The Battle for Online Groceries in Australia
Last week the AFR wrote why Coles and Woolworths are trying to use Amazon’s increasing market share in the online grocery delivery space as justification that they aren’t a duopoly.
I thought this was a timely piece given last week I shared that I would be republishing my old articles written as part of This Week in Australian Startups as standalone articles in the lead up to issue 100.
I’m republishing two articles I previously wrote and combining it with new analysis, in Chatper 3, into one larger piece today ‘The Battle for Online Groceries in Australia’.
Haris
Chapter 1: Milkrun vs Supermarkets
Originally published on 1st February 2023
In an exclusive report, The Australian, claims Milkrun has failed in multiple attempts to raise a Series B a little over 12 months after a huge $75M Series A led by Tiger Global, Grok Ventures, AirTree Ventures, and Skip Capital.
If you haven’t been following Milkrun or the grocery delivery industry, perhaps this may come as a surprise - but it’s something that was absolutely to be expected. This doesn’t mean Milkrun won’t raise a successful Series B and continue operating, but the economics have changed dramatically.
In Europe in the last 12-24 months we’ve seen huge consolidation in this space. Getir acquired Weezy, Gopuff acquired Dija and Fancy, Getir acquired Gorillas for $1.2B. The last one was the most significant, it all but unified grocery delivery across all of Europe making the combined company of Getir and Gorillas worth almost $10B. At home, whilst not through acquisition Milkrun is the last grocery delivery app left with the closure of Send, Voly, and Quicko - a consolidation nonetheless.
There’s a few things at play here for me.
1. VCs don’t like loss making startups anymore
With so much competition in the space, grocery delivery apps had no real loyalty. It was a low cost race with consumers waiting for the next coupon or whichever app would get them their eggs cheapest and quickest. Similar to price wars with ride sharing apps we’ve seen in the past, when new players enter the market in the race for market share.
This model relies on paid acquisition to not only grow but keep existing customers was costly, and mostly funded by money raised by VCs in the form of on going coupons and discounts.
A consolidation in the space was natural. So many of these startups had no differentiation except for their branding and geographies they served - it would be naive to think many of these founders didn’t start these with the strategic vision to be acquired by a larger player who understands it’s cheaper to buy than spending money to grow into these new geographies. And there’s nothing wrong with that, it’s a common strategy - what’s a business successful overseas that doesn’t exist in your local market, you’ve got the playbook, go build it and then try and sell it when that business looks to enter your market.
2. Grocery shopping is an experience, and subjective
Grocery shopping is not your typical eCommerce experience. Especially when it comes to fresh fruit and vegetables consumers want to pick the product that is the level of ripeness for them and not be left with someone else choosing for them.
Yes time is money, and there is value in paying a premium for the same product through a grocery delivery service - especially if a full grocery run may take anywhere from 30 mins-1 hour. There are some people that just want to do it themselves, worried the right apple may not be picked or want to pick their owns substitute if their favourite brand of cereal is out of stock.
Let’s also not forget how expensive the cost of living has become, where even saving 10% on your groceries buying it direct is worthwhile.
3. Supermarkets aren’t sitting by idly
Click and collect, direct to boot - Coles and Woolworths are evolving and catching up with the times. They already have the distribution networks and locations across the entire country to serve a larger population and retain its customer base with their evolving needs. It’s easier for most consumers to choose one of these options if they aren’t in the service area for Milkrun, who has a very limited service area in limited areas in inner city Sydney and Melbourne outside of the CBD - despite living within 6km of the Sydney CBD even I fall outside of the limited service area.
The biggest game changer I’ve witnessed is subscription services. I never would have thought I would be paying for a subscription to Woolworths for groceries, but the offer is very compelling.
Since writing this Coles has also launched their own subscription, with the same benefits - Coles Plus Saver.
Even if I lived in a Milkrun service area - I would rather pay the $7/month or $59/year for Everyday Extra as it provides much greater value. 10% each month on one shop (including Big W) means I could be getting a free shop per year if I can do a big monthly shop. With the cost of groceries skyrocketing this means I save anywhere from $200-400 per year (or one free shop per year) not to mention the additional rewards points I can earn and redeem.
There is still a market for grocery delivery, within a few hours or even next day, but the model may need to change - Woolworths recently launched Metro60, groceries delivered in under 60 minutes in a limited service area. Instacart is different where they do not have local warehouses/shops with stock, they will go into the supermarket of your choice and do the physical shop and deliver it to your door.
I think we’ll see a similar trend across markets like Europe and the US with traditional supermarkets adopting a similar approach and winning back the market.
Chapter 2: Vale Milkrun
Originally published on 12th April 2023
Dany Milham made the difficult decision to wind down the business and cease trading this Friday shared in an email to employees.
Launched in September 2021, Milkrun went on to raise a total of $86M from investors including AirTree, Tiger Global and Atlassian founders, Scott Farquhar and Mike Cannon-Brooke in a short space of time. Now only 19 months later it’s shutting down.
So what went wrong?
Just in February Milkrun reduced its workforce by 20%. That same month The Australian broke news Milkrun had made two failed attempts to raise more capital whilst losing as much as $13 per order according to a slide deck shown to prospective investors.
In Chapter 1 of this article I wrote about the consolidation happening across Europe in the fast delivery space, the changing economic environment, why Australian’s still like to shop in person and how incumbents like Woolworths were taking market share back with much more compelling offerings.
“Since we announced our structural changes in February, economic and capital market conditions have continued to deteriorate, and while the business has continued to perform well, we feel strongly that this is the right decision in the current environment,” Milham told staff in his email.
I previously also wrote a deep dive into the changing economic environment in tech, and the rising cost of capital, predicting more startups will shut down.
I had to count this morning, but in my career I’ve witnessed 8 rounds of layoffs in tech at companies I’ve been at. Whilst it’s never black and white, and maybe there are things that could have been done better - what’s clear is that there is a right and a wrong way to go about it and especially if you’re making the decision as a founder to shut your business down.
Without working at Milkrun, what I’m seeing externally is not normal in tech - in all the right ways. Milham is closing at a time with enough cash in the bank to pay suppliers, redundancy packages to all 400+ employees including delivery riders in full.
“We’ve always been committed to doing things the right way, and winding down the business while we still have a sufficient cash balance enables us to ensure our people and suppliers are paid in full,” Milham wrote
This is in stark contrast to experiences I’ve had where the team has been asked to chase down debt in order to get paid whilst making you redundant and winding the business down.
AirTree partner Jackie Vullinghs said the sentiment of growth investors shifted along with the economic environment shifted alongside the company being unable “to find a path to breakeven with the remaining funds available”. Nonetheless, the business “forced incumbents to invest” in response.
“We knew the business wouldn’t be profitable from day one and would require material scale to achieve profitability. As a seed-stage investment, we felt this risk was justified by the size of the upside,” she said.
“Despite great effort from the team to adjust, they were not able to find a path to breakeven with the remaining funds available.
Investment priorities have changed, with the rising cost of capital profitably is more important than ever. Unfortunately this has also impacted startups like Milkrun who were invested in with a ‘growth’ outlook - the startup playbook we’ve seen for the last decade or two, grow at all costs and figure out profitably once you have market share.
Milkrun isn’t the first and won’t be the last startup in Australia closing down. Whilst it’s never nice to see any startup fail, and there’s many lessons that I’m sure Milham and the team at Milkrun has learned along the way - this is a good lesson for every founder, VC and executive in tech in how to treat suppliers and people fairly and frankly doing things the right way when faced with the difficult decision to call it a day.
There is also something to be said about timing, and knowing when your time, energy and money (as a founder, employee or investor) is better spent on something new.
Vale Milkrun.
Chapter 3: Enter Amazon
Coles and Woolworths have come under a lot of heat lately as the ACCC has commenced proceedings against the pair for allegedly breaching the Australian Consumer Law by misleading consumers through discount pricing claims on hundreds of common supermarket products.
There’s a lot of public pressure and dissent against the pair especially when put in the context of the rising cost of living crisis.
Regardless of what they’d like to say or what can be argued, the reality is that if you ask anyone in Australia they’ll say that Coles and Woolworths are a duopoly.
Ask Coles and Woolworths? Well they’re saying look at Amazon - as written in the AFR by Carrie LaFrenz.
There’s a point to be made here - a deep dive by analysts at Goldman Sachs found that Amazon was the second-largest online retail business in Australia after Woolworths. CEO of Coles, Leah Weckert, claims that Amazon is selling certain groceries as loss leaders.
“From our perspective, this is another example of where we are seeing the rise of more competition,” she says. “They’ve been making investments into their robotic facilities in Melbourne and Sydney, which will enable them to have very rapid delivery – in the order of sort of two hours. We would expect that Amazon will make it more competitive as they continue to grow.”
A big worry in particular for the duopoly is the sale of items such as snacks, confectionery, cereal and beauty products, often the most profitable for supermarkets. Amazon is expected to bring in $1.3b this year for this category alone, yet it still only represents 1% of total sales of supermarkets.
Why are they so worried then? Aside from becoming public enemy number one, the pair have both said that growth in online sales outpaced in store sales in Q1FY25 rising 23.6% and 22.4% in the three months to September 30.
Janet Menzies the country manager for Amazon in Australia shared some good insight in the AFR article. First she’s stated that Australia is seen internally as an “emerging” market.
For context, in the US, which would be widely considered Amazon’s most mature market, they only have 3% of market share in the grocery space and this includes over 500 physical stores through Whole Foods which it acquired in 2007 for $13.7b USD.
On all accounts, in comparison Amazon is still a tiny tiny player in Australia, and even in the US 3% is not enough to consider them to be holding significant market share. Coles and Woolworths and Coles aren’t used to any real competition and it’s an easy target, changing the conversation if you don’t like what people are talking about is PR 101.
Throwing on my analyst hat, I do think aside from being a great distraction to the Coles and Woolworths duopoly, there are some real reasons to be betting on Amazon in Australia.
Since 2011 in Australia Amazon has invested $11b, with $5b of that in the last 2 years alone with plans to invest a further $1.6b by 2026. A lot of that money is being spent to achieve their goal of having same-day delivery in every major city.
The thing to understand is that at its core Amazon is a logistics company, and no one does it better than them. They have the experience and money to do it - they are prepared to invest billions upfront to build infrastructure to provide themselves an almost zero marginal cost. That’s how they’ve done it for both Amazon.com and even AWS.
Other companies have tried to take on Amazon and unsuccessfully to date - Shopify recently tried and ended up exiting the logistics market. Shopify acquired Deliverr, an e-commerce fulfillment company in May 2022 for $2.1b USD in cash and stock, and then just a year later in May 2022 sold it to Flexport for 13% stock. Shopify came to the realisation that logistics was a ‘side quest’ and not its main quest.
An important question for Coles and Woolworths to answer is logistics a main quest or side quest? Coles has, for now at least, decided it’s a side quest partnering with Ocado to manage their logistics for online commerce. It’s an exclusive agreement, so there’s nothing to suggest Woolworths would not also partner with them given the opportunity.
Amazon has their famous flywheel, which has worked pretty well for it so far.
That flywheel is what it’s betting on will work again in Australia. Menzies was quoted in the AFR “Typically, people come to us, they’ll buy one thing, and then they’ll discover other categories”.
It is a different market to the US though. Will Amazon be able to get a larger than 3% market share here? They also don’t have Whole Foods in Australia - personally I’d love to see it launch here.
The US is a much more competitive market. Australia is famous for a small number of companies dominating any industry. I’m all for increased competition in Australia. I think that lack of competition in Australia creates a much bigger opportunity for Amazon, particularly as they are able to invest heavily.
Online penetration is also very low in Australia sitting at only 11%, compared to 25% in the US and UK, and 35% in China. It’s a line that will continue to increase, and Amazon is already the best option for many categories so it’s flywheel will work in its favour to capture customers into adjacent categories like groceries.
It’s not available in Australia yet but I’d be very surprised if Amazon is not working on a plan to launch Amazon Fresh once it achieves its goal for same-day delivery in every major city by 2026.
If I was Coles or Woolworths, I’d be worried about Amazon. They’ve already become the place of choice for many consumers, replacing online marketplaces like Kogan and Catch and physical retail like Kmart and Big W.