In 2002, René de Koster, professor of logistics and operations management at RSM, wrote a paper that showed why an online grocery business could never be more profitable than a regular supermarket. Today, Picnic, a fast-growing online supermarket headquartered in Amsterdam, is doing its best to prove him wrong.
Recently, De Koster and his colleague Niels Agatz, an associate professor of transportation and logistics at RSM specialised in online grocery retailing, met on Zoom with Team Picnic’s co-founder, serial entrepreneur and Erasmus School of Economics alumnus Michiel Muller, to discuss his company’s growth strategy and consider again whether online groceries can ever be something other than a luxury service. Growing any business is challenging, but it can be especially tricky for a business with as many moving parts as an online supermarket. “Scaling up means that you have to scale your infrastructure all the time. So all the time you have to add more people, add more vehicles, add more distribution centres with the related CapEx,” Muller said.
Picnic’s special sauce Most online grocers and traditional grocers with online offerings are struggling to grow profitably, according to the professors. But Muller pointed to several innovations in Picnic’s design that he says have given his company an advantage:
• The business was built from the ground up as an online delivery service, with every aspect from the warehouse to its small electric delivery vehicles fitted to support its delivery business. • Picnic wastes no food. “Since people pay for their basket the latest at 22:00 for delivery the next day, we know at 22:00 exactly how many cucumbers we need to deliver the next day, so at 22:05 we confirm our orders to our suppliers, ‘Okay, it will be 100 cucumbers tomorrow’ and they deliver 100 cucumbers, so we don’t have to throw away any stuff we didn’t sell,” Muller said. This is a substantial saving, he added, as the typical supermarket wastes about 10 times this compared to Picnic. • Picnic’s last mile of delivery is more efficiently organised than most other online grocers. Instead of delivering on an ad hoc basis, delivery routes are organised like the old milk routes, giving people several options for the time and day of their delivery rather than allowing the customer to choose any point in a day’s delivery hours.
Also interesting for you
“When people have ordered five or six times through our app, they never leave again.”
Michiel Muller, co-founder, Picnic
• Unlike most supermarkets, Picnic is first and foremost a tech company. “If you are a traditional store-based retailer and have been so for the last 60 years, there is obviously a lack of tech DNA in your company. When they talk about tech, they talk about the finance department doing an introduction of SAP, so either you have to ask a consultant to build it for you, which of course reduces your flexibility, or it becomes very expensive, and you don't build the DNA.”
Picnic deliveries seem to be extremely habit-forming, according to Muller, to the point that he says the company spends very little money on marketing. The big attraction is the time savings: the average Picnic customer’s shopping time is three minutes versus an hour or more that the average consumer spends grocery shopping every week. Once people get in the habit, they generally don’t want to go back, Muller said.
“When people have ordered five or six times through our app, they never leave again. After the fifth order, they just don’t leave. They just say, ‘Tuesday is my Picnic day,’ and every week they return. So an average customer does 40 purchases per year, on average €60, €70 each, so €2,500 per year, and they come back every time,” Muller said. Basket sizes also tend to increase over time, he added. “If you have high frequency, extreme loyalty, higher basket value, then over time, of course, it starts to be interesting. And so, if you look at our mature cities, we are already profitable, in both the Netherlands and Germany and we see significant potential to improve this further. We believe our model will become more profitable than the traditional store model, driven by the efficiencies in all parts of our value chain,” Muller said.
Also interesting for you
“Over time this whole movement to online will have a huge impact on supermarkets.”
Michiel Muller, co-founder, Picnic
But Agatz says that’s unusual. “Research in meal delivery and my experience at other online grocers suggest that loyalty is harder to achieve online than in physical supermarkets. People are extremely loyal to their favourite supermarket,” he said. A golden egg in Picnic’s basket? For most online supermarkets, success like Picnic’s remains elusive, according to De Koster. “Apparently Michiel has found the real golden egg, the answer to everything,” De Koster said. “But I can tell you all the others are struggling. They are all facing the same challenges, but they are not realising profit.”
“In our current research, we look at the conditions for profitable growth in online grocery retail in relation to the developments in offline supermarkets. Our conclusion is that profitable online grocery is only possible if consumers are willing to pay more for the service.” Agatz said. “It is just a lot cheaper to run a regular supermarket. The economies of scale seem limited online in this business.”
Agatz asked Muller: “I’m wondering if Picnic expects that it can be as profitable, or even more profitable than a physical supermarket.” Muller answered that Picnic will generate superior profits ultimately, above the 4 per cent of the best conventional supermarket, or the 2 per cent or even 1 per cent of the rest.
“Over time this whole movement to online will have a huge impact on supermarkets,” he added. “Store-based supermarkets will start increasing their prices a bit just to make up for the lost margin, meaning that will make the online grocers more profitable sooner.”
But even Muller sees a hybrid future ahead. “‘I need a warm croissant now’ is difficult to accommodate in a mass market online offering like Picnic’s. Hopping online for the weekly shopping and going to the cheesemonger at the weekend for that Stilton you need that night is the perfect combination.”