Grocery Retail is permanently disrupted by COVID. During the past 3 months most national grocery chains have added a significant amount of revenue from a shift in food sales from restaurants shut down by the pandemic. Most of this revenue is generated through digital channels such as e-commerce sites, mobile apps and online delivery services. Up until now, customers have been slow to embrace online grocery shopping. However, based on recent market research studies we learned that after new shoppers experience the convenience and ease of buying groceries online, they are most likely to continue to buy this way in the long run. And that is exactly what is happening i.e. Online groceries and delivery services are seeing a surge of app downloads and new sign-ups, pushing customers beyond one of the big barriers to entry. Customers now have the familiarity to keep up with the habit. This is fantastic news for online groceries as they see their top revenue skyrocket. However, the story for margins is slightly different as the online grocery business has always been a logistical challenge due to the fact that the online commercial model shifts more variable costs to grocers instead of customers. The pandemic has actually magnified those pain points. Going forward as demand normalizes, competition intensifies, and e-commerce becomes the new norm, we expect profit margins of online groceries to be heavily pressured.
Given the disruption that is currently happening in the global online grocery value chain, what is the right strategy for an online grocery shop to ensure that shareholder value increases over time? How does this strategy look like? For the purpose of our analysis we identified Picnic as one of the most promising and best-in-class online grocery shops in the Netherlands. For the record, Netherlands is a very competitive market and has the highest supermarket density in the world, yet a technology company such as Picnic has been able to gain significant market share from established competitors.
Picnic is a Dutch online grocery retailer founded in 2015. According to their website, the company has developed a fast-growing, low-cost business model that is somehow different from all other grocery delivery services operating today. There are three main factors that set the company apart from competition:
a. Picnic runs a fixed delivery route instead of using on-demand delivery. The cost advantage that comes from using regular bus route model allows the company to capture significant savings which allow the company to offer to its customers free delivery and more affordable prices.
b. Picnic prices for the mass market – not the premium market. Affordable pricing causes the customer base to expand and that operates as a flywheel that enables the company to grow fast
c. In terms of adding new routes and geographies to current mix, the company has adopted the “Tesla” model i.e. Picnic first measures demand for its products and services and then once there is enough density to support margins it then launches new routes that have high chances of becoming profitable very fast. It builds waiting lists of interested consumers. Moreover, consumers receive a small gift for each week they wait on the list, and the current list is reported to have several thousand people on it.
Last November, the company raised 250MM euros [$278MM] in a new round of funding. Picnic is currently backed by a group of wealthy investors including the investment arm of the entrepreneurial Fentener van Vlissingen family. Other backers include De Hoge Dennen Capital, the De Rijke family and Hoyberg, the investment arm of the Hoyer family, which is a shareholder of Heineken NV.
The company has recently built a fully automated fulfillment center for online groceries in Utrecht, Holland. The center aims to process around 150,000 orders every week.
Going forward as they are building up their e-commerce fulfillment capabilities, the company is currently exploring options to expand to other product categories besides groceries. The company believes that food and online groceries is only the entry point. Their ultimate goal, according to the founder and CEO, is to disrupt and significantly improve the e-commerce experience.
Last year was a record for Picnic, which added almost 300K new customers in the Netherlands and Germany. Picnic’s annual revenue currently stands at about 300MM euros. Picnic relies on its distribution model and technology to keep costs down and profits up. Due to its low-cost structure & delivery time optimization approach Picnic has always had a positive EBITDA since 2017.
Picnic remains dedicated to Sustainability. The company wants to revolutionize and reinvent the food supply chain, from the producer to the consumer, and they want to do this on a sustainable fashion. As an example, they have been working really hard to reduce the amount of packaging they use substantially. Their philosophy when it comes to packaging is that if you do the picking in a warehouse you don’t need this extra packaging – and so you can make it much more efficient, much more sustainable and better for the customer. Moreover, the company has installed solar panels to their warehouses, which help power the firm’s fleet of almost 1K electric vehicles. Between deliveries, or on non-peak days, their electric vehicles remain plugged into the smart chargers, storing batteries with solar energy. At night, the energy is redirected to the frozen cells to keep the food fresh.
Picnic uses data and analytics to continuously optimize operations, services and offerings and make decisions [this is what I refer to as the ultimate decision engineering machine]. They collect data not only from the app, but also from the warehouses and electric vehicles. They use the data to identify bottlenecks in the flow of goods, optimize operational efficiency, communicate with their customers and ensure that their fleet of electric vehicles is used in the most efficient way. The company is constantly investing in data science and engineering projects i.e. their data science team has recently built a sophisticated vehicle routing model, that determines which routes are optimal given the customers and their placed orders, amongst other factors. They also apply analytics to remove friction and improve overall customer experience in the mobile app. I am also hearing they’ve been experimenting with AI voice-driven order placement interfaces such as Alexa and Echo. When the shift from mobile to voice gets traction and v-commerce becomes a reality they will be definitely ready.
There are several opportunities for additional revenue streams that will make the company more successful in the long run:
Third Party Delivery Services
The company designs its own electrical vans so one idea would be to offer this as a service to other e-commerce companies. Those electric vans would be ideal for last mile type of deliveries or customer returns. The company should explore partnership opportunities with Amazon Europe and other supermarket companies in Continental Europe that don’t have e-commerce capabilities in place
Paid Advertising and Vendor Marketing Services
There’s a huge opportunity for Picnic to leverage advertising to create a flywheel effect. Picnic should allow food vendors to promote certain items on its app. This marketing activity could become an additional revenue generator for the company as Picnic will charge vendors and advertisers a certain fee for paid advertising services. Picnic will provide advertisers with measurable results by leveraging first party customer data along with marketing campaign exposure data and other third-party media channel data. Scale and improved customer experience drive selection. Selection results in increased traffic which attracts advertisers. Enhanced measurability and robust performance marketing capabilities drive more sales through paid advertising.
Launch a Premium Food Membership Service
Launch a premium subscription service for delivering locally grown organic items to the premium market. A basket of products could include high margin items such as strawberries [or any type of berries], goat milk, sheep yogurt, vitamins, fish and special meat. The service will be offered for an annual fee and should entitle members to additional services such as discounts, special offers and 2-hour delivery service.
As customers desire for fresh foods, emerging brands, unique flavors, and transparency, Picnic should look for ways to strengthen its relationships with farmers, small cooperative grocers, and agriculture communities across Europe. The company could explore options to increase sales of locally grown produce and perhaps launch its own product line of organically certified products. While the demand for more locally raised products has grown, the technologies such as block chain platforms that ensure traceability and sustainability in supply chains, that move these items from the fields & small factories to the fulfillment centers of online groceries have struggled to keep pace. Local farmers are eager to work with online retailers. However, getting their supply and operations up to speed requires time and investment, while standards in food safety and other areas are often burdensome. Most local producers interested in sourcing to retail markets need to get certified and some premium online marketplaces require more expensive international certifications as customers desire for fresh foods, emerging brands, unique flavors, and transparency.
My recommendation for Picnic is to try to strengthen those supplier/vendor relationships and provide transparency across supply chains. The goal should be to create a community of smart shoppers who are interested in learning more about sustainably grown food and are looking to buy the best locally grown food regardless cost. This will eventually enable Picnic to increase margins and start exploiting network effects as the company will leverage the information provided by community’s members to expand their selection of locally flavored products. That is exactly what Whole Foods tried to do by offering a uniquely defined offline retail experience based on sustainability and premium organic offerings. Whole Foods was acquired by Amazon a couple of years ago for $13.4B.
Grocery Retail is permanently disrupted by COVID. During the past 3 months most national grocery chains have added a significant amount of revenue from a shift in food sales from restaurants shut down by the pandemic. Most of this revenue is generated through digital channels such as e-commerce sites, mobile apps and online delivery services. Up until now, customers have been slow to embrace online grocery shopping. However, based on recent market research studies we learned that after new shoppers experience the convenience and ease of buying groceries online, they are most likely to continue to buy this way in the long run. And that is exactly what is happening i.e. Online groceries and delivery services are seeing a surge of app downloads and new sign-ups, pushing customers beyond one of the big barriers to entry. Customers now have the familiarity to keep up with the habit. This is fantastic news for online groceries as they see their top revenue skyrocket. However, the story for margins is slightly different as the online grocery business has always been a logistical challenge due to the fact that the online commercial model shifts more variable costs to grocers instead of customers. The pandemic has actually magnified those pain points. Going forward as demand normalizes, competition intensifies, and e-commerce becomes the new norm, we expect profit margins of online groceries to be heavily pressured.
Given the disruption that is currently happening in the global online grocery value chain, what is the right strategy for an online grocery shop to ensure that shareholder value increases over time? How does this strategy look like? For the purpose of our analysis we identified Picnic as one of the most promising and best-in-class online grocery shops in the Netherlands. For the record, Netherlands is a very competitive market and has the highest supermarket density in the world, yet a technology company such as Picnic has been able to gain significant market share from established competitors.
Picnic is a Dutch online grocery retailer founded in 2015. According to their website, the company has developed a fast-growing, low-cost business model that is somehow different from all other grocery delivery services operating today. There are three main factors that set the company apart from competition:
a. Picnic runs a fixed delivery route instead of using on-demand delivery. The cost advantage that comes from using regular bus route model allows the company to capture significant savings which allow the company to offer to its customers free delivery and more affordable prices.
b. Picnic prices for the mass market – not the premium market. Affordable pricing causes the customer base to expand and that operates as a flywheel that enables the company to grow fast
c. In terms of adding new routes and geographies to current mix, the company has adopted the “Tesla” model i.e. Picnic first measures demand for its products and services and then once there is enough density to support margins it then launches new routes that have high chances of becoming profitable very fast. It builds waiting lists of interested consumers. Moreover, consumers receive a small gift for each week they wait on the list, and the current list is reported to have several thousand people on it.
Last November, the company raised 250MM euros [$278MM] in a new round of funding. Picnic is currently backed by a group of wealthy investors including the investment arm of the entrepreneurial Fentener van Vlissingen family. Other backers include De Hoge Dennen Capital, the De Rijke family and Hoyberg, the investment arm of the Hoyer family, which is a shareholder of Heineken NV.
The company has recently built a fully automated fulfillment center for online groceries in Utrecht, Holland. The center aims to process around 150,000 orders every week.
Going forward as they are building up their e-commerce fulfillment capabilities, the company is currently exploring options to expand to other product categories besides groceries. The company believes that food and online groceries is only the entry point. Their ultimate goal, according to the founder and CEO, is to disrupt and significantly improve the e-commerce experience.
Last year was a record for Picnic, which added almost 300K new customers in the Netherlands and Germany. Picnic’s annual revenue currently stands at about 300MM euros. Picnic relies on its distribution model and technology to keep costs down and profits up. Due to its low-cost structure & delivery time optimization approach Picnic has always had a positive EBITDA since 2017.
Picnic remains dedicated to Sustainability. The company wants to revolutionize and reinvent the food supply chain, from the producer to the consumer, and they want to do this on a sustainable fashion. As an example, they have been working really hard to reduce the amount of packaging they use substantially. Their philosophy when it comes to packaging is that if you do the picking in a warehouse you don’t need this extra packaging – and so you can make it much more efficient, much more sustainable and better for the customer. Moreover, the company has installed solar panels to their warehouses, which help power the firm’s fleet of almost 1K electric vehicles. Between deliveries, or on non-peak days, their electric vehicles remain plugged into the smart chargers, storing batteries with solar energy. At night, the energy is redirected to the frozen cells to keep the food fresh.
Picnic uses data and analytics to continuously optimize operations, services and offerings and make decisions [this is what I refer to as the ultimate decision engineering machine]. They collect data not only from the app, but also from the warehouses and electric vehicles. They use the data to identify bottlenecks in the flow of goods, optimize operational efficiency, communicate with their customers and ensure that their fleet of electric vehicles is used in the most efficient way. The company is constantly investing in data science and engineering projects i.e. their data science team has recently built a sophisticated vehicle routing model, that determines which routes are optimal given the customers and their placed orders, amongst other factors. They also apply analytics to remove friction and improve overall customer experience in the mobile app. I am also hearing they’ve been experimenting with AI voice-driven order placement interfaces such as Alexa and Echo. When the shift from mobile to voice gets traction and v-commerce becomes a reality they will be definitely ready.
There are several opportunities for additional revenue streams that will make the company more successful in the long run:
Third Party Delivery Services
The company designs its own electrical vans so one idea would be to offer this as a service to other e-commerce companies. Those electric vans would be ideal for last mile type of deliveries or customer returns. The company should explore partnership opportunities with Amazon Europe and other supermarket companies in Continental Europe that don’t have e-commerce capabilities in place
Paid Advertising and Vendor Marketing Services
There’s a huge opportunity for Picnic to leverage advertising to create a flywheel effect. Picnic should allow food vendors to promote certain items on its app. This marketing activity could become an additional revenue generator for the company as Picnic will charge vendors and advertisers a certain fee for paid advertising services. Picnic will provide advertisers with measurable results by leveraging first party customer data along with marketing campaign exposure data and other third-party media channel data. Scale and improved customer experience drive selection. Selection results in increased traffic which attracts advertisers. Enhanced measurability and robust performance marketing capabilities drive more sales through paid advertising.
Launch a Premium Food Membership Service
Launch a premium subscription service for delivering locally grown organic items to the premium market. A basket of products could include high margin items such as strawberries [or any type of berries], goat milk, sheep yogurt, vitamins, fish and special meat. The service will be offered for an annual fee and should entitle members to additional services such as discounts, special offers and 2-hour delivery service.
As customers desire for fresh foods, emerging brands, unique flavors, and transparency, Picnic should look for ways to strengthen its relationships with farmers, small cooperative grocers, and agriculture communities across Europe. The company could explore options to increase sales of locally grown produce and perhaps launch its own product line of organically certified products. While the demand for more locally raised products has grown, the technologies such as block chain platforms that ensure traceability and sustainability in supply chains, that move these items from the fields & small factories to the fulfillment centers of online groceries have struggled to keep pace. Local farmers are eager to work with online retailers. However, getting their supply and operations up to speed requires time and investment, while standards in food safety and other areas are often burdensome. Most local producers interested in sourcing to retail markets need to get certified and some premium online marketplaces require more expensive international certifications as customers desire for fresh foods, emerging brands, unique flavors, and transparency.
My recommendation for Picnic is to try to strengthen those supplier/vendor relationships and provide transparency across supply chains. The goal should be to create a community of smart shoppers who are interested in learning more about sustainably grown food and are looking to buy the best locally grown food regardless cost. This will eventually enable Picnic to increase margins and start exploiting network effects as the company will leverage the information provided by community’s members to expand their selection of locally flavored products. That is exactly what Whole Foods tried to do by offering a uniquely defined offline retail experience based on sustainability and premium organic offerings. Whole Foods was acquired by Amazon a couple of years ago for $13.4B.
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