Tech giants in SE Asia gear up to grab a slice of online grocery delivery pie

A foodpanda fulfilment centre in Singapore. Source: foodpanda.

It’s been a new experience for Azhar bin Khairudin, sprinting around packing bags of vegetables and bottles of alcohol in less than four minutes before a delivery rider comes and picks them up. But the 38-year-old, who usually works with three others on each shift, says he enjoys the adrenaline. “It’s quite stressful [but] we create fun vibes [here].”

Khairudin is a senior warehouse manager at one of foodpanda’s over 200 fulfilment centres – or ‘pandamarts’ – in eight countries in Asia. As the battleground for food delivery heats up, its players are moving into an even bigger space of on-demand grocery delivery, hiring warehouse workers to pick up anything from diapers to dips and dispatching drivers and bikers to drop them at peoples’ doorsteps.

And it’s not foodpanda alone that’s betting big on the burgeoning sector. Other tech firms that are looking to grab a slice of the grocery market in Southeast Asia are UK-headquartered Deliveroo, Singapore ride-hailing giant Grab and Vietnam’s Chopp.

Companies say it is a natural extension of their food-delivery and ride-hailing services, as they can leverage on technology and delivery fleet.

“Because our drivers are able to toggle between mobility and deliveries, we have better unit economics, while increasing earning opportunities for our drivers,” a Grab spokesperson responded over e-mail.

Compared to goods such as electronics and clothes that made their way to the e-commerce market earlier, online groceries are yet to strike a chord with the region’s tech-savvy consumers. However, this could change soon.

“It’s not as easy to convince a customer to add an extra plate of chicken wings into their order if they just don’t want them, but [with] groceries and convenience goods, you could always add an additional tissue box … to whatever the free delivery threshold [is],” said foodpanda’s chief financial officer Arun Makhija.

According to a report by Facebook and Bain & Company, online groceries saw significant growth in the e-commerce space in Southeast Asia last year. Online adoption of groceries grew by 2.7 times year-on-year in 2020, compared to 1.4-1.6 times growth witnessed by other peripheral e-commerce segments.

And because online groceries had a meagre 7% penetration rate in the region, far lesser than other goods, it signifies more room for growth.

Going forward, the sector is expected to grow at a much faster rate of 32% from 2020 to 2025, compared to other e-commerce segments, the report further stated.

Source: Digital Consumers of Tomorrow, Here Today - a report by Facebook and Bain.
Source: Digital Consumers of Tomorrow, Here Today – a report by Facebook and Bain.

Grocery deliveries at people’s doorstep are not entirely a new concept in the region. Apps from Lazada’s Redmart, HappyFresh, Amazon Fresh and local supermarkets have been sending groceries to consumers with delivery ranging from an hour to a few days after an order is made.

What’s different is that now traditionally food delivery and ride-hailing players are leveraging on their existing playbook and delivering groceries to consumers in around 30 minutes.

Take foodpanda, for instance. The Delivery Hero-owned food tech startup, that launched its grocery service in October 2019, works on a hybrid model in Southeast Asia. Customers can choose from about 5,000 products with each order being delivered in 25 minutes or less. The platform also offers groceries from third-party retailers.

Meanwhile, Deliveroo, which started delivering groceries at people’s doorstep in October 2020, has adopted a different strategy in Singapore, the only Southeast Asian country it is present in. It has partnered with retail brands like Marks & Spencer and The Providore, instead of opening their own mini-warehouses. Once orders are placed, couriers collect them to make a delivery in an average of 32 minutes.

The company has also struck an exclusive deal with the Dairy Farm Group, the corporation that runs the Cold Storage and Giant supermarkets.

“We want to give consumers access to brands that they know and trust,” said Deliveroo Singapore’s general manager Sarah Tan, adding that the company has no plans of opening its own fulfillment sites.

Similarly, Grab, which started grocery deliveries in late-2019 under GrabMart, primarily works with third-party retailers such as Japanese grocer Don Don Donki and Filipino retailer WalterMart. The company also has micro-warehouses to close “gaps” in the assortment of goods in the eight countries it operates in.

While the amount raked in from online groceries by these companies could not be ascertained, foodpanda said its grocery orders in the first quarter of 2021 grew by 160% year-on-year. According to its parent company Delivery Hero’s quarterly update, integrated verticals – which groceries are classified under – revenue rose by 420% in the same period to €183.5 million. But the segment is also posed an adjusted EBITDA loss of €64.9 million in 2020, based on the latest data available.

Deliveroo, which went public in March this year, said in this year’s first-quarter update that its gross transaction value in the grocery segment across all its markets rose by 700% year-on-year. Meanwhile, GrabMart’s gross merchandise value in the first quarter of 2021 went up by 21% compared to the fourth quarter of 2020, Grab said in an SEC filing.

Yet to breakeven

Even as rapid grocery delivery services may seem like a lucrative business proposition, existing data shows that most startups operating in the sector are still loss-making.

Groceries that operate a brick-and-mortar model typically earn a 2% to 4% profit margin, whereas any methods to fulfill home deliveries still incur negative profit margins between -15 and -2%, according to an analysis by Bain. The only way to make money is to have automated micro-fulfillment centres, which bring in a 2% profit margin.

Micro-fulfillment centres refer to small warehouses that sell products via an online medium to their customers without additional charges.

Source: Bain
Source: Bain & Company.

However, companies have a different take on their app-based model.

“We had to make some initial investments into improving the app, perhaps how it presents groceries compared to restaurants [but] we leverage the same fleet, the same riders, the same kind of customer app in place,” Deliveroo Singapore’s Tan said.

Grab’s spokesperson similarly said its “grocery delivery service rides on our tech, digital payments and transport infrastructure that we’ve built for other services like ride-hailing and food delivery. Our customer acquisition cost is also lower, as we can cross-sell new services like GrabMart to existing Grab users”.

Meanwhile, foodpanda’s Makhija added that food delivery has shown a path to profitability in these almost-immediate delivery services, as the cost to deliver each order has gone down. Delivery Hero financials showed that its adjusted EBITDA margin in Asia “improved significantly” to -38.1% in 2020 compared to -68.5% in 2019 “as a result of greater overall efficiency measures undertaken”.

To reduce costs, companies are also looking to automate their processes. foodpanda’s senior director of new verticals Abhishek Sahay said that the company, which is aiming to open another 200 cloud stores within the next year, is developing a feature on its app that will help warehouse workers navigate items better in stores. And in the long run, they hope to have robots doing some of the pickings, although a timeline is hard to set right now. “These are quite massive investments,” Sahay said.

Another way for groceries to generate revenue is by working with retailers and brands to advertise their products and create special promotions on their apps, and offer subscription services to create more sticky customers, as they would want to make full use of their membership.

Investor interest

“[Southeast Asia] is really big number from a population perspective, from a size of the economy, from even where things are now which is a very low online penetration … so there’s still very much growth potential,” said Bain partner and head of its Southeast Asia retail practice Derek Keswakaroon.

While companies have garnered significant capital for their overall expansion plans, these mark the early days of funding in the region, and investors are adopting a wait and watch approach before carving oout their exit options.

Keswakaroon compared the wait to Amazon, which took more than nine years to make an annual profit.

And in China, food delivery giant Meituan, which was listed in Hong Kong in 2018, made its first profit in the second quarter of 2019.  But it returned to the red from the second quarter of 2020 as it increased its spending on new initiatives including grocery deliveries. Investors do not seem to be alarmed – the price of shares in the company hit a high of HK$460 each in February, more than four times from a year ago.

Going forward, with the internet economy in Southeast Asia continuing to grow at an unprecedented pace, the sector is expected to get a leg up. According to a report jointly published by Temasek, Bain and Google last year, as many as 47% of all online grocery customers were new – they embraced the segment because of the COVID-19 pandemic. This is expected to increase as the number of new internet users grows in the market.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.