4 minute read
Price elasticity is the sensitivity of demand to a product’s price. For an elastic product, if you raise price by 10%, demand may fall by more than 10%. For an inelastic product, if you raise price by 10%, demand falls by less than 10%, if at all.
The Information reports rapid grocery delivery companies like JOKR and BUYK, struggling under the strain of cash burn from doing 15 minute or less delivery, are exploring longer delivery times (in the two-hour range). Extending delivery times would enable them to combine deliveries and potentially scale back labor inside their dark stores, improving the economics.
“The pressure to change strategy so soon after launching illustrates the challenge of operating an instant-delivery business in the U.S., where intense competition from other rapid-commerce startups and more-established delivery firms like Instacart make it more expensive to attract customers.”
We really don’t know what delivery speed elasticity looks like for the consumer. Meaning, what is the sensitivity of demand for rapid grocery delivery as delivery speed slows down? Will consumers respond negatively if 15 minutes turns into 30 minutes? What about two hours?
The core value proposition of rapid grocery delivery was speed, with these companies willingly trading off assortment. If they have to move towards 30-minute delivery, or even (gasp!) two hour delivery, it seems Instacart’s Priority Service would have a significant advantage considering the assortment it is pulling from is multiples larger.
More broadly speaking, the experimentation by JOKR and BUYK fits within the perspective of online grocery players looking to span all use cases, including moving down and to the right. You would expect these RGD companies to do their own tests, just like the omni-enablers are doing and Amazon has become known for in grocery.
As we wrote about last month, Amazon is positioned interestingly, with three million (!) items capable of being delivered in five hours. That timeframe is 20x slower than a RGD company delivering in 15 minutes, but the assortment is 1,000x larger, and delivery speed elasticity may be inelastic below a certain threshold.
Most likely, there is not one silver bullet. Use cases vary with grocery (let alone other categories), and companies are more focused on uncovering what consumers value for each use case and finding an economic model that can work.
It is hard to bet against faster delivery though, something Bezos would characterize as a consumer desire unlikely to change:
“I very frequently get the question: "What's going to change in the next 10 years?" And that is a very interesting question; it's a very common one. I almost never get the question: "What's not going to change in the next 10 years?" And I submit to you that that second question is actually the more important of the two -- because you can build a business strategy around the things that are stable in time. ... [I]n our retail business, we know that customers want low prices, and I know that's going to be true 10 years from now. They want fast delivery; they want vast selection.
It's impossible to imagine a future 10 years from now where a customer comes up and says, "Jeff, I love Amazon; I just wish the prices were a little higher." "I love Amazon; I just wish you'd deliver a little more slowly." Impossible.
And so the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now. When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it.”