Food Service Retail Business Models

More than 25 years ago Amazon was founded with the initial idea to disrupt the e-commerce market, which started by selling books. Up to date, the company has grown in multiple categories of products and businesses, becoming one of the most valuable companies in the world with a market capitalization of more than 1.5 trillion dollars; this is similar to the gross domestic product of Canada, Russia or South Korea.

As a result of this disruption, new business models have been born impacting, among many other things, the distribution of food service at different levels. A clear example is Ocado in the UK, which started in 2000 as an online supermarket. The company does not have physical stores and makes all shipments from its warehouses. Currently the firm is listed on the London Stock Exchange and has a market capitalization of 18 billion dollars.

With all the potential and the size of the market for the food sector, ¿will the next 1 trillion dollars company get out if this sector?

According to Charged Retail in the UK, the current pandemic (COVID-19) has favored Ocado’s sales growth by more than 42%, also increasing its market share to more than 1.7%. In the United States, traditional supermarkets such as Kroger and Whole Foods (acquired by Amazon in June 2017) have accelerated the opening of dark stores in the recent months, in order to meet the demand of digital customers.

According to the intensity and duration of the current pandemic, the penetration of online supermarket sales in the next 5 years could reach up to 14% in the UK and 11% in the US.

According to The Institute of Grocery Distribution (IGD), the online supermarket shopping sector, by 2023, will have grown 196% in Asia, 152% in North America and 66% in Europe.

Usually, these online businesses differ from traditional businesses in the following elements:

- Digital vs. Physical format: Digital models are omnipresent and avoid the fatigue of the consumer traveling to the point of sale. By not having physical stores, online businesses evade the cost of the real estate, of having personnel in the shop and streamline the automatic online buying process. In addition, they improve the accessibility and convenience of shopping anywhere and anytime.

- Product selection: Digital platforms usually have a greater offer of products compared to physical stores, which is adjusted according to the data analysis of the consumption patterns of their clients. This data is, at the end, consequence of its use.

- Flexibility: They provide the user with the convenience of choosing and automate the method, time and place of delivery, as well as their preferred form of payment.

- Visibility: They provide the producers and brands that are offered on their platforms actionable data on consumer habits, their relative position against their competition and insights about their operational efficiency.

- De-intermediate the supply chain: Digital platforms usually have a direct agreement with producers and brands, thus eliminating the different intermediaries and transferring the cost savings to the consumer.

- Digital capabilities: These disruptive models achieve operational efficiencies compared to the traditional models because they integrate the Big Data as part of their operations; for example, for inventory forecasting, demand prediction with artificial intelligence and optimized own or outsourced real time routing capabilities.

Below, we show the framework on the various types of food distributors, according to type of customer they are focused on and the level of inventory they keep on their balance sheet. These are two criteria, that as a result of multiple talks with players in this sector, we conclude that define the effective way in which these companies have to operate.

Ocado Model

-Description: Online supermarket, without physical stores, with high technological use, automated and with differentiated logistics capabilities.

-Competitive advantage: Competitive price, broad products catalog, quality guarantee and convenience (home delivery and preferred schedule selection).

-Operation: Operational efficiencies reflected in the inventory, dispatching execution and the route optimization. They depend on economies of scale to purchase the products.

-Business model: They gain an intermediation margin (buy directly to producer or brand, then sell directly to the client). They can also commercialize their own brands (white labels) and bulk products as a mechanism to increase financial profitability.

-User experience:

— — UX: Simple, fast and convenient. Sometimes looking to give an extra to generate brand loyalty (ie. delivery to your door, outstanding customer service, visually appealing packaging, extra details or gifts to the customer)

— — UI: Intuitive navigation digital platform, easily accessible and visually attractive content.

Digital Wholesaler Model

-Description: Wholesale market that intermediates with producers and brands, taking possession of inventory and reselling to retailers (convenience stores, mom and pop stores, restaurants).

-Competitive advantage: Direct access to producers and brands looking for a competitive price, inventory planning always based on Big Data to have a 100% availability level; and robust and efficient logistics to minimize delivery times.

-Operation: Operational efficiency that is reflected in inventory, dispatching execution and route optimization. They depend on economies of scale to purchase the product. Delivery of the product timely and in a due form (dry chain and cold chain capabilities).

-Business model: They earn an intermediation margin (direct purchase from producer or brand, then sell directly to customer). They can also commercialize their own brands (white labels) and bulk products as a mechanism to increase financial profitability.

-User experience:

— — UX: Shopping experience is similar as in a physical store, although with a digital format. The user expects to access promotions, suggested orders, and an immediate customer service.

— — UI: Intuitive navigation digital platform, easily accessible content and ease of administrative and accounting control.

Broker Dealer and Distributor Marketplace

-Description: Digital intermediary between producers and brands with consumers (convenience stores, mom and pop stores, restaurants) without owning the inventory.

-Competitive advantage: Works as a Marketplace, it favors from having a greater product selection available for the customer. An advantage for producers and brands is that they don’t lose their direct relationship with the customer and have visibility into consumption data.

-Operation: As an intermediary, they need superior commercial capabilities to be able to attract suppliers, brands and clients on the same digital platform.

-Business model: Brokerage commission on the value traded on the platform or a fixed commission per client. Additionally, they offer complementary services to differentiate themselves from competitors; such as logistics and distribution capabilities, analytical decision making for providers, micro-credit, insurance, among others.

-User experience:

— — UX: Have direct contact with the brand or producer to have access to better prices and promotions. Accessibility to the entire portfolio of products and brands in the digital platform.

— — UI: Intuitive navigation digital platform, easily accessible content and ease of administrative and accounting control.

Personal Shopper

-Description: Marketplace that seeks to serve the immediate consumer needs of the client, delivering to home through its logistics force of gig economy.

-Competitive advantage: Access to an almost unlimited assortment of products and brands, and to a personal shopper who attends to the tastes and preferences of the client.

-Operation: It relies on the “network effects”, where the density and mass of the platform are key to provide a better service with greater coverage.

-Business model: Brokerage commission on the value traded on the platform. They are usually premium prices focused on consumers with less price elasticity.

-User experience:

— — UX: Ease of ordering and of communication with your personal shopper. Convenient and fast.

— — UI: Intuitive navigation digital platform, easily accessible and visually attractive content.

Traditional players are entering this sector, driven by the global pandemic. Some examples are stores like Walmart, Target and Kroger that have increased presence in e-commerce. Another avenue has been investments or acquisitions of companies in digital platforms, such as Falabella with the acquisition of Linio in August 2018

To sum up, the digital food distribution sector is relatively new, it is in full growth by the COVID-19 and the future is yet to be defined; however, the industry has to be realistic and take into account that these business models are here to stay and compete against traditional players. Such as with other industries, the market will compare and validate the effectiveness of each of the ecosystem participants and will differentiate the winners of the losers depending on how they solve the real needs of consumers.

Written by:

Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.

Gonzalo Soriano. Investment analyst at ACV.

ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.

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ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.