Quick Commerce: Challenges and Opportunities

A look at countries like South Korea or the USA shows us that the future belongs to quick commerce (q-commerce). Goods are delivered on the day they’re ordered, often at a time specified by the customer. SEEBURGER’s home country of Germany is still miles away from such idyllic conditions, but the changes in shopping behaviour since the Covid pandemic hit has also triggered a rethink here. Many consumers have discovered the convenience of online shopping, while as many workers are still working from home, they’re also no longer popping to the shops on their way home. The ageing society is doing the rest, with pensioners and the increasingly less mobile having discovered the convenience of shopping over the internet. Demand is certainly there for q-commerce. However, before a retailer can offer this to their customer base, there are a few hurdles to overcome first.

Q-Commerce challenges for logistics

The biggest challenge in introducing quick commerce is logistics. In order to meet the extremely tight delivery times in q-commerce, which may even be under ten minutes in urban areas, you cannot use the type of large, central warehouse integral to traditional retail. Instead, the challenge is to integrate several inconspicuous mini stores – known as dark stores – into the urban environment. As a rule, these premises are rented.  If the rental overheads weren’t enough, quick commerce needs a whole army of personnel at its disposal to process and pick the order and deliver it within a tight timeframe. If you have pledged to get goods somewhere within a few minutes, you simply cannot wait for a driver to drop off 20 other deliveries beforehand.

Figure 1: Estimated operating profit for pure delivery

The challenge of low profit margins in q-commerce

These two factors – warehousing and manpower – generate pretty high costs, while the average customer is not willing to spend more on online purchases than in a shop – nor to pay a premium for faster delivery. This means that compared to conventional online grocery and food delivery, the margins in quick commerce are pretty low. The chart above illustrates how tight the calculations actually are. Assuming a €1.80 delivery fee, as charged by the quick commerce provider Gorillas, for example, a driver would have to manage six deliveries per hour merely to cover his take-home hourly wage. This is not a pace you can expect to keep up long-term. The employer then has to cover all other overheads from the remaining small profit: ancillary wage costs, depreciation on warehouses, equipment, etc. A loss is essentially inherent from the start. At the same time, companies want to entice their customers with low prices. Furthermore, in quick commerce, customers only tend to order a few items at a time; based on an acute need. This means that the classic tactic used in the grocery trade of offsetting low prices for basic foodstuffs by also offering high-priced products in a mixed costing strategy, is not a viable option here. Quick commerce providers like Gorillas have to compensate for their comparatively small range of 1,000-1,500 products with rapid delivery and a delivery guarantee without first booking a slot.

The challenge of acceptance in q-commerce

In order to be able to supply customers at the required speed, goods need to be stored close to a customer. Q-commerce does this through several small, local delivery centres, known as dark stores. The name comes from the fact that they are usually flats or business premises with blacked-out windows. These centrally-located micro warehouses are the beating heart of quick commerce and are what enables such speedy delivery to the end customers. How they have been strategically located within a delivery area can be crucial to the success of a quick commerce enterprise. Artificial intelligence and machine learning give insights into shopping volume and delivery routes, which are used to optimize how dark stores are distributed and networked. However, dark stores in residential areas and city centres often cause resentment among residents, who complain about blocked pavements and driveways as well as high noise levels during goods deliveries.

The challenge of working conditions in q-commerce

Reports of stress, poor working conditions and low, non-liveable wages also blight the image of delivery services as hip, feel-good employers[7]. Indeed, with such low margins it’s difficult to see how there can be a successful balance between profitability and sufficient payment and social security for the people on the ground. Gorillas, one of the leading delivery services in Germany, has so far mainly aimed at rapid growth to establish itself as a market leader over the other providers. They are looking at profitability through a long-term lens. As one of the best-funded German unicorn start-ups ever, Gorillas can afford to do so, but another long-term question is how low margins and being in the black can coexist – and whether they should.

Quick commerce as an opportunity for greater sustainability

Modern customers want convenience – but not at the expense of the environment. Through the proximity of the dark stores to customers and the use of electric vehicles and bicycles for short distances, quick commerce meets this social desire for sustainability (net zero emissions). Packaging can be environmentally-friendly or even reusable, while the close proximity of the dark stores to the customer often means there is no need for cool packs or dry ice during transport. Indeed, under certain circumstances, q-commerce could mean that customers no longer need their own fridge or freezer. Why keep ice cream and ready pizzas at home, if they can be delivered within 10 minutes? Anyway, why are we limiting the discussion to food? In principle, pretty much all of our everyday needs are suitable for quick commerce, from cosmetics and drugstore articles, up to furniture and clothing. Provided, of course, that we find a good solution for warehousing these items. However, this type of thinking opens up all sort of possibilities for tapping into completely new customer bases.

What technology do you need to offer q-commerce?

The foundation for implementing the closely timed storage and delivery system which characterizes quick commerce is a warehouse management system with real-time inventory management which links up all central warehouses and dark stores. This is the only way to update existing stocks in real time, calculate optimum delivery times and keep track of the freshness of goods, which is essential for perishable goods. Any time that the q-commerce company does not have to devote to working out and monitoring the above transforms into a competitive advantage. You will also need route management software to plan and routes and assign these to drivers, as well as potentially an ERP system. Many companies draw some or all of this software from the cloud, although some have developed their own applications. This all needs to be intelligently interconnected and automated with middleware, also known as integration software. Ideally, this also integrates production or deliveries to ensure that stocks are regularly replenished in the main warehouses and stores.

Key IT areas in q-commerce

In order to ensure your quick commerce venture runs smoothly, you need a first-class, well-structured IT set-up. In no other area of retail is the real-time exchange of data and seamless networking of systems as essential as in the rapid-paced q-commerce world.  This includes procurement, warehousing, logistics, and the myriad supply chains, all the way to the end customer. Customers expect a smooth, easily accessible shopping and delivery experience, sometimes with delivery within minutes. The days when ramshackle shop systems and inaccurate stock quantity information were acceptable are over, and the competition is just a click away. So what key IT functions do you need to integrate with each other?

Data management

Customer orders, warehouse capacities, tour and job data need to be automatically reconciled. Incoming orders need to be transferred to the drivers, accurately, automatically and in real time. You also need real-time access to drivers’ locations, routes, and the warehouse capacities en-route to enable a speedy, successful delivery to the customer. With everything integrated, the logistics or fleet manager can receive automatic notifications for each delivery milestone, whether by email, as an in-app alert or on a customised dashboard. This lets him monitor and measure the day-to-day success of his team. These notifications will need to be primarily in real time, although depending on the type of goods in question, interval-based or otherwise intelligently triggered notifications may be appropriate.

API/EDI integration

Online shop, app, customer database, procurement system, fleet management, payments – the list of systems needing to be linked together is long. At the same time, in no other area of retail is smooth, rapid communication between the individual elements as important as in quick commerce, which has no room for delays. Seamlessly integrating the various data systems into a uniform whole is therefore the cornerstone, without which the entire quick commerce structure will collapse.

Artificial intelligence and predictive buying

Artificial intelligence and machine learning have long been used to create customer profiles and evaluate shopping behaviour. This is even easier to do in e-commerce than in traditional retail. What customer prefers what products is an open secret for e-commerce providers – and this secret is worth hard cash, especially in quick commerce with its limited storage options. This algorithm-based consumer analysis is also called predictive buying. It lets retailers work out what customers are likely to buy in the future with a pretty high degree of accuracy. Amazon, which has been using predictive buying for many years, was a pioneer in this field.

Is q-commerce an innovation driver for online trade?

There is no doubt that implementing quick commerce is strewn with not insignificant challenges. Nevertheless, the advantages clearly outweigh these. Tightly and intensively linking systems and making their data available in real time increases the flexibility of delivery strategies, while integrating processes and systems and adding in some artificial intelligence increases the speed at which orders are fulfilled. There is potential for further reducing delivery costs, while also improving delivery reliability. Incidentally, this resource optimization also benefits the environment. Platform owners and logistics providers who succeed in setting up such a cohesive IT infrastructure can gain a competitive edge and open up new markets. These opportunities shouldn’t be forgotten in a SWOT analysis of whether to start offering q-commerce.
And the above applies to all online retailers – not just those in quick commerce. The customer, who has become accustomed to seamlessly smooth ordering processes and rapid delivery in one area, grows to expect the same performance in shopping experiences. With this in mind, quick commerce, which in Germany at least has so far led a somewhat Cinderella existence, actually needs to be viewed as an innovation driver for the entire retail sector.

How can SEEBURGER help you introduce quick commerce?

Quick commerce is revolutionising not only customers’ expectations of their shopping experience, but also how retailers respond to these expectations. Omnichannel design, demand management and real-time customer experience are the new standards.

It is essential to integrate and synchronise all the applications and systems involved in q-commerce. The API capabilities on the SEEBURGER Business Integration Suite, which comes with adapters and connectors, lets you connect all the applications and systems you need. Available in a deployment model which suite your organization’s needs and resources, the SEEBURGER Business Integration Suite gives all relevent parties a comprehensive insight into the processes necessary for q-commerce at any time, and is a foundation for continued, long-term business success.

Source: https://blog.seeburger.com/quick-commerce-challenges-and-opportunities/