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 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.