The future of online grocery and our investment in Fabric
By: Bill Pescatello
At Evolv Ventures, we are very fortunate to sit inside one of the largest food and beverage companies in the world and being here, we think 24/7 about what is disrupting our industry and what game-changing technologies will come next.
Online grocery growth is exploding…
One of the most visible trends is the explosion of e-commerce in the grocery industry and how it will shape how consumers buy food and CPG products going forward. While online penetration for grocery is still relatively modest at ~5%, online grocery purchases are expected to grow 3x in just the next 5+ years. Driven by shifting consumer preference for greater convenience and major investments by companies such as Amazon and Walmart, the way we buy groceries is changing quickly.
While this growing market provides an incredible opportunity for well-positioned companies, traditional brick and mortar retailers need to address this market and make changes to how they operate NOW.
… but e-commerce sales remain unprofitable for retailers
To make this even more urgent, most of the existing e-commerce solutions that retailers are using today are not resulting in profitable e-commerce sales. Driven by high delivery costs and expensive fulfillment methods, on average retailers have a negative 4% margin on each additional dollar of online sales.
While delivery costs may be improved in the coming years by emerging delivery providers and technical solutions, we do not see this as having a meaningful impact in the near term. Any real savings need to be captured by lowering fulfillment costs, of which still has major inefficiencies.
Changing methods of fulfillment
While Instacart changed the industry and helped make online grocery delivery possible for millions, we view this as just the beginning. Ultimately, relying on physical shoppers picking items in store will not be efficient enough for online orders.
Greater automation and dedicated systems are needed to scale e-commerce efficiently. We applaud Ocado and Kroger who have reportedly committed over $1B to solve for the limitations of instore fulfillment models by building large automated and centralized fulfillment centers (CFCs) to address this issue. This is a step in the right direction, but is it enough or ultimately the right approach for grocery retailers?
These facilities are certainly more efficient and have better margins than existing instore solutions, but due to their massive size (300k-700k+ sq. ft.) need to be located outside of major urban areas, and have higher transportation cost and longer delivery times. According to Jefferies, these delivery costs are likely double that of retailers using local distribution centers and may not address 1 hour or even same day deliveries.
So if these existing solutions don’t scale, and large automated fulfillment centers only get us so far, where do we go from here? How can we better automate fulfillment, leverage existing infrastructure and minimize delivery cost?
The microfulfillment model can unlock profitability
This is where the microfulfillment centers (MFCs) come in and have the potential to finally unlock profitable online sales for retailers globally. MFCs, like the ones that Fabric provides, deliver the same level of automation and efficiency you see in large facilities like Ocado, but do not have the large real estate requirements that generally push them outside of dense urban areas. These facilities can utilize existing retail spaces and can grow vertically, making them economically viable in dense urban areas. They provide the automation necessary to materially lower fulfillment costs, while also keeping delivery costs low by being closer to the consumer.
As we spent more time with microfulfillment solutions, we evaluated all the major providers to invest and/or work with. One company stood out that could lead the way from a technical and operating perspective and that was Fabric.
On a trip to Israel last year, we finally got a firsthand look at the smallest MFC in the world at Fabric’s first site and simply were blown away. The utilization of advanced robotics and machine learning was nothing short of remarkable and stood out from anything we had seen. It was one of those moments where you see the future and know this could change an industry.
We spent the next couple months evaluating the space, partners, and their technology, and only became more bullish on the company’s bright future. Fabric has a best-in-class technical team driven by founder and CEO Elram Goren, full pipeline of Fortune 500 companies, operates on 2 continents, and, having raised over $100m, has all the resources necessary to win.
In just the initial months after our first conversations, Fabric’s existing locations continued to break their own records for productivity and look to be on the path to make what was previously unscalable in e-commerce, scalable.
For food tech investor and retailer partners, now is the time to invest in the future of e-commerce. Change is coming fast to the way grocery items will get to you. This revolution is only accelerating and we at Evolv Ventures are betting on the companies that will be leading the way. We are proud to announce our investment in Fabric…change is coming!