With E-Groceries, Software is Indeed Eating the World

This blog post was originally published by IDB Invest.

Driven by social distancing imposed by COVID-19, the online grocery ecosystem is becoming more diverse, and increasingly innovative. Colombia’s Merqueo is a good example of a solid business model in a rapidly transforming market.

In 2011, famed venture capitalist Marc Andreesen coined the expression “software is eating the World.” However, until recently, grocery was one of a few areas in retail still resisting digitalization. And there were good reasons. After all, who doesn’t value the serendipity of roaming the alleys of a supermarket? Or grabbing and smelling fruit and vegetables to make sure they are perfectly ripe?

Many consumers felt (reasonably) well-served by traditional supermarkets until online grocery experienced its “manna from the sky” moment. COVID-19, lockdowns and social distancing instantly moved millions of global shoppers online, and we were all lucky that e-grocery was ready for the challenge: something was already brewing, and many start-ups had been flexing their muscles, taking positions across the grocery value chain, from simple to highly demanding business models.

The online grocery ecosystem is becoming more diverse, and increasingly innovative. On one hand, so-called “last-milers” source product from existing supermarkets and then deliver to the end consumer. Instacart in the US, and Cornershop and Rappi in Latin America, fall under this category. On the other end of the spectrum, full-stack online grocers own the inventory, which they source from proprietary “dark” (and often automated) warehouses. Prominent players in this category include GoPuff and FreshDirect in the US, Ocado in the UK, Justo in Mexico, and Merqueo in Colombia.

Percentage of online food delivery by country

There are many other specialized business models. In Europe, Gorilla specializes in small-item grocery deliveries … in under 10 minutes. In the US, Imperfect Foods offers a membership for weekly home delivery of “ugly” (but otherwise perfectly fine) fruit and veggies, aiming to address the problem of 20 billion pounds of produce that each year goes to waste in US farms. And in Colombia, Frubana operates a B2B online platform that secures fruit and vegetables directly from small farmers and distributes them to restaurants, with no intermediaries.

But is online grocery a pandemic-induced fad? Apparently not, since it’s only entrenched habits that explain why the traditional grocery model survived for so long with only limited innovation, despite structural problems.

Supermarket shoppers can suffer long lines, busy parking lots, and poorly displayed merchandise. In many instances, products are even more expensive than online alternatives. The model needs to factor in unethical food waste volumes, of up to 30% of a supermarket’s trash in the US. Also, supermarkets occupy thousands of square feet, often inexpensive parts of town. In comparison, many online grocers take up only one square inch of space … an app on the screen of a smartphone.

Less reliance on physical outlets also reduces water and electricity consumption. Interestingly, in Jeff Bezos’s 2020 letter to Amazon shareholders, he stated that thanks to optimized routes and transport capability and less mid-step packaging, “online grocery deliveries generate 43% lower carbon emissions per item compared to shopping in stores.”

The sector is attracting large amounts of capital. This is evidenced by sky-high valuations of players like Grubhub, Delivery Hero, and DoorDash and over $14 billion invested in the space since the pandemic began. Latin America and the Caribbean (LAC) has also seen strong activity. General Atlantic led one of LAC’s largest rounds A for Justo, while IDB Invest and Clean Technology Fund recently approved a Series C investment for Merqueo. IDB Lab has also indirectly invested in the broader space through investments in VC funds. In this regard, SP Ventures is an investor in Frizata, a startup in the flexitarian frozen food space, while NXTP Labs has regional food delivery app Pedidos Ya in its portfolio.

Yet online grocery is part of a broader theme: food tech. According to Emerging Tech Research, global venture funding for food tech startups increased to $10.1 billion in the first quarter to 2021, for a total of 241 deals. In LAC, IDB Invest participated in ProducePay’s Round C, which raised $48 million for a fintech and e-commerce platform which provides small farmers with advances on produce sales into the US.

For these reasons, traditional supermarkets in Latin America are taking note. While many are actively pursuing omnichannel strategies (from curbside pickup to home delivery), others are still struggling with their approach towards digital transformation. In any event, the upside for the online share of consumer packaged goods is huge. The region’s penetration is currently at less than 3% in 2020, well below the US (10%), the UK (17%), and China (25%). The stakes are high, considering that for many in the population a very large share of income is assigned to groceries.

Mom & pop grocery stores account for up to 30% of sales in LAC some markets. Many are starting to adopt digital solutions, sometimes with the support of specialized actors such as Increase in Argentina, Cívico in Colombia, and Wabi in México. IDB Lab is supporting several initiatives built on low-cost solutions, as the whole food value chain recognizes the need to transform. For example, famous Peruvian chef Gastón Arcurio was prompted by the pandemic to create a digital information platform to monitor production data and product traceability for the benefit of over 200 SMEs providing organic produce.   

This highlights the relevance of this sector for development banks and impact investors. The online grocery model can not only provide resiliency to local SMEs, but can also promote community group buying, foster employment among minorities and women and reduce food waste, while making cities more inclusive and reducing green-house emissions.

As with many things “digital”, the value lies in the data. A traditional supermarket knows little about its typical shopper, who may even be paying cash. Online grocers benefit from a deeper knowledge of client behaviors and addresses. Artificial intelligence and other tools provide a more personalized experience, like contextualized recommendations. Likewise, business analytics can also be monetized with suppliers.

So, ten years after Marc Andreesen coined his famous quote, indeed it seems that “software is eating … groceries!” Pun intended!