand and the supply of riders is crucial. Companies must ensure they have the appropriate number of riders available to cover times of peak demand and manage riders on stand-by during times of lower demand. To motivate riders, some companies pay a minimum salary plus various multipliers or bonuses, for example, in periods of high demand or poor weather.
Staff retention, however, is a key challenge. Drivers are often independent contractors and have the option to work for multiple companies, so pay rates influence which company they choose. At the same time, workers have called out poor pay and conditions in the industry, with Gopuff’s drivers in the US staging a one-day strike after the company reduced minimum hourly pay rates and bonuses.
Average basket size is another important metric, and companies will try to upsell and cross-sell products where possible to increase their profit margin.
And finally, monitoring customer acquisition costs and customer retention numbers is vital.
Customer loyalty in the q-commerce space is unforgivingly low and is possibly one of the greatest challenges faced by players in the market.
Companies employ aggressive marketing tactics to attract customers, and whoever offers the best deal on any given day tends to win.
To counter this issue and help keep customer acquisition costs at a manageable level, companies are investing in machine learning-backed next best action (NBA) solutions. Using predictive and prescriptive algorithms, these solutions provide insights into customers’ actions, anticipate their needs, and inform the most effective response or next best action.
Looking to the future of quick commerce
Quick commerce has been naturally evolving since the 1990s, with a perfect storm of demand, consumer expectations, and technology now putting this new sub-industry firmly on the map.
But as 2022 gets underway, a question mark remains over the profitability of businesses currently operating in the quick commerce space. Given the high probability that only the companies with the highest market share will survive in the long term, many are focused on scaling as fast as possible at the expense of short-term profit.
According to TechCrunch, Gopuff recently reported an EBITDA of negative $150 million despite earning $340 million in revenue, and Gorillas may be operating at negative unit economics of -6%. These deep losses are likely to continue until the key players have built the necessary operational, technological, and customer barriers to lock the competition out of the market.
Once companies have consolidated their positions, they will begin optimizing both sides of the profitability equation. For example, we may see companies cutting costs by reducing drivers and closing dark stores while simultaneously improving revenue by raising delivery fees or increasing product margins.
Anticipating the next big disruptor
As we’ve hit 15-minute delivery times, companies have likely reached a point of diminishing returns in their attempts to get faster. From here, removing further minutes will become increasingly expensive and difficult to scale and ultimately won’t provide much extra value to the end customer. Therefore, the next big disruption will come from drone delivery.
Companies like Amazon and Walmart are already experimenting with drones, which have a variety of advantages over two-wheeled drivers. They can fly in straight lines to wherever they’re needed, increasing geographical coverage and slashing delivery times. Also, there is no limit to the amount of time they can be in the air, and they cost less to operate, providing economies of scale that add up.
One European company making huge leaps forward in this space is Irish startup Manna. Its CEO and founder Bobby Healy has ambitions to turn his pilot service into a worldwide drone delivery system capable of high-volume distribution. “It does seem like a mad idea, but the thing is that drone deliveries are absolutely going to happen across the globe, and it will lead to huge behavioral change,” he told The Irish Times.
Whatever the future of quick commerce may bring, the market is still relatively young, and you can count on many exciting developments to come.