Platform instead of ownership? METRO's strategy to support digital food startups

In the second article of his analysis column, digital analyst Joel Kaczmarek discusses the strategy by which METRO intends to promote the digital connectivity of the food branch via startups and considers the structural requirements that seem necessary for this undertaking.

Why digitalize?

From the considerations on the market situation in the food and hospitality sector, it is clear why METRO has chosen its strategy of advancing the digitization of the independents. Given the sheer size of the food sector, their development has almost economic relevance and especially a large proportion of the independent small businesses are threatened to fall back against the better organized system gastronomy.

Out of pure altruism, the profit-oriented trading group certainly does not devote itself to it, but it should also be much more than pure indirect customer rescue. The accelerator follows a disruptive role in METRO’s structure and the company aims at improving the digital connectivity of all market participants, as otherwise the company’s own digital optimization will be in vain. It helps all participants, if the industry as a whole becomes more digital and it is obviously METRO’s idea that the marketability of the independents has to be increased, so that they return money again.

To this end, a number of operational factors are available for optimization to improve planability and implementation capacities. For METRO, therefore, it must also be a matter of strengthening its own activities with external investments, which is a first indication of why an open concept appears more promising than a proprietary one, which is characterized by ownership and dependencies.

The digitalization potential of the food industry

For various reasons, the gastronomy and hospitality industry is presented as conceivably underdigitalized, as many restaurateurs simply lack the necessary training or are so absorbed by their day-to-day business that they become frightened and advice-resistant. However, from a structural point of view, it can also be stated that the corresponding technology was clearly too expensive for a long time and lacked the relevant access points.

But technology has long become a commodity, while the industry shows massive inefficiencies, whether it is material flow, planning, replicability, or the main cost factor spoiling food. These and other factors have hitherto only been addressed by system restaurateurs and thus their business has been sustainably profitable.

No matter at which stage, whether pre-arrival, in-house or post-purchase, there is a wide range of digital opportunities. For example, a study of the METRO (PDF) analyzes digital scenarios, such as reservation, online food ordering, loyalty programs, mobile payment or marketing, and it is not quite surprising that consumer acceptance is growing. On the side of the restaurants, the staff, the acquisition and the factor of bureaucracy are some of the hurdles. Deeper insights into the digital divide in the food sector are also offered by a series of studies from the École hôtelière de Lausanne:

Why an own non-food business does not seem plausible

Now the question may arise why METRO does not enter the digital service business itself, lets its participations run against one another, and then takes over the relevant providers and merges them into a separate, coherent entity. It would be obvious, to further monetize its own customer base via digital services, while at the same time driving the digitization of the segment.

However, the food sector has shown that suites, i.e. the bundling of different offers under one brand, often won’t work. In particular, METRO has already tried many times to open up additional product categories via cross-selling procedures. Frequently, however, a saturation effect was shown on the customer side. It is quite conceivable that there is a lack of the necessary product competences in the non-food sector at the relevant sales levels of the retail group, or the brand may simply not allow for such an approach.

Many restaurateurs may see the sword of Damocles of a too great dependency here or simply be mentally overburdened by the range of offerings. Above all, it is clear that METRO’s business is conceivably simplistic at the highest level (food for money), but that there is an immense heterogenization of the business on the lower levels. From cash systems, reservation platforms, logistics concepts to perishability measurement or purchasing processes, there is a huge range of divisions with their own potential for digital services. At the same time, independent restaurants threaten to lose their uniqueness when they are too much streamlined by technology.

Platform approach instead of ownership?

From this highly simplified macro-perspective, it can be deduced that it would cost METRO extreme efforts to establish a non-food segment. And this in the view of unclear success potentials. Apparently, the trading group has instead voted for an ecosystem formed out of different external service providers, which resembles Zalando’s platform implementation, which Zalando now also broadly implements. With the difference that Zalando’s “fast-boat initiatives” are largely implemented out of the group, while the approach implemented with the METRO Accelerator is more like an open platform with externals.

METRO is neither able to master a targeted business building in the digital environment nor it is an investor in the sense of a venture capitalist. However, it has broad access to relevant SME customers and can specifically target them with offers. In exchange for access to the collected data and corresponding testimonials, METRO thus offers its accelerator startups immediate customer access by offering the possibility of modular additional purchases, which is likely to work better as the sales process grows with the learning abilities of the restaurateurs.

On the one hand, METRO is curating various startups with digital services in the food sector and is targeting foreign investments in order to promote an ecosystem for the digitization of the industry. On the other hand, it establishes a viral distribution strategy (instead of a central distribution) by letting startups leverage their market approaches through METRO’s market access.

Relevant structure implications following this

At the same time, however, it is also possible to conclude that METRO is in great need of infrastructure and reconnaissance:

  • Preventing negative incentives: In practice, the balancing act of METRO will be to provide startups with their own market access without incurring incentives through fees, participation requirements or slow processes. Whether, in the long run, the transfer of the data views has neuralgic potential for some startups, also remains to be seen.
  • Avoid false signaling: Likewise, METRO will have to show the extent to which the success of the different accelerator startups is not determined primarily by the access of METRO. The question of dependencies and why METRO should not be paid for this is immediately apparent.
  • Too low deal volume: In addition, METRO will probably have to increase its deal volume by a multiple, if a certain relevance level shall be accomplished. It is certainly not possible to generate a portfolio that can meet this demand from two to three accelerator batches. If METRO wants to generate a sufficient and, above all, a qualified deal flow, further activities will be required.
  • An own venture arm: In addition to this, it is also obvious that the trading group would have to think about its own venture capital arm in order to be able to finance in rather small to medium-sized dimensions if external financing is not needed or requires co-investments. Here again, however, corresponding signaling requirements would have to be met, if METRO had to go along with the financings of its portfolio companies to avoid a negative impression.
  • Cascading the vision: On the operational level, the question arises how METRO can cascade its vision of platform support for business-relevant digital services throughout the company. Especially large corporates regularly suffer from the fact that innovative visions can be implemented at the top of the group and at the actual translators, but the transfer via mid-level and the field service often becomes a challenge. And even then it remains to be seen whether a sales rep for large companies understands how to effectively promote digital products.

All in all, it is therefore a very complex undertaking to realize the digital connectivity of the industry on the basis of an open platform with access via METRO. However, the strategy concept associated with it appears very plausible and innovative in its approach. If METRO succeeds in adapting its own structures to build up a certain intellectual ownership and managing the upcoming signaling, promising synergies could be lifted.

In his next column contribution, Joel Kaczmarek looks at the concrete measures METRO uses to help its accelerator startups, takes a look at the relevant deal terms and evaluates to what extent these structures are reasonable.

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