The I Want it Now Generation: Quick-Commerce and Where It’s Headed

• Gone are the days where free delivery or even 2-day delivery is the norm…we as consumers want BETTER! Enter Quick-, or Q-Commerce: the newer and faster next step in the evolution of eCommerce where we can expect delivery in as little as 15 minutes.
• The Go-Puffs of the world have started on a journey to prove operational excellence can enable profitable delivery in less than an hour. The beginning is food delivery but once it’s cracked, the opportunities are endless.
• The model works thanks to dark stores, fewer SKUs, and “riders” instead of drivers
  …but it’s not easy. New entrants are finding it exceptionally difficult to maintain healthy unit economics given the amount of marketing investment and discounts needed to capture consumers’ share of wallet.
• The U.S. has remained largely untapped (with a few exceptions). The most dominant players who have optimized operational capabilities exist outside the U.S. – it is only a matter of time until they enter the U.S.
• The keys to success will be an optimized supply chain and personalized customer experiences to be able to build not just a delivery company, but also a brand.

The current Q-Commerce market was valued at $25B in 2021, and is expected to grow to $72B by 2025 (Forbes). It is understandable then that the space raised about $6M in VC investments in the first nine months of 2021.

You may be asking yourself, why now? “Instant” delivery seems like a no-brainer. Answer: there’s a new consumer. We as shoppers have changed tremendously, and the pandemic has accelerated some of the transitions that were already taking place. A few consumer truths help to explain the rise of Q-Commerce:

• We are lazy: We might not like to admit it, but we don’t go to the grocery store as much as we used to. Prior to the pandemic, a PwC study highlighted that a majority of consumers around the world valued convenience over all. In fact, 80% of U.S. consumers said that convenience is core to a positive customer experience. The pandemic has only fueled this trend, forcing us to trial food and grocery delivery apps for the first time. For a lot of us (3 in 5 of us to be exact), we haven’t gone back. What’s even more important to note is that it’s not just millennials and GenZs. 21% of U.S. consumers ordered groceries online, and 19% of 65+ year olds also did (source).
• We are at home: Hybrid must be the word of the year…companies are adopting remote work left and right.. 74% of U.S. companies are either currently using or plan to implement a permanent hybrid work model. More remote work → more time at home → more meals at home → more snacking at home. When we mix an increased volume of groceries with consumer laziness, we get more demand for Q-commerce.
• We are time starved: The pandemic has also made us crunched for time. Parents are spending more time taking their kid to the soccer game instead of their nannies. The emergence of the gig economy has made people take on more than one job, leaving less time for chores. Working from home has turned into dangerous workaholic scenarios for some, sacrificing the trip to the store for an additional hour taking meetings.

But don’t give yourself a pat on the back yet. We also made Q-Commerce a monster to take on:

• We are impatient and picky: The advancement of delivery app capabilities has made us very sensitive to mistakes. When our Instacart order is even 2 minutes overdue, we wreak havoc. When our UberEats order comes without the extra chipotle mayo, it’s like the world is ending. What this means, unfortunately for Q-Commerce companies, is that mistakes can’t be made.
• We are less brand loyal: The food and grocery delivery space is still in this phase of subsidy for consumers in order to win our wallets. We are constantly switching apps searching for the best deals, instead of being loyal to one. This makes it difficult to gain our loyalty unless delivery companies can deliver not only our products, but also a unique brand and value proposition.
• We want things 24/7: Q-commerce has done a great job of catering to this, but it doesn’t come easy. Unfortunately the “always-on” culture has made us awake at all hours of the day, craving things at all hours of the day. That craving for a pint of Ben and Jerry’s at 2am is not going to go away, and Q-Commerce is here to satiate that craving.

Now for the golden question…how does Q-Commerce actually work? To answer this, we first need to understand the key use case this delivery model targets for consumers. Q-Commerce is for the last-minute items that we forgot at the store. Yes, this means the forgotten OJ for the morning mimosa brunch, the forgotten candles for the birthday cake, or the 2am pint of ice cream craving to accompany some binge watching. We value convenience and timeliness in these situations more than discounts, and are willing to pay a premium for it.

This more narrow and focused need is supported by a few key operational necessities and use cases that make Q-Commerce feasible:

There are pros and cons to these use cases. On one hand, these use cases come fewer and are less predictable than the weekly grocery run. On the other hand, however, they help create the ultimate brand connection . The q-commerce brands are able to be our “saviors”…helping us feel a sigh of relief to be able to get the OJ, the candles and the pint of ice cream just int the nick of time. We now entrust in this delivery company who was able to be there in an urgent time of need. THAT is what creates consumer stickiness and ultimately, brand loyalty.

Players are starting to really optimize the operations of this next generation of e-commerce, and the sector is seeing explosive growth globally. What is interesting, however, is that the U.S. is lagging significantly behind Europe in terms of number of players. All the big guys, except for GoPuff and JOKR, started in Europe. In fact, 30 new Q-commerce companies have emerged in western Europe in the last 10 months [source].

Aaaaand the unicorns are (drumroll please):

It’s only a matter of time before the European and Asian players enter the U.S. market. GoPuff is about to have some serious threats…

We should also keep our eye out on our behemoths: Instacart and DoorDash, who have also gotten the memo. Instacart just launched a platform for food retailers that helps them with more local fulfillment models to create faster delivery options, including 15-minute ultrafast delivery called Carrot Warehouses (their version of dark stores). Carrot Ads helps them build a new revenue stream from ads, and Carrot insights provides the analytics platform as well. These three pillars create a highly differentiated model from the newer players emerging.

Large incumbents entering the space may encourage new players to adopt more local mom and pops onto their platform rather than the big food retailers (e.g., Publix, Kroger), which will get swallowed by the Instacarts and DoorDashs of the world.

15-minute delivery sounds easy, right? Wrong! There have certainly been and will continue to be some failures because it is very difficult to get q-commerce right. The biggest issue that has just recently been exposed is achieving healthy unit economics. As the post pandemic era starts to shape up, the cracks within the quick commerce model are emerging. The initial days of such brands require exorbitant marketing costs and strong promotions / discounts to achieve customer loyalty and awareness. This is inevitably causing some to burn too much cash too quickly. Unit economics are so heavily reliant on high repeat orders and low marketing costs, which is not an easy place to get to with this kind of an industry. As more try to enter, repeat orders will decrease and CACs will increase, inevitably exacerbating the already thin contribution margins. See below for an illustration of this.

*Note: Numbers are largely illustrative: average order value is GoPuff’s from 2020, margin % is an assumption based on average margin of food delivery companies. DoorDash CAC ($6) used for CAC benchmark

There are a few additional challenges associated with this space:

• Delivery Riders: companies are employing their own community of delivery riders in order to maintain control, but are not keeping them happy. There is an ongoing and rather big issue with employee satisfaction.
• Urban Warehouses: even if they are small, they are expensive because they are in urban hubs. This makes inventory management of utmost importance for these companies to make it. Deadstock will severely drive up costs.
• Competition: as shown above, the competition is about to get fierce, and switching costs for us as consumers is near to nothing. This means that in addition to mastering the operations, q-commerce companies need to create consumer stickiness.

Now for the golden question – who will win? Once the operational aspects are normalized / commoditized, which is only a matter of time, companies will need to differentiate to gain that share of consumers’ minds. Barriers to entry will be low; there will be nothing stopping me from getting some friends, some bikes, a couple rooms and starting a service for local stores. Scaling effectively and differentiating will be key. This means we will see consolidation, but also other means by which to gain consumer awareness. I argue there are a few key areas that q-commerce companies will need to master to make it to the next stage of this new area of delivery:

• Supply Chain: The enablement of instant delivery goes hand-in-hand with robust inventory management supported, which will need to be supported by AI / ML. Stellar product forecasting to keep inventory-on-hand light and reduce the probability of stockouts will be key.
• Location Location Location: dark stores are great, but optimal regions for dark store placement are restricted – there is only so much real estate available. First movers will get a sizeable advantage here.
• Personalized Customer Experience: much like the Doordash and Uber Eats of the world are hitting us with tailored messaging and discounts, q-commerce startups will have to adopt something similar to be able to even be considered. The more personalized this is, the more consumers will be willing to remember one q-commerce company over the other when making the decision through which to order their 2am pint of icecream.
• Niche Audiences: Targeting a specific or niche audience is a great way to gain share of wallet. Although limited, it allows for a brand to be built faster, since that niche audience is likely served by much fewer players. A great example of this is the startups targeting the Asian grocery sector. Weee! and Umamicart are great examples of stalwarts targeting this differentiator.
• Building a Brand: I can’t leave this section without talking about the importance of building not just a delivery company, but a brand. Those upfront marketing costs to acquire customers need to be limited in order to maintain sustainable unit economics. Retail and influencer partnerships will be key here, as well as differentiated brand purpose. While expensive (and thus sometimes detrimental for some companies), eco-friendly / sustainable packaging is starting to take off. The more q-commerce can tie in these consumer imperatives, the more brand recognition they will get.
• Technology: Dare I use the word ~drones~, but really the future of Q-commerce looks bright with new technological advancements like drones. They will drive that delivery time down drastically, and increase delivery radius, not to mention cutting cost and removing key concerns around labor and employee satisfaction within the space.

For now, Q-commerce is just focused on grocery. Give it a couple of years (until the operational aspects and profitability concerns are cracked) and Q-commerce will shift to other products too, like medicine.

The I Want it Now Generation is here to stay, and in terms of how “Now” is defined….well let’s just say time will tell…