Woolworths, Coles ride the MilkRun wave

What do companies like AirBnB, Uber, Atlassian and MilkRun have in common? They all started with ideas that seemed unlikely to work at first.

Consider MilkRun. The on-demand grocery startup was a true disruptor when it burst onto the scene in 2021. Its promise of delivering groceries within ten minutes for just $2.99 challenged the duopoly of Coles and Woolworths, which held a combined market share of about 70 per cent.

So how did MilkRun manage lightning-fast delivery? It leveraged range localisation and a dense network of micro-fulfilment centres to offer instant delivery and reduce inventory.

However, MilkRun continued to struggle to turn a profit and eventually succumbed to market forces, joining a long list of fast delivery companies that shut down operations, such as Send, CoLab, Voly, Delivr and Deliveroo.

MilkRun's story doesn't end there though. Last month, Woolworths acquired the MilkRun brand, its social media accounts and its customer base for an estimated $10 million. 

As MilkRun shut down, its founder Dany Milham explained scale is key for last-mile delivery and "significant investment over time is needed for profitability."

Well, who has more scale than Woolworths and Coles? The Woolworths acquisition of the MilkRun brand with its loyal fan-base shows it succeeded in getting the big guys to up their game.

Need for speed

The grocery retail sector is worth $132bn in Australia (Statista), dominated by slow-moving incumbents who account for 80 per cent of the market; Woolworths, Coles, Aldi and Metcash (owner of IGA).

Up until now, startups like MilkRun and Deliveroo have filled the gap in the online space, but now Woolworths and Coles have stepped up.

Woolworths recently announced 'rapid deliveries for $5' via its Metro60 app, now rebranded to 'MilkRun powered by Metro,' creating a major shift in groceries delivery. It boasts 33-minute average delivery times, no service fee and fulfils orders via third-party couriers. It will be available in more than 500 suburbs across Sydney, Melbourne, Brisbane, Canberra, and the Gold Coast.

Coles also offers rapid delivery. Last month it tied up with Uber Eats to offer one-hour delivery and plans to add 500 brick-and-mortar stores to the app.

Unlike MilkRun, Coles uses gig workers to pick up, pack, and deliver their orders—a model MilkRun rejected, resulting in its higher labour costs than gig-economy delivery services.

By signing up Coles, Uber has cemented its market share in the grocery delivery market. Until now, Coles delivered groceries using its own drivers as well as DoorDash.

The move puts Coles on an equal footing with rival Woolworths, which has been using Uber for deliveries since June last year for its Metro60 brand.

According to IBISWorld, Woolworths now accounts for 53 per cent of online food sales, up from 45 per cent four years ago, while Coles accounts for about 31 per cent.

As e-commerce moves toward quick commerce (q-commerce), shoppers are demanding faster deliveries. In a recent study, Macquarie Group revealed that almost 40 per cent of customers prefer click-and-collect, while 35 per cent prefer delivery as soon as possible. In fact, Woolworth's e-commerce sales increased 8 per cent to $1.2 billion in the March quarter on the back of its same-day and Delivery Now offerings.

With its quirky advertising and a strong customer connect, MilkRun pioneered instant grocery delivery. But now the deep-pocketed incumbents have entered the market, unit economics and online profit margins will likely improve, making the offering sustainable. The rapid delivery space seems poised for further disruption.

Key takeaways for investors

1. On-demand grocery space is set for further disruption, led by Woolworths and Coles.

2. Online profit margins in the rapid grocery delivery market are likely to improve with deep-pocketed players entering the space.

3. As e-commerce trends shift towards quick commerce, faster deliveries and click-and-collect are key to achieving revenue growth.

Disclaimer: This article is prepared by Ankita Rai. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.