20VC The Memo Never Before Revealed Metrics; A Full Breakdown of Unit Economics Behind JOKR, How Does Emerging Markets Compare to Developed Economies & The Biggest Misnomers on Quick Commerce with Ralf Wenzel, Founder & CEO @ JOKR

Summary Notes


In this episode of 20 VC the Memo, Harry Stebbings interviews Ralph Wenzel, founder and CEO of Joker, a QuickCommerce company that has raised over $260 million and is valued at $1.2 billion. Wenzel, who has extensive experience in the food delivery industry, including as founder and CEO of Food Panda, and roles at Delivery Hero and SoftBank, discusses the business model and unit economics of QuickCommerce. He emphasizes the importance of understanding customer demand to offer a personalized, speedy service, and the operational focus on efficient procurement and supply chain management. Wenzel outlines how Joker is responding to secular market trends accelerated by COVID-19, aiming to replace traditional offline supermarkets with their on-demand delivery model, and the strategies behind achieving high product margins through direct procurement. He also touches on the potential for additional revenue streams like advertising and the importance of achieving sustainable business practices. The conversation delves into the complexities of achieving profitability in varying markets, the role of private labels, and the future of the QuickCommerce space, including potential consolidation.

Summary Notes

Introduction to QuickCommerce

  • QuickCommerce is a business model focused on fast, efficient delivery of goods, particularly groceries.
  • It responds to secular consumer trends and demands for more personalized, speedy, and social shopping experiences.
  • The unit economics of QuickCommerce are often compared to traditional offline supermarkets.
  • QuickCommerce aims to provide a more spontaneous shopping experience, moving away from monthly to weekly or bi-weekly shopping.
  • Joker, a QuickCommerce company, is discussed as a case study, having raised substantial funding and achieving a high valuation.

"Now, usually in the memo we're joined by an investor who led around in a company and they walk us through their reasoning for leading the round. Today is slightly different. I feel there's so much confusion around the business model of QuickCommerce, in particular how and when these businesses start throwing off cash and being sustainable businesses."

This quote sets the stage for the discussion, indicating that the episode will focus on clarifying the QuickCommerce business model and its sustainability.

  • Customers increasingly prefer goods delivered to them, a trend accelerated by COVID-19.
  • Urbanization and the lifestyle of younger generations contribute to the growth of mobile-based shopping.
  • Joker's model is a response to these trends, aiming to meet the demand for delivery and spontaneity in grocery shopping.

"Customers appreciate a more social, a more personalized, a more speedy consumer proposition. And I think what we are doing, first and foremost, is to adhere and to react to very clear secular trends that we are seeing out there in the market on demand is a reality."

The quote explains the underlying consumer trends that QuickCommerce models like Joker are responding to, highlighting the importance of speed and personalization in delivery services.

Unit Economics of QuickCommerce

  • QuickCommerce businesses compare their unit economics to those of offline supermarkets.
  • Joker positions itself as a replacement for offline supermarkets, not just a convenience store.
  • The company focuses on spontaneous grocery shopping with frequent, smaller transactions.
  • Joker's data shows customers prefer weekly shopping with an average spend of $50 per order.

"So instead of doing a monthly grocery shopping, people would do a weekly shopping, or maybe like twice a week. And that's what we see articulated in our frequency."

This quote describes the shift in consumer behavior from monthly to more frequent grocery shopping, which is central to Joker's business model.

Procurement and Margins

  • Joker takes care of procurement by directly sourcing from producers, cutting out middlemen.
  • The company focuses on local brands and fresh products to enhance direct procurement.
  • Direct procurement leads to higher product margins, approximately 40% for mature markets.
  • A $50 basket with a 40% product margin results in a first contribution margin of around $18 to $20.

"We are trying to procure as direct as possible by vertically integrating, by disintermediating the different middlemen that do exist in the global supply chain and procurement environment and go as directly as possible to the producer."

This quote emphasizes Joker's strategy of vertical integration and direct procurement to achieve higher product margins.

Delivery Model Efficiency

  • The 15-minute delivery model is a key part of Joker's strategy.
  • Fast delivery leads to higher order frequency, retention rate, and customer lifetime value.
  • Efficient delivery is measured by rider utilization rate, which is crucial for profitability.
  • Short delivery windows allow for higher rider utilization and lower delivery costs per order.

"Only in a situation where you consistently stick to a 15 minutes delivery window, only then your ability to drive a higher rider utilization can allow you to drive a significant gross profit margin."

The quote explains the importance of adhering to a 15-minute delivery window to maximize rider efficiency and profitability.

Driver Efficiency and Delivery Optimization

  • Joker's model is designed to optimize demand and supply for efficient delivery.
  • The company's background in marketplace models informed its approach to QuickCommerce.
  • Efficient delivery is achieved by controlling the supply chain and optimizing the location of goods.
  • The possibility of batching multiple orders in one delivery trip is discussed as a way to improve efficiency.

"How do we make delivery, first of all, more efficient? By moving supply closer to the demand."

This quote highlights Joker's strategy of supply chain control and optimization to improve delivery efficiency.## Delivery Efficiency

  • Delivery efficiency is a key focus, with the goal of increasing efficiency by reducing delivery polygon size and minimizing delivery times.
  • The model aims for delivery efficiency that is twice as high as that of typical marketplace companies.
  • Higher gross margins are achieved through direct procurement, contributing to higher net margins.
  • A balance is sought between short delivery times and the ability to stack orders for efficiency.
  • There is a 15 to 30 minutes delivery window that allows for order stacking without significantly affecting customer retention or lifetime value.
  • Delivery efficiency is also a function of reducing idle times for riders.

"How, on top of that, do we increase delivery efficiency by reducing the size of our delivery polygons and allowing for delivery time that is as short as possible."

This quote emphasizes the importance of optimizing delivery routes (polygons) and shortening delivery times to enhance overall efficiency.

"Because we have seen that in between the 15 to 30 minutes delivery corridor, the difference in customer frequency or in order frequency and customer lifetime value and retention rates is relatively minor."

This quote indicates that extending delivery times slightly, within a specific range, does not greatly impact customer behavior or value, which can be leveraged for logistical efficiency.

Drops Per Hour

  • Drops per hour is a measure of delivery productivity.
  • As a young business, they are aiming for a drop rate of 3.5 to 3.7 drops per hour per rider.
  • Maintaining a 15-minute delivery guarantee for over 90% of orders contributes to this rate.
  • Flexibility within the 15 to 30 minutes delivery window allows for additional order stacking, improving the drop rate.

"Most mature cities, we are already at a so-called drop rate of in between 3.5 to 3.7 drops per hour per rider."

This quote provides a benchmark for successful delivery productivity in mature markets for the company.

Cost Structure and Margin

  • Efficient procurement is the largest cost lever, with a shift towards local producers being beneficial.
  • Consumer demand is trending towards local products, which supports the business model.
  • Product margins could potentially reach 50% of revenue at scale.
  • Differences in product margins exist between product categories and regions, such as higher margins for fresh produce in LATAM compared to the US.
  • The gross margin converges to around 40% across geographies after accounting for product cost and inventory losses.

"Cost lever that you have in this business is indeed your ability to procure efficiently."

This quote identifies procurement efficiency as the primary means of controlling costs and improving margins.

"I think that product margins can converge at scale towards even 50% of revenue over time."

This quote suggests that with scale and efficient operations, product margins could reach up to half of the revenue.

Regional Margin Differences

  • Product margins for fresh produce are higher in LATAM than in the US.
  • In the US, margins are enhanced through direct procurement from local brands.
  • Gross margins are consistent across geographies, but the cost of delivery and micro warehouse lease costs vary.

"So what generates the margin for us in Latin America is rather on the fresh side. What generates the margin for us in the United States is rather the basically small local food, convenience and grocery brands that we're able to procure directly into our warehouses."

This quote explains the different sources of margin in LATAM and the US, highlighting the importance of local procurement strategies.

Delivery and Warehouse Costs

  • Delivery and picking costs vary significantly between regions like LATAM and the US.
  • Lease costs for micro warehouses are much lower in LATAM compared to the US.
  • Contribution margins after picking and delivery costs are calculated to assess profitability.

"And then obviously underneath you have very, very different costs for picking and for delivery, which are the other main cost items for this type of business model."

This quote underscores the impact of regional variations in picking and delivery costs on the overall cost structure.

Real Estate Cost Structure

  • Real estate costs for warehouses are a fraction in Mexico compared to the US.
  • Order volume is calculated to determine the break-even point for lease costs.
  • Mature hubs in LATAM are nearing or achieving break-even on lease costs.

"So if we have, let's take the higher amount for a country like Mexico and Brazil of approximately $5,000 per store per month, at a five US dollar contribution margin, we would need 1000 orders per month in order to break even on the actual lease cost."

This quote illustrates the calculation used to determine the order volume needed to cover warehouse lease costs in different markets.

Emerging Markets vs Developed Markets

  • Emerging markets offer an arbitrage opportunity in labor and real estate costs compared to developed markets.
  • The business model may be more favorable in emerging markets due to lower costs.
  • The potential for higher average order values (AOVs) and additional revenue streams is greater in the US.

"Our ability to drive higher AOVs, higher average order values, and our ability to drive additional revenue, be it on the advertising side, on the merchandising side, on the sampling side is overproportionately higher in the US as compared to Latin America."

This quote discusses the potential for increased revenue through higher order values and additional revenue streams in the US market.## Convergence of Contribution Margins

  • The net contribution margin is expected to converge among Mexico, Brazil, Colombia, and the United States.
  • The US has higher upfront costs for investments, leases, and employment of riders and pickers.
  • Latin America has lower initial investment costs, lease costs, infrastructure costs, and faster procurement.
  • It takes longer for the US to reach profitable margins compared to Latin America.
  • Over a five to ten-year horizon, margins between the US and Latin America will become very similar.
  • Both regions present substantial market potential, with the US market being large enough for multiple players.

"On a net contribution margin basis, we think the countries in between Mexico, Brazil, Colombia and the United States will pretty much converge."

This quote suggests that despite different initial costs and investment strategies, the net contribution margin across these countries is expected to stabilize and become similar over time.

Fulfillment Center Efficiency

  • Micro fulfillment centers and larger distribution centers are being implemented and built.
  • Larger distribution centers allow for building stock, tapping into higher product margins, and leveraging procurement discounts.
  • Increased replenishment frequency and inventory turnover are targeted to match customer ordering habits.
  • The goal is to increase the amount of available SKUs by rotating inventory more quickly.

"The larger distribution centers allow us to build the stock of products ourselves."

This quote highlights the strategic advantage of larger distribution centers in controlling stock levels and improving product margins through bulk procurement.

Growth vs. Profitability Balance

  • The company is experiencing strong secular trends and demand for online grocery services.
  • Over 50% of new customer growth is organic, without marketing costs.
  • Marketing campaigns are tailored to complement organic growth, focusing on cities with the most efficient procurement and delivery infrastructure.
  • Positive unit economics are already being achieved in the majority of the company's micro fulfillment hubs.
  • The balance between growth and profitability is not seen as a contradiction in their business model.

"Our business is a business that where strong growth and positive unit economics are not a contradiction."

This quote emphasizes the company's strategy of simultaneously pursuing growth while maintaining positive unit economics, suggesting that these objectives are aligned rather than being at odds with each other.

Marketing Investment Strategy

  • Marketing investments vary by city and neighborhood, with initial high spending to activate new areas.
  • The investment is reduced over time to achieve profitable payback periods within three to six months.
  • Details on the percentage of average order value (AOV) spent on marketing are kept confidential due to sensitivities.

"You start with a very, very high marketing investment and over time already after the first, like three to six months in any given neighborhood, slightly start to reduce, to have profitable payback periods within a reasonable timeframe."

This quote explains the company's approach to marketing spend, which involves a high initial investment that is gradually reduced as the customer base becomes more self-sustaining through organic growth.

Private Label Strategy

  • The company aims to provide an assortment that meets customer demands, whether from large CPGs, local producers, or private labels.
  • Private labels are used to fill assortment gaps and offer unique products to customers, potentially increasing margins.
  • The company is investing in building out private label offerings and expects an additional 5-10% margin potential at scale.

"We want to make sure that we do have the assortment available that customers care about."

This quote reflects the company's focus on customer-centric product assortment, which includes a strategic mix of CPGs, local brands, and private label products to meet diverse customer needs.

Advertising and Search Engine Potential

  • The company is seen as an attractive platform for brands due to customer stickiness and loyalty.
  • Disintermediation between producers and customers creates opportunities for direct promotion and advertising.
  • Building scale, relevance, and healthy business fundamentals is essential before focusing on advertising propositions.
  • The core business model must be self-sustainable to explore advertising revenue streams.

"So yes, we see a strong opportunity for integrating some of those services."

This quote suggests that the company recognizes the potential for additional value generation through advertising services, contingent upon achieving a significant customer base and operational scale.## Industry Consolidation and Supply Chain Strategy

  • Ralph Wenzel emphasizes the lack of a demand issue in the industry, with organic customer growth being a strong indicator.
  • The success of businesses hinges on the efficiency of procurement and supply chain capabilities.
  • The ability to disintermediate middlemen and leverage data-driven, machine learning-based systems is crucial.
  • Balancing product offerings from local and private label brands to large consumer packaged goods (CPGs) is necessary.
  • Achieving product margins of 40% or more in a complex logistical environment is a goal.
  • The construction of an efficient last-mile delivery system is key, particularly one that promises and maintains a 15-minute delivery window to drive high margins.
  • The potential for strategic partnerships or acquisitions is considered only if they enhance efficiency in procurement, supply chain, or delivery.

"The key to success in this business how do you structure your procurement and supply chain capabilities? How are you able to disintermediate middleman to procure what is needed and when it is needed, based on a very data driven, machine learning based type of engine that you have to create?"

This quote highlights the importance of an efficient procurement and supply chain system driven by data and machine learning to meet customer demand and disintermediate middlemen.

Sustainability Challenges in Hiring

  • Ralph Wenzel identifies hiring for roles related to sustainability as particularly challenging.
  • The company aims to become fully carbon neutral by the end of the year, a goal that presents significant difficulty.
  • The focus is not only on economic and operational profitability but also on ecological sustainability.
  • Finding talent that understands sustainability both on a macro and micro level and can integrate it into daily operations is a major challenge.

"What keeps me up at night is not the question of economical and operational profitability, which we are on a very, very good path to achieve it, but how do we leverage that in order to create an online retail proposition that is not only economically more successful, but ecologically more sustainable."

The quote communicates the speaker's concern about achieving ecological sustainability in their business model, beyond economic and operational profitability.

Investor Misconceptions

  • Ralph Wenzel suggests that investors should compare traditional P&Ls of offline retailers with those of successful online marketplace companies.
  • He highlights that their business yields higher revenue per square foot than traditional retailers like Whole Foods and has a leaner SG&A structure due to technology leverage.
  • The company's ability to drive a more positive gross margin and reduce inventory losses is due to a more local, direct, and data-driven procurement process.
  • Investors should understand the economic attractiveness of the quick commerce business model in comparison to both traditional and third-party marketplace companies.

"If you compare SG&A levels, if you compare product margins, if you compare revenue per square foot in between what we are doing already today to in a traditional offline retail companies, you see a margin profile and an economic attractiveness that is significantly higher on our side than with any of the offline retail companies."

This quote suggests a comparison between the speaker's company and traditional offline retailers, highlighting the superior economic performance of their business model.

Leadership Evolution

  • Ralph Wenzel's leadership focus has shifted towards building a more efficient procurement and supply chain infrastructure.
  • He identifies this as a key factor for sustainable and profitable business growth.
  • His leadership style has evolved from remote management to prioritizing face-to-face interactions with the team across different countries.

"I personally have become significantly more focused on understanding, brainstorming and analyzing how we can build a more efficient procurement and supply chain infrastructure because I've identified that myself over the last few months as the key success factor to build sustainable and profitable business."

This quote reflects the speaker's shift in focus towards the importance of procurement and supply chain efficiency for the success of the business.

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