Investment Insights: Finally, people are getting groceries

How changes in consumer behaviour are driving Kinnevik’s food vision

At Kinnevik, we are experts in understanding complex and fast-changing consumer behaviours which empowers us to back business models that are harnessing the power of technology to address vital, everyday needs and make consumers’ lives better in the digital age.

The food space is one of the key sectors we’re focused on as we continue to grow our private portfolio of fast-growth technology businesses. It’s a fascinating industry that’s going through a dramatic transformation that will improve the lives of consumers, and that represents enormous opportunities for investors. 

Magnus Jakobson, Senior member of the Nordic Investment Team and responsible for Food investments recently wrote a Medium post on how changes in consumer behaviour are driving Kinnevik’s food vision and outlining his reflections on some of the most frequent questions in this area.  You can read the full piece here and a smaller extract below. 

Magnus also sat down with Kinnevik’s CEO Georgi Ganev for an informal chat at our Stockholm office to discuss the market and its opportunities.

Finally, people are getting groceries! 

Back in 2017 when we started looking at the food space in a more deliberate manner, we as a firm were quite focused on backing consumer brands. This led to our initial investment in Oda (the dominant online grocer in Norway) in 2018, followed by our investment in Mathem (the leading and only pure-play online grocer in Sweden) in 2019. In retrospect, these investments may seem uncontroversial. But back then, the space was far from in vogue (perhaps as some investors were still licking their wounds from the Webvan adventure 20 years ago), and we consequently had loads of interesting conversations with various stakeholders. 

In general, it seemed like people intuitively got that the grocery segment has some differentiated ecommerce characteristics like big basket size, high frequency and zero product returns. And to some extent people bought into the notion of ‘platform value’ derived from the proprietary last-mile and native app relationships with the customer. However, there were (and to an extent these still persist today) some questions around (A) the viability of the business model, (B) the size of the addressable market, and (C) what the prospects of pureplay online grocers are in said market. Below I have outlined my reflections on some of the most frequent questions in these areas. 

But how much of the grocery market is really going online?

The traditional grocery assortment encompasses food and other household consumables. A lot of it include branded and/or commoditized low interest products, which are often bulky and relatively heavy. As such, getting these items delivered to your home is a great service. Also, the larger scale and higher throughput of Customer Fulfilment Centres enables a broader assortment, particularly in fresh products, compared to what is sustainable in much of the brick-and-mortar footprint. Importantly, the model has a structural advantage as it pertains to spoilage levels, partly due to the larger scale and throughput, and partly due to the data driven nature of the business providing benefits when it comes to forecasting demand, but also managing stock levels through targeted offerings, etc. 

Consequently, our thesis is that a huge share of groceries will go online already in this decade. As noted above, the tricky part is to predict the speed of this online transition. It’s often said that people tend to overestimate the impact of technology in the short term, and underestimate the impact in the long term. To the extent that holds true, it’s good to be a long term investor without fund life restrictions. When we started deploying capital in the space, there was less visibility on that. The Covid-19 pandemic has clearly accelerated the digitization, but it remains to be seen by how much. Some consumers will go back to offline, but many have created a habit of getting their groceries delivered at home. 

In addition, there is a meaningful opportunity beyond the traditional grocery assortment. Having a last-mile fulfilment platform and a high-engagement native app relationship with a large customer base provides an unfair advantage to compete for adjacent household consumable categories, in particular commoditized categories like pharmaceuticals, since the delivery is already paid for and the customer is already largely acquired. 

But won’t Amazon ultimately win this category as well? 

Amazon is clearly a formidable competitor in any category, and it has publicly stated for years that it needs to make it in the groceries and apparel categories to meet its growth ambitions. Yet, across most of Europe, it’s not really there yet. I’m sure there are many reasons, but one is probably that these are somewhat emotional categories. You’ll for sure trust Amazon to efficiently bring you books or electronics just as much as the next ecommerce provider. However, do you really want Amazon to curate your closet or pick out fresh local produce? That said, the broader threat of players like Amazon coming into the space does highlight the need for online grocers to build a differentiated assortment and a trusted brand. 

So, what’s next?

In summary, we are convinced that great online grocers can build really big profitable businesses. 

However, as the online penetration goes deeper and the market matures, the nature of the game will evolve, and likely include further fragmentation. We’re already seeing innovation along all three classic ecommerce drivers: Convenience (e.g. instant groceries), Price (e.g. surplus inventory discounters and price clubs) and Assortment (e.g. vertically integrated farm-to-table players and private label led direct-to-consumer (DTC) brands. To some extent these services are complimentary, but they will also compete and ultimately morph towards each other. Over time, certain aspects of these services will increasingly become table-stakes, accentuating the value of building a trusted brand backed up by a quality assortment, because ultimately more and more consumers will care about what they put into their bodies.  

As illustrated by the velocity and size of funding rounds in the space over the past few months, it seems like many investors are coming around. We’ve deployed north of USD 200m into online grocers to date, and continue to think it’s early days for us and for the sector.