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The great food delivery space race

Sector: Industrial & Logistics | Contact: Freddie John

Demand for last-mile supermarket and food delivery space is hugely competitive, but how do the property requirements of the various operators differ?

The desire by the likes of Ocado Zoom and Amazon Fresh to deliver groceries within a one-hour period is a concept that was evolving well before the arrival of the global pandemic, but the surge in demand for such services since last March has seen this trend accelerate. The ensuing space race these types of occupiers face for mid-box units inside the M25 has been well-documented, with this market sector facing diminishing supply due to both increased occupier take-up and loss of industrial accommodation to support London’s housing requirements.

Perhaps one of the few examples that can rival Amazon’s pandemic growth story (albeit on a smaller scale) is the meteoric rise of venture capital backed start-ups seeking to outgrow each other by offering a grocery delivery service within a 10-15 minute window. What was first described to me by one of the newer entrants as a way of ‘delivering a DIY smoked salmon and avocado breakfast to the affluent areas of Chelsea and Fulham’ is evolving, fast. With a number of these occupiers establishing themselves with a raft of warehouse acquisitions not only in the more affluent boroughs but now London wide, their aspirations are now well beyond the delivery of breakfast ingredients for millennials.

At the last count, I could name 10 occupiers – including the likes of Weezy, Getir and Gorillas – all seeking to deliver groceries within a short timeframe. What perhaps has become the most interesting differential between these occupiers is the variation behind their individual acquisition strategies to secure foothold and market share.

Having advised London landlords on over 10 such deals, most are seeking leases at lengths of around six years with a tenant-only break at three, although one of the sector’s names prizes the greater flexibility offered by an 18-month break. Many of these occupiers have been targeting industrial / warehouse units of between 1,000 and 3,500 sq ft, while others are taking a different approach, seeking space between 3,000 and 7,000 sq ft. This of course can be impacted by the ‘chimney pot’ density test but has been one of the clear emerging patterns.

An added layer of complication for the respective acquisitional teams is the tight supply of industrial accommodation, exacerbated by so many parties vying for the same space. We are now starting to see these occupiers assessing the viability of taking vacant retail units or basement space as the desire for accommodation in London’s boroughs becomes stronger.

Throughout the evolution of this sector, two factors have remained consistent:

  1. The desire to have the legal process completed as quickly as possible to ultimately allow one occupier to become established in a particular location ahead of another.
  2. Competing aggressively in areas of hot demand, defining strong rents that often exceed existing market rental levels.

Gerald Eve’s Multi-let research for units in London of 500-50,000 sq ft shows Q4 2020 rental growth close to 2%, with the keenest headline rents being achieved around £35 per sq ft and occasionally hitting nearer £40 per sq ft in the most prime locations.

My original view was that this concept would have a very London centric nature, however the likes of Weezy are currently seeking to roll this out UK wide with live requirements for Brighton, Birmingham and Manchester among others.

It will be interesting to monitor this space race to understand the longevity of having so many occupiers seeking to deliver the same service, especially as we move out of lockdown. As the sector evolves and matures we can expect dominant operators to emerge – through mergers and acquisitions as well as the establishment of stronger market footholds – and by its nature this will impact on competition. But make no mistake: the Great Food Delivery Space Race has a long way yet to run.

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Freddie John