Quick commerce has entered our daily lives at a tremendous speed, promising delivery to our doorsteps in a few hours, sometimes even minutes – a game-changer for busy lives and the new "convenience gold standard". Nevertheless, it cannot be ignored that all market players must move away from their "top-line-oriented" mindset, and are forced to focus on profitability.
The key question that arises for quick commerce players is: How can my company build a sustainable growth trajectory? In this article series we share our view on three key levers helping quick commerce companies to take first steps on this sustainable growth path. However, let's summarize the existing challenges first before we dive into the first key lever.
The pressure to achieve profits fast
Quick commerce is traditionally dominated by fixed costs and is characterized by high cash requirements due to continuous capital expenditure (CAPEX) needs. Paired with current macroeconomic challenges, the pressure to finally achieve profitability increases day by day.
On the demand side, the industry is challenged by the vast diminishment of the COVID-19 boost, with market growth rates returning to pre-COVID levels and increasing consumer price sensitivity limiting the potential to pass on rising internal costs.
Market dynamics in the quick commerce environment don't help either, as competition is still fierce in most markets and a clear monopolist setup for one player has not yet arisen.
Additionally, higher inflation puts a considerable strain on profit margins by increasing nearly all cost positions such as direct labor, leasing fees, rent etc. On the capital side we experience access (for expansion) getting tighter, making it harder for companies to grow in line with the overall VC investment spend in the retail space also decreasing significantly (~80% 2021 vs. 2023). If they are undertaken at all, investments are now limited to (national) market leaders, meaning that all players need to increase their cash runways, with the following levers playing an integral part on this path:
Three key levers for quick commerce players
Lever I: Basket Boosters - Optimizing Baskets
Quick commerce baskets are typically smaller than traditional baskets, as a significant share of orders still results from impulse or "add-on" purchases.
To achieve profitability both at company level and for individual orders, basket sizes and average order values (AOV) must consistently reach and stay above €40. But how can this be supported effectively?
The 'Good message'
Factors affecting basket size are known and quick commerce companies started to experiment with these since the beginning. Overall basket size is determined by three different elements: "Items per order", "Price per item", and "Variable customer fees", with each of them serving as a standalone basket booster type when applied in the right way.
The graph below outlines the most widespread "basket boosters", some with an explicit nature (e.g. minimum order values) and some others with rather implicit nature (e.g. product availability).
Key elements with influence on overall basket size
The 'Challenge'
There clearly is an interplay between individual basket boosters. How to combine and when to apply individual measures – always with the aim in mind not to overstretch a customer's willingness to pay for convenience – remains the pivotal question and is one of the hardest challenges each quick commerce player must solve.
The 'Conclusion'
A one-size-fits-all approach will not be sufficient, and it will require in-depth customer behavior analysis and monitoring of related measures (e.g. cohort analyses, customer churn) as well as solid testing approaches to optimize baskets step-by-step. In parallel, trade-offs (e.g. product availability vs. product waste) need to be made visible and discussed.
Looking at recent industry developments, we can see that most players have made significant progress over the last 1-2 years and select market players are close to finding a nearly "optimal formula" for their business/value creation – sometimes at the expense of customers, as many of us have most likely been surprised by higher prices or fees at order completion recently. However, as long as customers still complete the order, they have contributed to the quick commerce player's sustainable growth path.
Once orders are captured, the question arises around how quickly commerce can predict customer demand (overall and at a store level) and how they provide sufficient workforce capacity to predictably deliver orders to customers as promised – which most often is valued higher than pure speed. Therefore, our next article will shed light on how to optimize a quick commerce player's large blue-collar workforce, as well as how to cope with demand forecasting.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
