The WimLex Show #6

Spryker & Dept present you the Hottest International Podcast Series about all Things E-Commerce

Online food shopping with Michiel Muller, co-founder of Picnic

 

Three years ago, serial entrepreneur and investor Michiel Muller joined forces with Frederik Nieuwenhuys, Joris Beckers, and Bas Verheijen to set up online supermarket Picnic in their native Netherlands. Now on a steep growth trajectory, Picnic has already revolutionised a market which has, thus far, proven comparatively elusive for e-commerce concepts. In this podcast, Alex and Willem talk to Michiel about the importance of customer and employee feedback, the virtues of greenfield set-ups and of starting small, and about why the milkman is making a comeback 
 
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“We’re in a completely different world!”

02:00

Alex: Michiel, before we start with the questions, could you perhaps take our listeners through your backstory and the Picnic concept?

Michiel: Picinic is an online supermarket with a very simple proposition: all your groceries at the lowest price delivered free to your door. That’s generated a lot of interest both here in the Netherlands and abroad, probably because it is the first time people can order their shopping and have it delivered without paying more than if they themselves go to the supermarket. That’s the really interesting feature because all other formats to date have been premium, i.e. Ocado in the UK, and have charged delivery costs.

It all started when Frederik Nieuwenhuys and Joris Beckers came up with the idea just after selling their e-commerce software business Fredhopper. What they noted was that all sorts of segments – books, electronics, fashion – had been penetrated years back and are now heading towards 30%-40% online sales, while groceries were at 1%. Most people say: “Well, that’s just logical.” But if you really think about it, it doesn’t make any sense at all. Why would you go to a fashion store? It can be fun and maybe you want to treat yourself, yet that segment is already at 30% online penetration. So why on earth would you go to a supermarket? In you go, three to five times a week, to do the same things, buy the same stuff, queue up at the check-out… Then you’ve got to take it all out to your car, take it into your home, and put it in your fridge!

So there’s no logic behind the fact that people aren’t grocery shopping online. Our market research revealed that what has thus far prevented people from doing it are, a) long delivery windows – i.e. you have to be at home for two to three hours waiting for your milk – and b) the cost of delivery. Every other grocer online in the Netherlands charges for delivery, anything from €4-€14. It is this combination that is stopping people from shopping for food online. We said to ourselves that if we could solve these two issues, we could go for the mass-market and get teachers, nurses, everybody ordering groceries online.

What we’ve done is to completely reorganise the last mile by using the “milkman model” to narrow delivery slots right down to the minute – and make it free. Now everyone can shop for food online – hence our growth.

Alex: Obviously you’re not telling this story for the first time! Could you back this all up with some stats: numbers of customers you’re serving in the Netherlands, location and size of distribution centres, etc. I mean, can we order where we are here, in the inner Amsterdam suburbs? What is your status quo?

Michiel: The status quo is that we did our pilot in summer 2015 to check whether people actually liked what we were offering. We tested our “milkman model”, for instance. All other online delivery schemes offer you 10-15 slots per day from which you as a customer pick the best window. What that means, however, is that if two neighbours order – one for 10am, say, and the other for 11am – then the driver goes to the other side of town in the intervening period. That makes things inefficient, generates costs, and means you have to charge for delivery. With our model, you don’t have the choice of time: Picnic is in your street at, say, 3pm on Monday, 7pm on Tuesday, 5pm on Wednesday, etc. You can pick the day with the slot which suits you best, of course, but that’s it. What this allows us to do, however, is to do three customers who live in the same street in one go. Having delivery vans zigzagging through town is inefficient and costly – and that’s before we’ve even looked at it from a sustainability point of view.

7:50

Willem: So how do you calculate the optimal routes?

Michiel: Our pilot was in Ammersfoort – not Amsterdam! We didn’t want people to think “Oh, that’s just something for the rich and famous!” Our is a product that everybody can afford and everybody can use. Starting in a smaller town also allowed us to gain a lot of insights by asking our customers for feedback, i.e. how they would modify the product range, what they thought of the app, and whether the milkman round worked for them.

After that, we launched in Ammersfoort at the end of September 2015 and then in Utrecht in early 2016; Almere followed in summer 2016. That showed us that it worked in a city with around 100,000 households (Ammersfoort), in a larger city (Utrecht, fourth in Holland by population), and a new-build location (Almere). So we knew it would work anywhere and decided to open the throttle.

Currently, we have 25 hubs in the Netherlands serving around 60 towns and cities (each hub can serve three or four locations). We have four distribution centres, with the fifth opening in Rotterdam in a couple of weeks’ time. All of them are manual centres where workers pick (supported by software, of course); that will give us enough capacity to keep growing before the next step, which is building automated fulfilment centres. For us, it’s about serving all these customers who have already been willing to adopt this new model.

(Willem repeats the question about how the optimum routes are calculated. All orders come through the Picnic app and must be placed by 10pm on the previous day, explains Michiel. At 10:05, Picnic knows exactly how many orders have come in and exactly what has been ordered. Only then are the delivery routes calculated using a planning model which can offer to-the-minute precision. Michiel then muses on the fact that milkman was once run out of town by competition from the supermarkets, but that the model can now be rebuilt with all the benefits it once had – convenience, dependability, social contact – and a vastly improved product range and low prices.)

12:50

Alex: As well as the “milkman model”, you’ve built your own vehicles optimised for food delivery and your hubs – we’ve just taken a tour of one – look rationalised and ergonomic. You load your vans so precisely that every box only needs to be picked twice: once from the fulfilment centre and once from the hub. That’s more innovation than your competitors have shown.

So when it comes to the question of who is going to win online in the food retail segment – and just to remind ourselves, it’s worth €200 billion annually in Germany, for instance, or €35 billion in the Netherlands, so even a 5% market share would make you as big as a major fashion retailer – why haven’t established supermarkets made the running? Or: what enabled you to come up with such an efficient approach?

Michiel: Well, we did a lot of work before we started the pilot, but in the end, entrepreneurship means taking a lot of risks and going with developments which happen along the way. So we got a lot of things right at the beginning, but found out a lot of other things along the way: scheduling, product range, staffing, etc. Right from that start, we’ve always kept our customers and staff involved in giving us feedback. You saw the team spirit in our hub just now: everyone is working together to make what we do better. That’s great because it minimises management and, more importantly, generates ideas. With our customers, we get them to rate every delivery and we get so much feedback from them on what they liked, suggestions on what we should do… There’s just so much information for us to capture and use that, almost by itself, the concept gets a little bit better every day.

(Alex comments that he has never seen as many happy pickers as at Picnic before asking about the German market, where Picnic has just started and where the four big supermarket players have already invested several hundred million Euros in online food shopping – without much success. Alex also wants to know how Picnic is financing its growth. Michiel stresses the importance of testing, talking to customers, and starting small without huge up-front investments, as Picnic is currently once again doing in Germany: Picnic has begun its operations in Neuss near Düsseldorf, but not in Düsseldorf itself – or indeed in Berlin or Hamburg or Munich.)

20:55

Alex: I don’t know if there was a country in Europe which didn’t have milkmen in the 1960s or 70s, but perhaps the previous presence of the milkman model is a good indicator of which markets you could succeed in…

Michiel: Interestingly enough, the UK has always had the largest milk fleet in Europe and it is still there. Another interesting fact: milkmen there have always driven electric vehicles. (Well, the first car was electric, too.) Inasmuch as our fleet is electric, we’re replicating that model!

Going back to established retailers: when you’re creating a new business model, you start with a blank sheet of paper – and that is a very important point in time. It’s when you can make things exactly as you want them. So we thought about sustainability (e.g. electric vans) and reducing food waste. Those are things we can do better than the incumbents, who have already invested in infrastructure and have their processes in place.

Willem: So looking at this white sheet of paper, you need a brand name. How did you come up with “Picnic”?

Michiel: Primarily, it’s a feel-good word: picnicking is about being outside and having fun, not going to a supermarket. Also, people find it easy to remember. At the beginning, we had a few people asking us if we only sold stuff for picnics or barbecues, but now that we’re better known, that’s stopped!

Willem: I read that you raised €100 million from various Dutch family offices last year. Was that money to help you grow in the Netherlands or is it also for the international roll-out?

Michiel: We used it for the Netherlands. When we started financing talks, we had three or four hubs; that money has helped us to invest in growth. To give you an idea: when we open our next distribution centre in Rotterdam, on the first day, one order will come out of it, but it’s built to handle tens of thousands. So that ramp-up phase has to be financed.

(Willem asks Michiel why he as a serial entrepreneur chose the food industry, who replies that a lack of innovation aside from incremental efficiency improvements on the supplier side presented an opportunity. Thus far, there has been no real alternative to supermarkets: Picnic aims to provide a genuinely attractive one that will change consumer behaviour.

Willem then talks to Michiel about his specific role in the company: is it much different to his early years as an entrepreneur? Michiel talks about how he personally recruited staff and, in so doing, realised that he needed people specialised in services, not logistics. From there, Michiel moves into Picnic’s focus on making the last mile a more pleasant experience – both for the workers and the customers – rather than relentlessly focussing on cost-cutting.)

28:00

Alex: Care to share any turnover figures with us…?

Michiel: Sure: this year, we’ll be at around €200 million. As for next year, we’ll see. Even though this is year three now, we’re still expanding rapidly. We’re still opening new hubs – like here in Amsterdam – and so many of our cities are still very young. Looking at our oldest location, Ammersfoort, over 50% of all households have now downloaded the app and registered with their phone numbers; 25% of households are now customers - i.e. have shopped with us at least one time.

Alex: That’s an astonishing figure. How much further can you go? Or rather: how much of grocery spending in Ammersfoort is going through Picnic?

Michiel: With its leading role in terms of market size and maturity, Ammersfoort is an interesting case. When we started, the overall online share for grocery shopping there was 1%; now it’s 5%. So 4% of that was down to us in just three years. And in the grocery market, 5% is huge. There are companies that talk about changes in market share of 0.1% as if it’s major news. And nobody knows how big the online share will become…

(Alex wonders why, with this level of growth, Picnic isn’t taking up huge sums of investment capital to expand even faster in foreign markets. Michiel answers that expansion is happening, and happening ever faster, but that Picnic needs to make sure quality goes before growth: just one order which goes wrong is, in the food segment, enough to stop customers not used to shopping for groceries online from trying it again. Alex applauds this level of customer care, but highlights the danger of copycats using the Picnic model in other European markets before Picnic feels ready to enter.)

33:45

Alex: A technical question, if I may? We’ve looked at models from German and some French incumbents: they’ve tried to use SAP Hybris or Magento software to build a grocery experience – and have usually failed. You’ve built an app on which you base picnic and that’s no mean feat: how do you handle technology?

Michiel: For details on software, you’ll have to ask Joris and Frederik, I’m afraid, but what I can say is that it’s built around TagTeam. What was important was Joris and Frederik’s own programming experience because, when you start a new tech company, you need to build your software from scratch. Why? So that you’re not stuck buying off-the-peg legacy products from somebody who didn’t make the software for that purpose – i.e. online groceries – and on whom you’re dependent for new releases. Yet that is what most incumbents are doing.

The result is that across industries and countries, the market leader in the offline world is seldom the market leader in the online world. A lot of stationary retailers think: “I’m the market leader here, I have great people and systems – and a lot of money. Why not go online and win there too?” But it doesn’t work like that.

Alex: Yes, and from my point of view, there’s a very simple explanation for this phenomenon: in the offline world, there was a location lock-in and those selling the best products in each location were the winners; in the offline world, location doesn’t matter, so it’s those who are selling better who are winning out – and selling better means being better in terms of software development. Those are two very different premises, and if your company proposition is based on selling better products, offering a retail experience, and running a smart buying operation, you don’t have a basis on which to compete with Zalando or AboutYou on the internet.

Michiel: So, as you see, I’m not that worried about incumbents in markets we haven’t reached yet copying our model.

Alex: Yes, but there will be some smart consultancies out there who will look at Picnic and go to, say, the leading Polish supermarket and tell them: “Look, don’t try to set up online within your legacy operation. Why not take 10% of your revenue and set up a greenfield ‘Picnic Poland’ company?” That’s how companies are doing it these days.

On that point: ALDI’s online team have gone very quiet recently (Hi guys, if you’re listening!), so I wouldn’t rule out them surprising the market with a fresh approach. Lidl, too, has probably got something up its sleeve. Nevertheless, these kind of companies are still growing fast offline and we’re talking about turnover of a hundred billion here, so at the moment, they’re not bothered about 4% market shares in Ammersfoort. Yet. Which is lucky for you!

Michiel: Online groceries is still a young market and there is still room for everybody. We won’t be the only ones in the space for ever, but even if online grows to 20% or 30% market share, that still leaves 70% traditional food retail.

Alex: I don’t agree at all! Just look at the markets in which we have already reached 30% online – electronics, for instance, or fashion. The 70% left over isn’t an attractive business proposition: there’s no margin in it and you still have expensive bricks-and-mortar structures (with expensive employees!). What is more, in these other segments, it’s almost always a case of “Winner takes all”. So if I were you, I would be trying to expand as quickly as possible.

(Citing Amazon, Alex goes on to elaborate how moving from selling things to being the platform on which things are sold is the only way to secure profitability in the long term. Michiel agrees, stating that with its specially-designed electric vehicles and set rounds, Picnic is creating a whole new infrastructure to which it can control access, while even AmazonFresh is still relying on existing courier companies for the last mile – a system which is fundamentally unsuited to grocery deliveries. Companies are already approaching Picnic with ideas: in some towns, Picnic returns library books, and some retailers such as Zalando allow customers to give returns to Picnic drivers. It makes ecological sense, Michiel adds, because it prevents the vehicles making empty journeys.)

43:10

Alex: Let’s do a quick deep-dive into the German market. It’s your first international market. How did you approach it? Did you set up in Neuss and Mönchengladbach because they are close to the Dutch border and so to existing infrastructure? Or, asked differently: if there were a huge amount of demand in Munich or maybe Kiel (where I’m from: please open there soon!), would you go there next or are you looking to expand in a sweep eastwards because you can send a few pickers on to the next site?

Michiel: Well, some clever guy – Was it you? Or was it Udo? – drew a circle around our German distribution centre in Viersen and looked at towns we could serve from there. But when we want to go into another region, all we need to do is to open a fulfilment centre there. The first one is difficult, the second one is hard, too, but the third one is where it starts to get easier. We organised Rotterdam, our fifth centre in Holland, more or less in a single afternoon. It gets quicker every time.

Alex: What’s the most difficult part of scaling? Finding a site for a new logistics centre? Finding people?

Michiel: Vehicle-building is a limiting factor at the moment; we need to step up capacity there. Then you’ve got to find your runners, train them up, and get them on the road; you also have to find a fulfilment centre and employ shoppers (as well call our pickers). Those are the prerequisites to growth.

Willem: You’re finding out a lot about your customers’ tastes. Are you looking to white-label certain products and produce Picnic own-brand versions?

Michiel: Currently, we have A-brands, private labels, and all sorts of other brands. And one thing we did right at the start: in the app, at the end of every category, there’s this little guy saying “Is there anything missing?” If five customers ask for it, then we stock it and they all get notices in the app saying “Your product is now here!”

What a lot of customers want are organic food and local products: beer, cheese, honey. We’ve added a lot of those since the beginning, and that shows how demand-driven we are. Stuff we have in the app is stuff people buy. In supermarkets, there are lots of products that hardly anyone ever buys, but suppliers make it a condition that supermarkets stock them. We’re in a completely different world! Our customers want to get their grocery shopping done in three minutes’ time: efficiently, at the lowest price, and with the products they want.

(Willem asks whether Picnic has a “You might also like…” feature. Michiel says that the focus is on usability, so rather than spamming customers at the check-out with messages like “You bought spaghetti: do you also need tomato sauce?”, Picnic makes sure that the sauce gets shown next to spaghetti one step before. That’s why the app is personalised: after all, why show a dog-owner catfood? Alex praises Michiel for not being short-sighted and purely revenue-driven. Michiel confirms that Picnic is not gunning for high spends after four weeks, but for lasting loyalty. Their average customer buys around 40 times weekly, i.e. every week except holidays. Importantly, customers get used to having the runner at their door every week, making it easier to offer services piggybacking onto the Picnic infrastructure.)

50:00

Alex: One thing that interested me during our tour of your hub: you said plastic bags are more sustainable than paper bags? How, precisely?

Michiel: It’s very simple: our customers pay a deposit for an organic plastic bag made of sugar-cane; when they return it to us, we give them back their deposit and collect the bags for recycling to be made into other plastic products. It’s a closed loop. That’s far more sustainable than just handing out paper bags which get thrown into the dustbin.

Alex: Apart from that, what are your biggest learnings to date?

Michiel: First and foremost: people like the milkman model! And the way our runners present themselves on the doorstep plays a very important role. If you order an electronic device online and a courier company delivers it, it doesn’t really matter what the guy looks like. With fresh groceries, though, the person who is delivering you vegetables, cheese, meat is part of the experience. From the very start, we got lots of positive feedback about our runners (30% of whom are female, by the way). It’s them who make us a brand people can relate to.

(Towards the end of the podcast, Alex asks for details on how Picnic designed and built Europe’s largest electric grocery delivery fleet. Michiel explains precisely how, although the development was complicated, the benefits of having a bespoke delivery vehicle is crucial to quality, efficiency, and profitability. Batteries and wheels are bought in, everything is custom-made by Picnic; the electric vans can do 100km per charge and that is more than enough for milkman rounds. Michiel explains in some detail how the fleet is being modified on the basis of operational experience – and how cutting down the milkman rounds into one-hour units helps cut down delays. Alex starts the outro to the podcast before Willem asks one last question about how, as in investor, Michiel evaluates opportunities.)

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