When ecommerce started gobbling retail a little over two decades ago analysts prognosticated that large retailers would hire fancy CTOs and teams of engineers to build their ecommerce stacks and transition to a new digital world.
But analysts missed the most obvious component of ecommerce.
By and large, ecommerce involves the retailing of non-perishable goods.
This makes it possible for an entity to aggregate scale and drive down costs without much concern for the last-mile complexities that come with perishable retail, which must be made much closer to the end customer.
Thus Amazon was able to dominate ecommerce, growing to nearly 50% of total US ecommerce sales in 2021.
Amazon proved that consumers had very fickle loyalty to traditional retailers, and in many cases even consumer brands.
What Amazon proved to matter most was cost and convenience, or putting the customer at the center of the retailing experience, and traditional retailers didn’t (and still don’t) have the DNA to prioritize data collection and data analysis to improve customer touch points.
Amazon has drastically accelerated consumer convenience and it’s been detrimental to most SMB (small and medium business) retailers who don’t have the mindset – let alone the tools – to use data to optimize their businesses.
As a result, most SMB retailers have been effectively forced to sell their goods on Amazon’s marketplace, with Amazon unapologetically cloning whatever fleeting success these SMB retailers might stumble into.
And this has been a best-case scenario, as the majority of ecommerce focuses on non-perishable goods where a large player like Amazon has material cost and operational advantages over that SMB retailer.
COVID injected an accelerant into the restaurant industry, which is very much in the category of perishable retail. Perishability has been the thorn in Amazon’s side and why they’ve struggled with Amazon Fresh and shuttered Amazon Restaurant Delivery.
It’s also what’s prevented total domination of a single ghost kitchen provider:
Food ecommerce is orders of magnitude harder than conventional, non-perishable ecommerce.
This implicit reality means that it’s going to take some time for an Amazon to own 50% of the food ecommerce market, but that hasn’t prevented well funded companies like Uber, DoorDash, Grubhub, and Cloud Kitchens from trying.
Unlike ecommerce, however, we don’t think one single provider will own the food ecommerce market as quickly as Amazon has risen to power in ecommerce.
But we do think COVID will provide disproportionate tailwinds to larger food retailers.
SMB restaurants are already getting shafted on delivery and online ordering fees while larger restaurants are successfully negotiating lower costs from third party delivery providers (several large brands we know have third party commission percentages in the single digits, or about 15% of what your average SMB is paying the same third party delivery companies).
Now that COVID has greatly increased the number of consumers using digital channels, where more customer data is being generated, restaurants with resources and (relatively) higher levels of sophistication are going to make use of this data to change their pricing, menu items, and marketing.
In a low margin industry, this really matters.
We expect larger restaurant brands to start winning material market share from SMBs, who wouldn’t spend the money to operate on data even if they were smart enough to understand why it matters.
Larger restaurants will slowly increase their share of customer wallet, driving frequency and decreasing recency to the detriment of SMBs.
Larger restaurants will use their balance sheets to run smarter promotions that drive more sales at the expense of SMBs.
Larger restaurants will put their customers at the center of their business while SMBs can’t spell the word customer.
We’ll share a story to show what we mean.
A long time ago we talked with a 3-unit bar operator who employed a staff comprised of mostly naked women (think a bargain Hooter’s). We attempted to explain why data mattered and how it increased sales. The owner said if they needed to increase sales they would just run a costume night, which “always increased sales”.
Our rebuttal?
“Okay, then why aren’t you running costume nights every night?”
He’s now out of business.
Food ecommerce is maturing and SMBs are unequipped in every way to handle the changing market.
Sure, SMBs will still offer unique dining experiences that larger restaurants often lack, but we would bet on SMBs churning at an ever-increasing rate as business complexities compound. The food ecommerce market will become more ruthless, and SMBs will be left behind, with many being relegated to cooking some virtual brand’s food in their kitchens as a means to survive.
That is, until an Amazon cracks the code and owns 50% of restaurant ecommerce.
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