Milkrun was set up by Danny Milhaud, who had previously done very well through his start-up Koala, which provided a home-fulfillment model for mattresses.
Milkrun operated from a network of dark stores, which stocked 2000 grocery items and employed delivery drivers on e-bikes to get groceries to customers in 10 minutes or less.
It prided itself on offering good employment conditions to all its staff, and sought to distance itself from the likes of UberEats and others that relied on self-employed contractors.
Milkrun operated from a network of dark stores, which stocked 2000 grocery items and employed delivery drivers on e-bikes to get groceries to customers in 10 minutes or less.
It prided itself on offering good employment conditions to all its staff, and sought to distance itself from the likes of UberEats and others that relied on self-employed contractors.
High stakes gamble
However, with losses mounting and interest rates rising, VCs lost patience with the business. Unable to raise any further funds, Milkrun ended up selling its assets to Woolies for $10m.
Woolies wisely did not follow the same path of dedicated warehouses and in-house delivery staff. It took the Milkrun brand, and rebadged its existing delivery service run from metro stores.
For the VC investors, it was another high-stakes gamble by a sector that expects most of its investments to fail, in return for the occasional big pay-off.
However, the Milkrun business model was flawed from the outset, and is a cautionary reminder for business owners to stay focused on customer profitability.
Woolies wisely did not follow the same path of dedicated warehouses and in-house delivery staff. It took the Milkrun brand, and rebadged its existing delivery service run from metro stores.
For the VC investors, it was another high-stakes gamble by a sector that expects most of its investments to fail, in return for the occasional big pay-off.
However, the Milkrun business model was flawed from the outset, and is a cautionary reminder for business owners to stay focused on customer profitability.
Losing money on every order
According to an article in the Financial Review, Milkrun was making a loss of $13 on every order it fulfilled.
In other words, the gross profit on each order (the order value multiplied by the gross margin %) was not enough to offset the direct costs of picking and delivering the order.
In other words, the gross profit on each order (the order value multiplied by the gross margin %) was not enough to offset the direct costs of picking and delivering the order.
Turnround challenging
And the options to turnround the profitability of the business were limited. Simply growing the customer base (something Milkrun was very good at) would not help. With the business making a loss on every order (given the labour-intensive nature of the business model), if anything, adding more customers simply made the situation worse.
So what else could the business have done? Really the only levers available were to increase the average revenue per order (and hence gross profit), or cut the cost of fulfilment.
Increasing revenue per order would have been challenging. This can normally be done through raising the price and / or increasing the volume sold. It is true that customers will pay a premium for the convenience of home fulfillment. But if pricing is pushed too far, customers will decide just to go to a nearby store instead (the fact that Milkrun operated in densely-populated suburbs that typically had many near-by convenience options, exacerbated the competitive issues around raising price).
And increasing basket size was also a problem. Milkrun was operating in the last-minute convenience grocery sector, where basket sizes tend to be much smaller than for a household planning a weekly shop.
There was also little that could be done with the cost base. Having chosen an “ethical approach” to in-house employment of fulfillment staff, on generous terms and conditions, Milkrun had saddled itself with an unsustainable cost base.
So what else could the business have done? Really the only levers available were to increase the average revenue per order (and hence gross profit), or cut the cost of fulfilment.
Increasing revenue per order would have been challenging. This can normally be done through raising the price and / or increasing the volume sold. It is true that customers will pay a premium for the convenience of home fulfillment. But if pricing is pushed too far, customers will decide just to go to a nearby store instead (the fact that Milkrun operated in densely-populated suburbs that typically had many near-by convenience options, exacerbated the competitive issues around raising price).
And increasing basket size was also a problem. Milkrun was operating in the last-minute convenience grocery sector, where basket sizes tend to be much smaller than for a household planning a weekly shop.
There was also little that could be done with the cost base. Having chosen an “ethical approach” to in-house employment of fulfillment staff, on generous terms and conditions, Milkrun had saddled itself with an unsustainable cost base.
Customer Profitability is key
All of the above made executing a turnround of the business impossible, and it is no surprise that attempts to shore up the balance sheet with additional funding ultimately ended in failure. Milkrun was left vulnerable because it lacked the strong foundation of profitable customers.
Customer profitability is one of the 5 critical elements of our Proprietary Core Profit Blueprint. And it could be argued that had prospective investors done more analysis of Milkrun’s outlook for customer profitability, they could have saved themselves $86m.
Customer profitability is one of the 5 critical elements of our Proprietary Core Profit Blueprint. And it could be argued that had prospective investors done more analysis of Milkrun’s outlook for customer profitability, they could have saved themselves $86m.
