Explained: What is Milkman 2.0?
This company has kept me waiting for 3 months. And I’m still in love...
SO WHAT IS MILKMAN 2.0 IN BRIEF?
…more later on the company that has kept me waiting.
As for the original Milkman 1.0 business model, it is so old that there are black and white photographs of it in action!
And there is one embedded concept which Milkman 2.0 lead company Picnic has taken from Milkman 1.0 and exploded, thereby allowing a truly profitable and ultimately scaleable grocery delivery model: the fixed delivery route.
By having a fixed route more similar to a “bus” than “taxi”, Picnic is able to make 14 grocery deliveries per hour instead of the four deliveries per hour which other grocery retailers roster into their eCommerce business models.
It is exactly this which gives rise to “a new, low-cost method for free home delivery.”1
OK - SO CAN YOU TELL ME MORE?
Let’s start with some of the premises of the original Milkman 1.0 model:
One product (with possible multiple variants) delivered to give supply-side economies of scale and portfolio simplicity
Recurring revenue allowing predictability of demand and allowing a fixed delivery route
Small product cost mark-up vs. supermarkets as a “cost of convenience”
Empties picked up, washed, refilled and restocked for delivery to another customer
It strikes me as remarkable that there are structural mechanisms built into the original milkman model now coming back into vogue in 21st century business models:
Packaging Loops: the prime example of this the eponymously named cross-industry behemoth Loop, which takes away the customers old packs and replaces them with someone else’s washed + cleaned packs full of products
Recurring Revenue: a key constituent of subscription models (“moving the mindset…from quarterly numbers to long-term bookings”2) and private equity takeovers (“a fantastic buyout candidate…with predictable and recurring revenue and cash flows”3)
But in fact, the original milkman component which is now being elevated is that of creating fixed delivery routes which are then squeezed for efficiency.
In the original model, the milkman would not knock but would drop the bottle at the door, thereby minimising friction and time spent with the consumer. Although a “zero interaction” business model cannot work with Milkman 2.0 groceries, the consumer is only given a limited number of delivery windows during the period when their route is being run. However, since they are sufficiently narrow and on-time delivery predictable enough, the consumer feels more incentivised to be in at that time.
Let’s also consider that the original milkmen never existed everywhere, but rather they would select certain densely populated regions where there would be associated delivery density. Many of the Milkman 2.0 companies have also adopted a similar technique of only rolling out to carefully selected neighbourhoods. In fact routes are often only added when there is enough signed up interest for a certain area (eg. confirmed delivery density).
WHY IS THIS BUSINESS MODEL RELEVANT TO FMCG?
As for the FMCG manufacturers, ultimately a new mass-market player (regardless of business model) does not grow the market for core grocery items, but arguably broadens the customer base and minimises over-dependence.
There are certain operational impacts that the Milkman 2.0 model could have. For Milkman 2.0 companies, driving order repeatability sets off the fly wheel that leads to delivery repeatability across the set routes that makes the business model work.
There a couple of ways order repeatability is achieved, which in turn may impact the FMCG supplier:
Low minimum order value to create customer retention → expectation that manufacturer allows low minimum order quantities
Simplicity of product range around core items → service and quality on a tighter portfolio of A + B SKUs instead of complexity in the tail with C + D SKUs
As for the impact on retail companies, suffice to say the Milkman 2.0 model completely disrupts the eRetail delivery model!
ARE THERE ANY SPECIFIC COMPANIES OR MARKETS WE SHOULD BE INTERESTED IN?
If you haven’t realised by now, that company I am interested in is Picnic.
Founded in the Netherlands, founder Michiel Muller says he came up with the idea based on two consumer pain points:
Grocery was only eCommerce market where you had to pay delivery fees
Grocery delivery time slots/waiting times were 2-3 hours
Based on optimising the business model to alleviate these pain points, in five years Picnic has expanded from one small city in the Netherlands (Amersfoort) to major cities in Germany and Netherlands.
There are some fascinating ways they are innovating with their business model:
On a Podcast4, the founder mentioned an early tech employee who had looked at “old business model” logistics delivery formulas and had converted hours in calculations into seconds in order to drive the obsession around number of deliveries possible within a time period
The vehicles have a super-narrow 120cm profile (I know this, I’ve measured!). As far as I can see the benefits from this are the relative lightness of smaller vehicles allowing better acceleration, and more significantly the vehicle bypassing conventional operating model risks such as car blocking the street by squeezing through the gaps
Obsessive focus on cost to serve to the point that routes are only added when the waiting list of interested consumers is long enough. To keep consumers onboard during this period they receive a small gift for each week they are on the list (I currently have a bottle of olive oil, some bananas and some fruit in my basket!)
WHAT ARE THE ECONOMICS OF THE BUSINESS MODEL?
There are three parties in the business model:
The manufacturer of the good
The retailer (eg. Picnic)
The consumer
As for the consumer, in mass markets the aggregate consumer will always orientate towards price, and therefore for the Milkman 2.0 business model to go mainstream, the amount charged must remain mass-market (Michiel Muller says as much himself).
As for goods manufacturer, they would logically not give any significant buying price concessions to the retailer, particularly since the volumes would initially be low.
Therefore, the cost workings we need to do are with the retailer, since we have established there will be no significant cost advantages in supply side nor revenue advantages on the demand side
Lumos Retail have 5 previously carried out a good P&L illustration of brick and mortar retailers vs. PurePlayers, so let us sit Milkman 2.0 alongside that.
It should be clear that there are the fundamental economic factors in place to make this a profitable business. Price to consumer is an initial table-stake. By focusing on value-adds elements such as convenience of delivery, reliability of fulfilment, and availability of range; there is the opportunity to slowly eat into market share of mass-retailers.
ANYTHING ELSE OF INTEREST?
A quick remark on how much before its time the original milkman model is based on a personal anecdote.
My mum bought me two vintage milk bottles from the 1980s with old adverts on. One evening, thirsty in the middle of the night I had filled up one of the bottles and drunk from it. My dad mistakenly took it downstairs and put it out with other milk bottles. And the milkman took it away unknowingly! That a subscription based, renewable business model can exist fundamentally unchanged for 25 years; that’s something to raise a glass of milk to.
Emerson, Robert. Milkman 2.0: The $6.0 Billion Opportunity in Food Delivery (2020)
Zuo, Tian. Subscribed (2018)
Canderele, Sebastian. The Good, Bad and the Uly of Private Equity (2018)
The Scale Lab Podcast. Episode 3
http://lumosbusiness.com/business-model-innovation-egrocery/