Are e-commerce buying groups the future of grocery delivery?

One of the big issues facing CPG manufacturers, retailers, and e-commerce companies is the last-mile delivery cost. Most FMCG direct-to-consumer companies fail because it often costs more to deliver the item to consumers than the item itself. However, the daunting economics doesn’t stop people from wanting the convenience of grocery delivery.

Enter Instacart and Postmates. Both offer grocery delivery by partnering with local retailers to create an individual delivery network. I’m incredibly skeptical of the long-term viability of either Instacart or Postmates. Part of this is history. America is littered with failed grocery delivery companies. Webvan lost over $800 million. Instacart shifted the business model from a retail play to logistics. These new “grocery delivery” companies don’t own any inventory. It seems to be the most promising, but it took a pandemic to make either profitable.

The biggest reason for my skepticism is that its success comes at the expense of traditional grocers and retailers. Instacart decimates already razor-thin grocery margins when it charges a reported 10% commission on every transaction. I have a hard time believing that grocery stores will give away margin in post-pandemic times.

The Chinese Approach to Grocery Delivery

So what’s the solution? There is a clear demand for grocery and other fast-moving consumer product delivery services. There should be a business model that is financially viable. A recent article in Businessweek on Chinese tuan zhangs (e-commerce buying groups) offers a potential fix.

From the article:

While managing her convenience store in the central Chinese city of Changsha, Chen Shishun always has an eye on her phone. In part, she’s just talking on WeChat and sharing photos with her improbably large network of friends and neighbors. But Chen also monitors grocery apps for bulk deals on fruits and vegetables, then gathers orders from people she knows and has the food delivered to her store.

The role of neighborhood e-commerce middleman, or tuan zhang, has become an increasingly vital one in Chinese cities since the first Covid-19 lockdowns. Chen, the kind of local merchant who does things like help customers carry purchases home, took charge of placing online grocery orders for the neighborhood when it was locked down this February. Word of her services spread quickly, and she now has almost a thousand people seeking to take advantage of steep discounts and cheaper shipping fees she gets by placing big orders—on the busiest days, she and an assistant handle 800—and centralizing deliveries.

There are hundreds of thousands of such operations across China. People form community buying groups based on shared neighborhoods, districts, or even apartment blocks. While some version of this has existed since rural farmers banded together to buy seeds and fertilizer, it’s been supercharged by smartphones and a growing e-commerce market.

There’s an old-school business model staring us in the face. The author misses it, instead referring to it as a consumer facing buying groups as a fad, echoing Groupon.

Consumer facing wholesalers

E-commerce buying groups are effectively consumer facing wholesalers. Like retail wholesalers C&S and US Foods, whose entire business model is buying in bulk from manufacturers and selling smaller retail outlets, buying groups make bulk orders and distribute to individuals.

Only they’re better positioned, because unlike traditional wholesalers, who are largely nameless, e-commerce buying groups are branded.

This makes people like Chen surprisingly influential. “My group members just buy what I recommend,” she says. “After all, I’m their next-door neighbor who knows them well, from what dishes they cook in the kitchen to what fruits they like.”

Buying groups could provide a sustainable business model to grocery delivery. It would spread delivery costs over multiple orders while allowing retailers to maintain higher margins via bulk purchases.

Image via Flickr