Technology

Q&A: Mercatus' Sylvain Perrier on Growth Potential for a Ghost Grocer

What's the appetite for 15-minute grocery delivery?

Sylvain Perrier is president and CEO of Mercatus Technologies Inc., a Toronto-based provider of enterprise grocery e-commerce management tools, and a Winsight Grocery Businesscontributor. WGB rang him up to talk about a recently announced $15.4 million Series A funding round for Fridge No More, a Brooklyn-based "cloud grocer" that promises deliveries within a 1-mile radius in 15 minutes or less. 

Fridge No More, which bills itself an instant delivery grocery service, said in a news release that it will use its new funding to expand in New York and along the East Coast, as well as build out its operations and engineering teams. 

Christine LaFave Grace: $15.4 million for 15-minute grocery delivery. What's your take? Amid all of the startup and app-focused activity in the food-and-beverage e-commerce space, is a ghost-grocer concept with limited SKUs promising hyper-speedy delivery novelty or something with legs?

Sylvain Perrier: I’m of two minds. Consumers are looking for convenience, there’s no doubt about it. And convenience has become even more important during the pandemic. There are reasons for that.

One is, the challenges that we consumers have had with our traditional brick-and-mortar operators. You don’t want to go in because you don’t feel safe; you don’t want to queue up in line. And the second one is when you’re using online services, there may be challenges because there may not be availability of time slots and you’re not getting an accurate representation of what’s available as far as inventory in the store, so that becomes very frustrating. We saw 60% of consumers shift away from their current brick-and-mortar operator to someone else.​​​​​​

That’s the main reason why you’re seeing a lot of these “cloud” e-commerce operators without a foothold into brick-and-mortar becoming really interesting. There’s also a second reason, and this lays squarely at the feet of Instacart: What Instacart has taught consumers is to disassociate themselves from their preferred brick-and-mortar operators. So now, a can of tuna is a can of tuna. A gallon of milk is a gallon of milk. Unless you’re an extreme foodie and you have certain brands and experiences you want to live through a store, you’re buying online.

E-commerce is a hot market right now—we’re predicting by 2025 that the compound annual growth rate will be 21.5%. There’s tons of room in this space to do this, and I think a Series A at north of $15 million for this little company is a drop in the bucket in what they will raise for capital.

That’s interesting when you look at Instacart relative to a DoorDash or an Uber Eats, because if you're ordering dinner, you’re not necessarily seeking out a particular neighborhood Thai restaurant anymore, right? You’re saying, “I feel like Pad Thai,” and then you choose whoever can deliver it fastest. That said, for that transaction to lead to repeat business, everything's got to go right. And it seems like when you’re promising something like 15-minute delivery, there’s very little room for error. Can you tell me what you see there?

If you look in the case of an Instacart, the margin for error is significantly larger compared to Fridge No More. That margin of error for Instacart is, the first is—you’re using gig workers. Are they going to show up? Are they going to pick the right items? The second series of variables in that total margin of error is, will the retailer have this in stock? Will it be of good quality? When you start stacking up these variables together, the risk profile is so much more significant.

If you look at Fridge No More, because they’re sourcing their own products from distributors and using these "cloud locations"—they’re controlling the supply chain to a certain extent. So what they’re representing on their app that is available for sale, they control, so they know. So you just lost a bunch of variables from the risk profile. Now you’re kind of down to, are the people that they’re recruiting to do the delivery, are they good? It doesn’t sound like they’re using gig workers, so I think for them if they’re not, they’ve eliminated another series of variables, and they will be able to have service quality levels greater than most.

In terms of the customer profile, who is this going to resonate most strongly with? What are their top priorities?

This is going to resonate with women. Professional, family-oriented, definitely one or two children in the household. If you’re working from home and you’ve got kids running around the house, getting groceries online is a must. In a busy place like Brooklyn or Manhattan, any of the boroughs, you can’t afford to just get in your vehicle, get on the subway to go and get groceries. It’s completely inconvenient.

Walmart has been touting express delivery in China within an hour and is expanding express delivery availability here. How compelling is 15-minute delivery? Is it necessary, or doable at scale?

It depends on the markets you operate in. If you and I right now were in France and having this conversation, I would say, 30 minutes, 60 minutes makes sense, because the average Parisian buys food for the current meal and maybe the next meal. They’re not like us here in North America where we’re doing a larger grocery buy for a week, week-and-a-half and then maybe one or two little stock-ups through the process. In New York, it’s less convenient to go grab seven or eight bags of groceries and haul them up the stairs, so maybe ordering more rapidly, sooner, more frequently during the week makes more sense.

With our roster of clients, typically people are still very regimented in their mind when they order their groceries online. "I’m going to be home here; I’m going to try to place the order the night before; here’s when I’m budgeting my time to be at home." And then you get frustrated if there’s no availability for it to be delivered. But very rarely when I talk to young professionals—unless they’re at a house party and they need something in 15 minutes—are grocery purchases spontaneous rather than planned.

The challenge when I hear these notions of an hour or 15 minutes—yeah, it’s tied to the population you’re serving and your markets, but this is also being used as a marketing differentiator. You put yourself at risk as a business that it's easy to do when you’re servicing one or two ZIP codes or a 1-mile radius, but what happens when you’re called to scale and to go to that next round of capital? Suddenly, that 15 minutes, it’s a great marketing differentiator, but is it tied to reality? Probably not.

One of the things we hear about is how important it is to provide meal solutions—prepared foods, meal kits, things that are easy to build dinner around. Does it hurt a concept not to offer items like this that are made in-house? 

I think the reality of them not wanting to tackle that is they’re sticking to the commodities. For them operationally, it just makes sense.

But the reality is, right now, in this situation we’re in, the lines between your professional life and your personal life have become so blurred that the things that are getting squeezed out of the elements are time with family and meal-prep time. I think that not having prepared foods, not having a partnership with meal kits or prepared foods in the long run—I’m not sure that this company will become sticky enough with consumers. Because it becomes, how many more orders do I have to put in to an e-comm provider system? I’ve gotta do you guys, I’ve got to do DoorDash because we do takeout once or twice a week; I’ve got to do HelloFresh or something—it just becomes confusing, and you’re asking consumers to further fracture their share of wallet as opposed to wanting to consolidate it.

So what do you see as far as acquisition potential, then?

100%. If I was investing in them, I would be pumping this Series B and Series C already, and it would be, let’s roll this out in Tri-State area, Los Angeles, Chicago, Miami and then sell the business. Who could acquire this? It could be a DoorDash; they have the DoorDash c-store concept today. This is a great complement to that. If you think Shipt, Target acquiring this and scaling it with the Shipt employees—absolutely. This is a "ramp it, roll it, sell it."

When we think about, as you've said, "survival of the fittest," what are the factors where, if you want to win at this e-commerce game, this is what you’ve got to be continually improving on?

Quality. Quality of service. You’ve got to knock that out of the park. And it’s got to be priced right. The ultimate third one is, don’t sacrifice operations and process for the sake of growth at scale. Entrepreneurs in the tech space, that’s what we’re taught: "Hold on for dear life, and when you’re revenue’s coming in you can go fix your mistakes." But we’re dealing with food here, and people. 

The other thing I'd add to look at is: What are the restaurant delivery services doing? Where are they lurking right now? COVID-19 has helped them, but I’m sure they’re looking to further expand their business models, to fortify themselves in case something was to happen with the economy, in case we go in a different direction.

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