Indonesia-headquartered HappyFresh could achieve a net profit in the coming months, a milestone for Southeast Asia’s loss-making online grocery industry and a hint of the Covid-19 pandemic’s game-changing impact.
HappyFresh recorded a net profit in Indonesia in the first quarter of 2020, and expects the same for its other two markets, Malaysia and Thailand, by the second quarter or the middle of the third quarter, chief executive Guillem Segarra told DealStreetAsia. He expects to stay in the black beyond that, with a “very clear path to break even on a group level by 2021”.
“This is definitely not a one-month kind of thing,” Segarra said. “Obviously now with Indonesia breaking even, it’s a huge milestone for us, and for the industry to be honest. We have a clear blueprint on how to replicate this for the other two markets we’re operating in.”
Southeast Asia’s online grocery market has long suffered from a number of challenges that have kept profitability an elusive prize. The industry’s history is littered with once-promising players, like Singapore’s now-bankrupt honestbee, that have fallen by the wayside.
The survivors have also been burning cash. Singapore-based Redmart, which now belongs under the Lazada group, reported a net loss of S$121.9 million ($86.2 million) in the year ended March 2019, according to regulatory records. On a pre-tax operating basis, Redmart lost about 41 cents for every dollar of sale made that year. Redmart declined to share updated numbers for this story.
Well-heeled market incumbents trying to protect their turf have their hands full as well. The Fairprice Group in Singapore, the country’s largest brick-and-mortar supermarket chain, has moved aggressively into the online space, hiring ex-Lazada group chief product officer Johnny Wong two years ago to head its digital business. Even with its store network and industry expertise, Fairprice’s online delivery business is not yet profitable, Wong said, although they are trending toward a turnaround in two to three years.
One of the most fundamental challenges faced by online grocery platforms has been persuading shoppers to switch out of age-old methods of purchasing habits. That has led to heavy spending on customer acquisition through generous subsidies just to get shoppers to switch, which has swallowed up margins.
HappyFresh marketing vice president David Lim said: “Groceries have been going for centuries. Especially in Southeast Asia, people develop relationships with the merchants. They want to touch. They want to feel what they’re buying. My main competition is the perception of the customers.”
The pandemic’s impact has therefore been tremendously positive for the industry. Online services are not just getting more customers from the outbreak, they are getting them without having to spend as many resources on marketing and discounts. Imagine embarking on a long trek up a mountain, only to come across an escalator that not only gets you to your destination faster but with less effort.
In concrete terms, Segarra shared that HappyFresh has seen new customer acquisition and retention rates over the past few months that it was only expecting to reach one to two years down the line. That quality volume helped HappyFresh to turn the corner in Indonesia, he explained.
First, having more customers and orders provides economies of scale that help to cover costs like manpower, technology and other operating expenses. Second, business partners — HappyFresh does not operate its own warehouse and instead provides fulfillment services for existing grocery owners — are more willing to collaborate and work with the company knowing that customers are moving online.
Just as importantly, while the company has not raised the service fees that it charges customers, it has however saved on the marketing required to get those customers on board and to keep coming back.
HappyFresh’s Lim told DealStreetAsia: “We stopped marketing during Covid-19…The new users formed a new habit, not by choice, but to adapt to a new way of buying groceries. They are showing signs that they are getting used to it. We see that this trend will continue, and then we will have a new baseline of customers. We acquired them without vouchers, so they won’t be spoiled.”
That shift in the behavioural and psychological constitution of these new customers has opened a rare window of opportunity for the region’s online grocery players to address an unsustainable price structure.
Fairprice’s Wong said: “To be honest with you, there’s also the miseducation that some of the startups have done. A lot of them were venture-funded, and their game was traditionally about market share, not profitability. So a lot of it was giving out freebies. Now, if you order something from [food delivery platforms] Deliveroo or GrabFood, you pay maybe a S$3 delivery fee. If you buy groceries…if you buy about S$79 or something in that region, you get free delivery. But that’s really unsustainable.
“When the consumer buys groceries at a brick and mortar supermarket, he or she is the one doing the picking. He or she is the one doing the delivery. For online grocery, however, someone has to pick for you, deliver for you, so you should pay for that service. Part of our strategy is coming back to the fundamentals and fixing these broken dynamics, educating the customer, while finding the most cost-efficient ways to do this.”
Fairprice in April introduced a new service fee of S$3.99 that would be applied to all online orders, as well a tiered delivery fee structure that charges up to S$5 per delivery for smaller orders. Those fees do not yet fully cover the cost of fulfilling an order, but it’s a start, Wong said.
There are admittedly costs associated with trying to meet the swelling demand.
Fairprice, which handles picking and packing in-house but contracts out the final delivery of orders, has been busy beefing up its ability to serve more customers. In the two months to April, the co-operative hired and trained about 150 staff as pickers and packers to increase its delivery slots by 25 per cent. It has also converted a reopened physical store into a dedicated online fulfillment centre to increase online capacity.
On the other hand, Wong is happy to invest in capacity because it is likely to reflect actual demand post-pandemic.
“We need to ask ourselves what’s going to be the situation post-crisis,” Wong said. “We look at China…coming out of the coronavirus situation there’s a new normal, and what it looks like is that people who started to use online groceries, a lot of those people continue to use online groceries because they’ve tried it. They no longer have the stigma of getting rotten vegetables and so on…We do think that the demand for online groceries has not only stepped up but will continue to step up.”
The grand prize of profitability has not come to all yet. Some, like Fairprice, are still tweaking their businesses and operations to try to complete that last mile to long-term viable business. Fairprice’s digital business, for instance, has begun to leverage the group’s existing network of stores to improve fulfillment efficiency by picking items and delivering from stores close to shoppers instead of from centralised warehouses.
“Because the stores are closer to customers, the vans don’t have to spend as much time on the road,” Wong said. “We can also leverage existing infrastructure. We don’t have to build new warehouses. We don’t have to solve the problem of frozen or chilled items with cold chains, because those are already built for existing stores.”
The industry also remains highly competitive, with traditional players like Fairprice not content to cede the online battleground to tech startups. In large fragmented markets like Indonesia, market share is still up for grabs.
Still, while profitability is not here yet, it seems more attainable than ever before. For those that claim to have their unit economics worked out, examples like HappyFresh suggest that the competition may be shifting to a new gear. Market share and reach alone may no longer be enough without talking about profit, not when a historic set of circumstances has practically given the industry a wave of new customers.
Already, The Information has reported that US-based Instacart is expecting a $10 million net profit for April. The big question now is who else is graduating to the next phase of growth.
“We need to continue to sell a service to the audience, rather than selling cheaper broccoli,” said HappyFresh’s Lim.