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Zapp Bets on Convenience Not Coupons in London Grocery War

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(Bloomberg) --

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To stand out amid the gaggle of startups offering Londoners their groceries in 15 minutes, Zapp is focusing on high-margin convenience items and fewer discount coupons to make the bulk of its deliveries profitable.

Backed by investors such as Atomico and Lightspeed Venture Partners, Zapp has already raised about $100 million and began operations in January. The startup says it’s on track for tens of millions of dollars in annual sales in London alone, and that two-thirds of its orders are profitable.

Zapp, which also operates in France and the Netherlands, argues that it’s different from competitors because it focuses on convenience goods like phone charging cables and diapers, rather than only groceries, allowing it to reach an average order value of around $30 excluding taxes.

“Convenience is the right use-case that has the right product-market-fit with customers, the right economics that can enable us to build the supply chain,” said Navid Hadzaad, Zapp’s co-founder and chief executive officer. “We’re just excited that we’re slowly starting to see some of the fruits of the labor.”

Read more: U.K. Delivery Startup Zapp Hires Bank of America’s Chu as CFO

Venture capitalists have poured billions of dollars into grocery, as consumer demand for food delivery and e-commerce surged amid the pandemic. Startups like Turkey’s Getir have raised hundreds of millions of dollars. Major competitors like Delivery Hero SE and DoorDash Inc. are investing in upstarts including Gorillas Technologies GmbH and Flink SE.

In the U.K., Zapp has risen to second in monthly downloads, according to data from analytics firm App Annie.

Other newcomers Dija and Fancy have both been bought by the U.S.’s Gopuff amid its international expansion, while rival Weezy is exploring a potential sale.

Hadzaad said they’d be open to acquisitions if the target proves attractive, but it would have to fit in with its existing strategy.

The company says that of its total sales, a single-digit percentage are accounted for by discounts. Rapid grocery startups are spending heavily to acquire customers and some companies have discount rates reaching around 30%, according to retail consultant Brittain Ladd, who advises companies in the sector.

“It’s an industry still looking for who the leaders are going to be,” Ladd said. “What we know for sure is those discount rates aren’t sustainable for very long.”

The business model of delivering items from a bevy of urban micro-fulfillment centers has also attracted the likes of Deliveroo Plc, which is building out its own rapid offering with Wm Morrison Supermarkets Plc in London.

To expand its just-in-time delivery plans, Zapp recently invested in a London distribution center to build out its supply chain and service its micro-fulfillment centers known as “dark stores” in various neighborhoods. The company aims to build a broader just-in-time supply chain for quick commerce beyond grocery.

“We knew from the outset that we’d have to build an incredibly sophisticated supply chain,” said Zapp’s chief operating officer Joe Falter. “I honestly don’t think that the activity in the market has any meaningful impact on the speed of our growth.”

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