Appetite for rapid grocery delivery is growing around Europe
In major cities around Europe, operators that deliver groceries within 10-15 minutes, also referred to as ‘quick commerce’ or ‘q-commerce’, have seen enormous growth over the last two years.
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Some US$4.5 billion of funding was invested in European grocery delivery services in 2021, almost double the amount their American counterparts received. While convenience and hyper-localism have been crucial for the retail sector for some time, the pandemic has acted as an accelerator for these rapid delivery services. Meanwhile, online penetration in the grocery industry is still lower compared to electronics, furniture, and apparel offering further room for expansion.
For real estate markets the rapid growth of q-commerce providers means that there will likely be increased demand for urban logistics and retail units as a dense network of fulfilment centres is required to guarantee fast delivery times. However, fast grocery delivery operators are increasingly facing regulations in some cities to prevent dark store locations.
What impact are these operators likely to have on the real estate markets in major European cities?
With a shortage of space in cities and tightening local planning regulations, sourcing suitable space is often challenging. Hence, there is pressure on developers, investors, and occupiers alike to innovate and enhance land utilisation. This means alternatively used space in urban areas could be converted or repurposed for use by dark stores, for example, establishing dark stores in garages or underground car parks.
For the delivery model to work, dark stores or micro-fulfilment centres have sprung up in many cities around Europe in very close proximity to their customers. They usually range between 150 and 800 sq m in size and operators mostly look for ground floor or basement space allowing for goods loading and bike access. In cities such as London, the rapid development of this business model has driven up competition and rents in highly urban locations, where the availability of space is constrained. This means that some traditional occupier groups are reassessing their location choices and that there is need to use land and warehouse space more intensively.
Additionally, ESG criteria has become increasingly important for investors, therefore local regulations in terms of the types of operations, vehicle movements, and operating hours to appease neighbours will come into consideration when leasing space to these operators.
Below, our local experts across our European locations, give their view on how the sector is evolving in their market.
Czech Republic
Online grocery retail is rising fast. Q-commerce is still in its early stages, but new players are entering the market as they target the same customer base as the traditional bricks-and-mortar as well as online supermarkets. The benefit of Czech cities and towns is their smaller size and thus, there is less need for in-city logistics facilities, as the required delivery times for standard grocery deliveries can be guaranteed from warehouses on the outskirts. Q-commerce operators seek smaller spaces, typically standard retail units in densely populated areas which reduces regulatory risk which operators are facing in larger cities where the segment is more mature.
The Czech online grocery market has been growing steadily over the last ten years, but the q-commerce segment is still in its early stages.
Dark stores are still a relatively new concept, with q-commerce operators entering the market only towards the end of 2021, as the traditional and online-only supermarkets hold the majority of the online grocery market share for now. The traditional supermarkets can use their hypermarkets as delivery warehouses and stores for customers to pick up their orders, while pure online players innovate to find alternative solutions for the Click & Collect model.
Most of the online grocery retailers started with distribution in Prague only, to date they have expanded their services to the majority of the regional capitals such as Brno, Ostrava, Pilsen, Hradec Králové, and Liberec. In comparison with larger Western European cities, the benefit of Czech cities and towns is their smaller size and thus, there is less need for in-city logistics facilities, as the required delivery times can be guaranteed from warehouses on the outskirts.
Online grocery retail was boosted by the pandemic, but even prior to that, sales grew almost by 100% year on year. What was special about the pandemic growth was that the new situation taught the older population how to shop online, and many of them kept this new habit even after the lockdown eased. While the overall online retail share reached 17% in 2021, the share of online grocery retail is significantly smaller at only 4.2%, indicating significant room for growth. Within the next three to four years, the overall share of online groceries could even double which will likely lead to a rise of the q-commerce segment and increased demand for smaller units (<300sqm).
Rohlik.cz – an online-only supermarket – currently leads the market with 80% share. By the end of 2021, their annual turnover reached CZK 8 billion (approx. €320 million). With market growth, q-commerce operators and food delivery services are entering the market, such as Wolt, BoltFood, and DámeJídlo, as they target the same customer base. Despite new market entries, the top three grocery e-retailers on the market are still Rohlík, Košík and Tesco, with the latter one being particularly strong in the Click & Collect section. Ahold, the second largest food retailer in Czechia in terms of number of stores, only introduced its online shopping in three cities in Moravia as a pilot testing project.
In 2021 rohlik.cz secured investment for expansion, both in existing markets which included besides from Czechia also Hungary as kifli.hu and Germany and other Western European countries, targeting logistics warehouses on the edge of the cities such as Garching by Munich, which ensures easy access to the ring road. This should, together with fulfilment automation help them to achieve promised short delivery times. After launching their stores in Vienna/Austria (gurkerl.at) and Munich/Germany (knuspr.de) in 2021, their goal is to launch new stores in Romania, Italy, and Spain in 2022, all under the same brand name Sezamo, and expand in Germany.
The traditional brick & mortar operators benefit from their store networks and can use their hypermarkets as delivery warehouses and Click & Collect stores. The online-only market players seek smaller warehouses in the city, which is a product difficult to find. Alternatively, for them to a gain market share in the Click & Collect section, delivery to lockers designed especially for grocery shops with parts being temperature controlled is growing. These benefit from small space requirements and there are numerous possibilities to locate the lockers in various car parks and other convenient locations.
For real estate investors, opportunities are in the warehouse segment outside of the city in larger warehouses for all types of e-commerce, not just grocery stores. However, this is the type of product which investors seek but few units are on the market for sale. Meanwhile, dark store operators are looking for smaller size units (<300 sqm) in existing developments, technically replacing standard retail units.
France
Q-commerce providers spread across France benefitting from favourable conditions in the real estate market given the still large supply of available premises. However, there is a growing number of municipalities that aim to better regulate the sector which could encourage more creative solutions to repurpose or occupy underutilised spaces, such as car parks.
To date, 170 dark stores have been identified by Knight Frank across France. Their development has been exponential, with the number of sites increasing fourfold between the first and fourth quarters of 2021. In 2022, some of the rapid grocery delivery players, backed by major fund-raising, intend to accelerate their development. They will benefit from favourable conditions in the real estate market, given the still large supply of available premises, even if the desire of towns and cities to better regulate the phenomenon could ultimately restrict their expansion.
The pandemic has acted as an accelerator for q-commerce: in less than two years, the sector has become ultra-competitive, and boasts a turnover of €120 million in France (+86% over one year). The number of businesses has multiplied, with around ten specialised companies now offering their services in France, most of which are foreign and started to open their dark stores in 2021 (Gopuff, Gorillas, Getir, Flink, etc.).
Mainly located in dense urban areas in order to be able to meet the promise of delivery in under 15 minutes, 68% of the 170 dark stores are concentrated in the Greater Paris region – 37% of which are within inner Paris, where the sector's businesses started their activity. Their presence is also becoming significant in the provinces where 32% of the total number of dark stores in France are located. They are mainly concentrated in the largest cities such as Marseille, Lyon, Lille and Bordeaux, but are also spreading their wings in smaller ones such as Montpellier, Reims and Grenoble.
The phenomenon is likely to continue to grow, as shown for example by the partnerships forged between quick-merchants and traditional distribution groups (Casino and Gorillas, Carrefour and Cajoo, etc.). Some companies, benefitting from significant fund-raising rounds, also have very high ambitions. This is true for both Getir, whose number of dark stores could reach a total of 150 in France by the end of 2022 compared with 55 identified dark stores today and less than 30 at the end of 2021, and Gorillas, which recently announced its acquisition of the French firm Frichti. This takeover demonstrates that, after quick commerce’s flying start and the proliferation of new companies, the sector is entering a consolidation phase, which is also reflected in another way by the recent demise of KOL.
It is still too early to measure the impact of consolidation on the pace of dark store openings. Their development could, however, from now on be constrained by the desire of a growing number of municipalities to better regulate the quick commerce sector, which they accuse of being both a source of nuisance and being in violation of the urban planning regulations. For example, in Paris, nearly two thirds of dark stores do not comply with the Local Urban Plan (PLU), which prohibits warehouse premises on the ground floor or in the basement of residential buildings. Rather than banning these quick-retailers, however, the city council would rather oblige them to comply with the urban planning rules. They could also be encouraged to establish their dark stores in better-suited vacant spaces, such as garages or underground car parks.
Germany
On-demand grocery services are seeing rapid growth in the major cities but suitable inner-city space that meets the location requirements of these operators is often scarce. Meanwhile, regulatory requirements such as labour laws are becoming increasingly important for ESG-conscious landlords.
The Covid-19 pandemic brought a multitude of on-demand delivery services to the German market, including Gorillas, Flink, Getir and Wolt.
While most of the providers in the first instance offered their services in the German capital Berlin, the expansion has progressed over the past two years, first in Germany’s top 7 major cities and then successively also in smaller cities.
Initially, the delivery services mainly focused on groceries, but in the meantime the range of products offered has become more varied. With Arive (Munich) a non-food on-demand service started offering lifestyle products.
Customer demand is clear: products delivered to their doorstep in the shortest possible time and in the most convenient way. The promised delivery time varies also depending on the means of transport from 10 minutes to two hours. Foodpanda even goes down to seven minutes.
Thus, the store location is of decisive importance. Favoured sizes are between 150 sqm and 800 sqm particularly in the A/B locations of inner-city districts and of course with excellent access and less effect on residential neighbours. Meeting these location requirements is only possible to a limited extent in some cities. In Berlin a dark store had to close, after neighbouring residents complained about increased traffic and noise pollution.
In addition, working conditions have come into focus with the workforce striking for adequate salaries, disinfected equipment or for compliance with labour law regulations. Therefore, landlords tend to be more sceptical towards these operators if they are looking for larger lot sizes as social aspects become increasingly important for ESG-conscious investors. Regulatory requirements and the shortage of suitable vacant inner-city space are putting pressure on the expansion plans of on-demand delivery services which means they may need to adjust their business model to meet local requirements.
Nevertheless, the turnover of on-demand services increased by €0.6 billion to almost €4 billion in 2021. In 2020, groceries accounted for 2% of online trade, according to Handelsverband Deutschland. At the end of last year, 4.2 million people in Germany were already using on-demand delivery services. With the support of venture capital investors, providers will continue to expand, and consolidations will become more likely. However, new market entries might decline, but there is a chance, the well-established German food retailers will try to fill their service gaps.
Poland
Q-commerce is on the rise but so far largely concentrated around the capital city with providers taking up space in the city centre near customers and apartment blocks. They are a new source of demand for retail units.
In Poland, the Covid-19 pandemic and technology advances have significantly accelerated the development of q-commerce networks, thereby increasing the number of dark stores in the largest Polish cities. There are several dozens of these dark stores in Poland, but most of them operate in the capital city Warsaw. They are located not only in close proximity to housing estates but are also based on the ground floor of apartment blocks and in city centres, allowing for delivery within several minutes but local authorities are increasingly concerned about their impact on public spaces.
There are several platforms operating in the q-commerce model on the Polish market: Lisek.app (a precursor of the e-grocery sector in Poland), Glovo (as well as the Biek services operating under the cooperation of Glovo and the Biedronka chain), Wolt Market, Bolt Market, GetNowX and Żabka Jush. Moreover, in Poland there is also the Stuart logistics platform, which offers "last-mile" deliveries for business. It is worth adding that the Swyft platform, which entered the Polish market in the summer of 2021, suspended its operations after just a few months as a result of strategic changes, while Jokr, which launched on the Polish market in June 2021, was the first entity to decide to close its operations in Poland. In the future there may likely be a consolidation of the fast grocery delivery sector in Poland, which will result in an increase in the scale of business and an increase in the efficiency of a single platform.
Local authorities raised the external appearance of dark stores as an issue – covered storefronts of premises located in prestigious parts of cities have a negative impact on the aesthetics of public space. As a result, if there is increased expansion of this type of retail activity in the future, it will likely be necessary to introduce appropriate regulations and guidelines for the functioning of dark stores, e.g. not being able to conduct q-commerce in premises owned by cities located on representative streets or to implement regulations at the spatial planning level.
However, dark stores are a new source of demand for retail units which previously were occupied by restaurants and local retailers that went bankrupt due to the pandemic.
Spain
As regulatory risk for q-commerce operators rises in key cities, expansion plans could be hampered which could, in turn, offer opportunities for the segment to find innovate solutions for land utilisation.
Rapid grocery delivery companies such as local operator Glovo, as well as international service providers including GoPuff, Getir, or Gorillas are expanding across the major cities and extending their network of dark stores. Getir operates 40 warehouses distributed across Madrid, Barcelona, Zaragoza, Valencia, and Seville, followed by Glovo with 30 dark stores but local regulations plan to push them increasingly to industrial areas and the outskirts of cities.
The strategy of these companies is to create a network of warehouses in densely populated urban areas close to their customers, as speed of delivery is key, but their expansion is met with pushback from local councils. Madrid has presented a series of regulations which include that these logistics facilities cannot be in residential areas if they have an area of 350 sqm or more and loading and unloading must always be inside the premises.
Meanwhile, Barcelona has prohibited the opening of new dark stores in the city but cannot act on those already in operation. Glovo, Getir or Gorillas operate about 30 of these stores in Barcelona and the ban hampers their expansion plans. Having to be outside the city or in industrial areas constrains the viability of their business model and increases the complexity of their last-mile operations.
Moreover, the “rider law” came into force in Spain in 2021, which protects the labour rights of delivery drivers. Grocery delivery operators need to employ them as salaried workers and not as self-employed. Concerns have been raised that this may lead to staff shortages which could further limit the expansion of ultra-fast delivery services in Spain. The new regulations could mean that dark store operators will need to operate either from industrial areas or come up with solutions that can be run from inner-city locations which may compromise on convenience for customers but appease local authorities.
United Kingdom
Q-commerce demand will continue and evolve. Strong competition for urban logistics from this segment of the e-commerce market has driven up rental and land values which will increase the need to use warehouse space more efficiently.
In the UK, we anticipate further demand from the q-commerce, or on-demand delivery sector. The rapid growth in this segment of the e-commerce market has driven up competition and rents in highly urban locations, where the availability of space is highly constrained. This offers the opportunity to developers, investors, and occupiers alike to come up with innovate solutions, enhance land utilisation, and use warehouse space more efficiently, for example increasing site density or establishing dark stores in garages or underground car parks.
Expansion of the ‘dark supermarkets’ has slowed as the main players near their current targets and consolidation in the market has started to take place, with Getir acquiring Weezy and GoPuff acquiring Dija and Fancy. However, the consumer adoption of q-commerce is likely to see further growth, and players in this arena continue to drive fierce competition for suitable units.
Operators in this market tend to run lean operations, often partnering with a larger retailer to take advantage of their supplier base and logistics infrastructure. As the market matures, we expect operators in this market to focus efforts on improving margins / achieving break-even, this will necessitate dealing directly with suppliers, growing their logistics operations, and taking additional, larger facilities to act as distribution hubs.
We saw this with Getir acquiring three units totalling 110,925 sq ft at the newly completed Waltham X development in Waltham Cross, London. This was a significant departure from their typical operations; targeting units sub-10,000 sq ft to function as dark stores. The Waltham X site benefits from close proximity to major roadways, including the M25 and M11. They are expected to utilise these facilities as distribution hubs from which to restock their dark store network.