tl;dr For the masses, having groceries delivered will continue to cost more than the market will bear until labor and transportation costs vaporize. Grocery delivery might work in some concentrated areas, but will remain a small niche, utilized mostly by the affluent. Grocery pick-up service can be profitable and satisfy consumer demand. Someday, drones might spare us from needing to travel for pick-up.
For about 15 years we’ve heard of all the failed startups and all the current ones struggling to make grocery delivery a viable service. So, what’s the big holdup? Why must I still go into the grocery store on a regular basis, when I enjoy it so rarely? Why hasn’t anybody solved this for me?!
During the September 2013 Austin Lean Startup Machine workshop, at Capital Factory, a few of us grouped around the very common idea that grocery shopping needs to be fixed. Along with applying Lean Startup principles to ‘some’ idea, I was also intrigued by diving head first into this huge opportunity that is seemingly impossible to resolve.
It almost goes without saying, I highly recommend The Lean Startup, by Eric Ries. When you’re ready to test Lean Startup theory, look for a Lean Startup Machine workshop, you’l really learn a lot and meet some awesome people.
Validation comes easy, for some things. It was extremely clear that a lot of people don’t want to go into a grocery store and shop. There were a lot of folks who do, don’t get me wrong, some people enjoy the experience. However, you can be certain that there is a massive market for those who don’t. Not surprisingly, the vast majority of those who don’t want to go into a grocery store are willing to pay for such a luxury.
Some ideas are simply invalid. People want it and they’ll pay for it, so what’s the problem? The problem, as we discovered, was the value customers price the service at. It seemed reasonable, and substantial that the general consensus of a 10% “delivery” fee was acceptable. Hold up. We really felt that we needed at least an 18% premium to break even. We had hoped that 20% would be acceptable and we’d have a little extra cheese to work with. Nope. Sorry. Not gonna happen. Our data showed pretty clearly that very few people, all affluent, would even begin to entertain the idea of paying that much of a premium. I’m guessing this is were all those failed and failing grocery delivery startups arrive. They must figure out how to deliver at an impossible margin or convince unwilling customers to pay more.
The Resolution: Don’t Deliver. Umm, OK, but that hasn’t solved anything, or has it? We felt pretty deep down the rabbit hole. How could we turn our backs on a service we want, a service so many others want and simply say it just won’t work. So, we concentrated on why it’s more expensive to “deliver” the goods than what people will gladly pay. We thought about the overhead costs. Paying somebody, minimum wage, to actually “deliver” the groceries plus transportation expenses is greater than 10% of the typical bill of groceries.
We validated that the premium they would pay was for the benefit of not having to park, and actually shop in the store, “delivery” is not a show-stopper, whereas needing to go into the store is. So, our solution was to build a service that allows consumers to shop online or call it in, but then actually arrive at a pick-up center to receive their groceries. This way, the customers incur the transportation costs and a 10% service fee might allow for a viable business.
Amazon’s Resolution: Drone Delivery. Two months after our LSM workshop Bezos, on 60 Minutes, announced that Amazon would someday deliver groceries by drone. Aha; it seems that Amazon’s R&D must have concluded similar findings, namely:
Paying somebody, minimum wage, to actually “deliver” the groceries plus transportation expenses is greater than 10% of the typical bill of groceries.