Supermarkets facing existential threat from ultra-fast delivery upstarts

The threat to incumbents in the grocery market, such as Tesco PLC (LON:TSCO) from so-called “ultra-fast” grocery delivery newcomers, is much more serious than JPMorgan previously thought.

The broker has been pontificating on the threat the likes of Getir, Gorillas, Weezy et al pose to bricks & mortar operators and even technology star Ocado Group PLC (LON:OCDO) after talking to the head honchos of a number of these upstarts.

"Overall, we feel even more assured of our view that: 1) major changes are about to come in regards to consumer grocery shopping patterns; 2) ultrafast delivery is a scale game and the unit economics for the new players do work and can achieve 10-15%+ contribution margin long term with operations also being successful in less urban areas and 3) ultrafast online grocery could become the third significant disruption for grocers since 2008."

Following up from other recent pronouncements on this emerging sub-sector, the broker noted that many of the companies have ambitious plans for nationwide rollouts, with Gorillas, for instance, seeing the potential for 5,000 warehouses in the UK alone, which compares to Tesco’s/Sainsbury’s 1,900/800 convenience stores in the UK.

All of the upstarts envisage “meaningful market share gains” over the incumbent grocers with some players dreaming of the insurgents gobbling up 50% of the grocery market, which in the UK alone is valued at £200bn.

The new operators, with their controversial employment practices, are believed to be enjoying margins up to four times higher than most bricks & mortar operators, “despite a low degree of buying power, own label or advertising”, JPM observed.

Meanwhile, the analysts at Credit Suisse held a conflab with Similar Web, which provides insights and estimates on web traffic and the news is mixed for Ocado.

Similar Web reckons Ocado gained around one percentage point in its share of the online grocery market in the second quarter but site visits were little changed quarter-on-quarter.

Furthermore, site visits to Ocado Zoom, Ocado’s service that attempts to deliver groceries “in a jiffy” (that’s a measurement of time, not a padded envelope), were down 7% quarter-on-quarter in the second quarter.

Over the same period, Gorillas (+183%), Getir (+409%) and Weezy (+33%) saw impressive growth in site visits.

“I-grocery competitors continue to see rapid growth ahead of Ocado Zoom, highlighting the challenges of scalability in automation,” Credit Suisse said, as it nudged its target price for Ocado up to 1,550p from 1,500p to reflect a stronger-than-expected first half of the year and the more favourable outlook for the rest of the year for its retail joint venture.

Despite the price target hike, Credit Suisse expects Ocado shares will underperform the sector over the next 12 months.

Ocado shares currently trade at 1,900p.

The ultra-fast delivery insurgents are following a similar model to the likes of Just Eat Takeaway.com NV (LON:JET), which Credit Suisse thinks is winning its battle against fellow traffic/employment legislation dodgers Deliveroo and Uber Eats.

The Swiss bank expects Just Eat Takeaway shares to outperform after visits to its UK web site accelerated by 9.5% in the second quarter, putting it ahead of Deliveroo PLC (LON:ROO) – up 6.7% - and Uber Eats (+5.6%).

Similar Web’s data suggests Just Eat has been growing share throughout 2021 in the fast food delivery market.

Visits were up by around a third year-on-year in the first 10 days of July, so the trends “look promising”, while the company continues to attract the higest number of new users; Just Eat added an estimate 450,000 or so in June versus an estimated 400,000 for Deliveroo and 350,000 for Uber Eats.

“Just Eat has best-in-class returning behaviour,” Credit Suisse believes, with roughly 76% of its orders being from repeat customers – must have been the radishes in the doner kebab – compared to around 70% each from Deliveroo and Uber Eats.

Credit Suisse has a price target of 11,000p, which currently trades at 6,491p.

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