Before the pandemic, grocery was often described as the last frontier of e-commerce. The dramatic acceleration of growth and consumer acceptance of online channels over the past two years has changed the equation.
The growth of e-commerce is being spurred by convenience (“anywhere, anytime”), safety (“direct to my doorstep”), and promotions (“better deals, lower prices”). Safety was an especially important concern during the pandemic, with a combination of movement restrictions and consumers’ reluctance to be exposed to crowded spaces forcing retailers to experiment with and adopt e-grocery.
In Indonesia, for example, consumers have demonstrated a growing preference for online shopping: approximately 60 percent of urban and suburban respondents to a recent McKinsey survey
indicated they shop online more now than they did before the pandemic. This behavior is expected to persist over the next 12 months. The same trend is playing out in Vietnam, with consumers expecting to continue their pandemic-induced migration to online channels.
As a result, e-grocery penetration in the Association of Southeast Asian Nations (ASEAN), while still low compared with more mature markets such as China and South Korea, is continuing to grow rapidly and is expected to rise from 1–2 percent in 2021 to 3–5 percent by 2026 (Exhibit 1). The total market size of e-grocery across Southeast Asian markets is expected to reach nearly $17 billion by 2026, with a projected compound annual growth rate of 16 percent from 2022 to 2026 (Exhibit 2).
Half of this increase could come from Indonesia, where the market is expected to grow faster than other Southeast Asian markets. Nevertheless, other countries are forecast to at least double their e-grocery markets from 2021 to 2026.
Competition is intensifying from multiple angles
Along with this rapid growth and changing consumer behavior, we have seen a flurry of activity from online grocery–focused start-ups, platforms, ecosystem players, and incumbent brick-and-mortar retailers.
Online grocery–focused start-ups
Renewed tailwinds behind this sector have attracted venture capitalist (VC) interest, resulting in a 7.3 times increase in funds raised by online grocery–focused start-ups, from $26 million in 2020 to $190 million in 2021 (Exhibit 3). Most deals have so far focused on Indonesia, with multiple new business models emerging beyond more traditional pick-from-store or darkstore models:
- The quick-commerce model features an assortment of 1,000 to 2,000 SKUs delivered from microwarehouses to consumers within 15 to 20 minutes. This business model, which includes companies such as Astro, Bananas, and Dropezy, has proliferated since 2021.
- The farm-to-table model involves sourcing produce directly from farmers and other primary producers and selling to either businesses or end consumers. This model bypasses intermediaries such as wholesalers and distributors. Start-ups have raised significant funds; for example, Sayurbox raised $120 million in series C funding, TaniHub $65.5 million in series B funding, and Segari $16 million in series A funding.
- The grocery-focused social-commerce model consists of companies that deliver group orders aggregated by community leaders to rural areas. Leading players have emerged in Indonesia (for example, Dagangan), Vietnam (Mio), and the Philippines (SariSuki).
Ecosystem players have moved into grocery, seeking more frequent purchases to organically increase revisits and capture a greater share of wallets (and stomachs). Super apps (such as Gojek and Grab), e-commerce marketplaces (for example, Shopee, Tokopedia’s Tokomart, and Blibli’s Bliblimart), and even food delivery apps (Foodpanda) have waded into this segment with various offerings. These services include pick and fulfill from store (whether third-party locations or a retailer’s own stores), fulfill from the retailer’s warehouse, click and collect, and marketplace models.
However, in response to increased competition, some players have sought to accelerate their efforts by pursuing bolder inorganic moves with incumbent brick-and-mortar grocers, including taking majority stakes (for example, Grab’s $400 million stake in Jaya Grocer), minority stakes (such as GoTo’s 4.76 percent share of Matahari Putra Prima), or forming joint ventures (for example, Bukalapak and CT launched AlloFresh, an online-grocery platform). Ostensibly, these deals enable players to quickly acquire a loyal customer base, reliable supplier pool, traditional retail capabilities, and consumer insights. Combining offline and online operations can also boost efficiency (popularized by Alibaba’s “New Retail” model). However, whether this value can be fully captured will depend on the extent to which these businesses with different pedigrees, mindsets, and operating models can be successfully integrated.
Incumbent brick-and-mortar grocers
Incumbent brick-and-mortar grocers have responded to these moves by upgrading their e-grocery offerings in a more concerted way, a break from the “wait and see” attitude prevalent before the pandemic. For example, Hypermart has developed an e-grocery portal and a mobile app, Hypermart Online, to provide both a grocery delivery and click-and-collect service. And supermarket chains such as LotteMart and Super Indo have created their own shopping apps.
While it’s too soon to determine which companies will come out on top, consumers will be the biggest winners for the next few years. They stand to benefit in several ways, including through better prices, fueled by an increase in promotions and incentives as multiple players fight to acquire and retain the same group of consumers; greater convenience, as more players enter the e-grocery market and try to differentiate on service levels, particularly speed of delivery; and improved quality and freshness, as direct-to-consumer models emerge to connect farmers and other primary producers with end consumers, disintermediating distributors and retailers in the value chain.
Challenges await e-grocery players
Despite this influx of attention and capital, e-grocery has been and will likely remain a challenging segment to crack. Already in recent months, the relaxation of movement restrictions and a tightened external fundraising environment have dampened some of the enthusiasm surrounding this sector. The shift from offline to online is starting to revert to the longer-term mean, and competitive intensity has lessened. A greater focus on profitability pervades and reinforces the challenges the sector faces.
Matching or exceeding the quality of the offline experience
Southeast Asia faces some challenges that are unique to the region:
Out-of-stock and replacement process when picking from store. Most grocery retailers are still using legacy IT systems for point-of-sale and stock management, so they lack an integrated inventory management system between their physical stores and e-grocery platforms. The resulting stockouts can frustrate consumers. Smart replacement systems (based on harnessing data and analytics or obtaining consumer preferences through an app or call centers) can help to reduce the negative impact, but some disappointment is unavoidable. Retailers that opt for fulfillment from their own dark stores or microwarehouses will have an advantage because they can provide real-time stock visibility to the consumer.
Fresh produce according to the consumer’s preferences. Target consumers for e-grocery are generally from middle- to higher-income levels, whereas the frontline workforce that is picking for fulfillment may not be as familiar with different types of fresh produce. One example is picking avocados with the right degree of ripeness: some consumers want them fully ripe for immediate consumption, whereas others might want to keep them for future consumption. Retailers that can provide relevant options for consumers to choose from and have intelligent workflows embedded in their picker apps will gain an advantage.
Preserving cold-chain integrity. The prevailing method of fulfillment in Southeast Asia is by motorbike, which can navigate traffic more easily and minimize capital expenditures. However, this delivery mode could have a potentially negative impact on consumer perception of the quality of chilled or frozen produce. Retailers that can innovate on the design of delivery boxes, which are typically strapped to the back of a motorbike, and institute strict procedures on the handling and packaging of such items will be better positioned to win the trust of skeptical consumers.
Achieving unit economic profitability
Margins in offline grocery are already notoriously thin. Making the unit economics work in e-grocery requires a delicate balancing act. While next-day delivery can be and is generally profitable, making the equation work for same-day and especially within-an-hour delivery is particularly challenging.
The primary tension is between average order sizes and fulfillment costs, both of which depend on each player’s chosen business model and value proposition (Exhibit 4). For example, quick-commerce players can offer only a limited number of SKUs to meet their promises on speed. The result is smaller average order sizes, which can be partially offset by efficient picking in optimized microwarehouses and lower last-mile delivery costs due to density of orders in a tight radius. On the flip side, an incumbent’s online offering will generally include a full range of SKUs (the same as in-store), allowing customers an opportunity to construct a full shopping basket. Yet fulfillment costs are often hampered by inefficient picking from their stores or large distribution centers and delivery, which is sometimes by truck from locations far away from customer hot spots.
Factors such as pricing and promotions, minimum order value and fees, the degree of seamlessness, and personalization in the customer experience all have a role to play in driving up average order sizes. For fulfillment costs, operational excellence and density of demand are key drivers as well.
Factors such as pricing and promotions, minimum order value and fees, the degree of seamlessness, and personalization in the customer experience all have a role to play in driving up average order sizes.
Advertising is a revenue stream that holds a lot of promise. Players in Asia are making strides, with some well on their way to achieving 4 percent of gross merchandise value (GMV) through advertising. By comparison, the international benchmark lies above 10 percent.
Implications for industry participants
Now more than ever, only players that can excel across five key areas (Exhibit 5) by combining both old and new capabilities will emerge as winners in e-grocery.
- Mastery of grocery retail basics. Incumbent grocers have a clear advantage in merchandising, category management, and pricing and promotions; these capabilities are core to running a profitable grocery retail business. However, in e-grocery, incumbents have room to further develop these capabilities through the application of advanced analytics and technology to specific use cases and tailor them to an online-shopping experience.
- Product and customer experience. Creating an inviting online grocery–shopping experience is not an easy feat given the breadth of SKUs. To be competitive, retailers must offer an easy browsing and searching experience across those SKUs, provide high-quality images and product descriptions, and manage inventory and pricing, which can be highly dynamic throughout the day. The list goes on. Incumbents have often suffered from poor execution (for example, products without images or any descriptions), rudimentary front- and back-end functionality, and a lack of integration with their offline retail systems. At the same time, newer players have often tried to approach the grocery category with a generic e-commerce lens, trying to replicate for grocery what has worked well for categories such as electronics or household goods.
- Operational excellence in warehousing, picking and packing, and last-mile logistics. While incumbents are familiar with bulk logistics, bulk breaking, and store replenishment, picking and packing for smaller online orders and last-mile logistics are typically new capabilities that need to be built. Even for newer players, achieving operational excellence, especially in coordinating and routing drivers, is a challenging yet critical element to ensure positive unit economics. Automation will be a critical component: while business cases have traditionally been negative, rising labor shortages and the falling costs of automation can help to tip the scales.
- Cutting-edge digital, analytics, and technology. Grocery-focused start-ups and ecosystem players will have a head start on digital and analytics, thanks to their tech-first pedigree and access to talent. Incumbents are quickly catching up, however, and are investing heavily in building their own capabilities and transforming legacy technology infrastructure.
- New business models and revenue streams. Grocery retailers that can master the preceding capabilities have the potential to augment their core business with new business models and revenue streams. Opportunities include generating advertising revenues through a retail media network, monetizing insights from the rich data collected at the point of sale, and collecting fees from third-party vendors that list their products on a marketplace. The real bottleneck here is not technology or analytics but rather go-to-market capabilities—for example, consumer and market research, sales, partnerships and business development, and marketing—that are often underdeveloped in mature, traditionally stable sectors such as grocery retail.
Retailers should adopt a consumer-backed, grocery-specific approach to ensure a fit-for-purpose and seamless customer experience. This effort is especially critical given the high propensity of first-time e-grocery shoppers to revert to offline shopping after a poor initial experience with online shopping.
Retailers should adopt a consumer-backed, grocery-specific approach to ensure a fit-for-purpose and seamless customer experience.
E-grocery is the fastest-growing channel in many countries and is a magnet for investment and competition. Its growth is also forcing retailers to reimagine their omnichannel offerings. Despite several challenges, including achieving favorable unit economics, retailers that focus on five key areas can build the capabilities needed to win in the years ahead.