Can Colombia’s one-stop App become profitable?
Is becoming profitable achivablein a sector with thin margins, high labor costs, and tricky economics.
The last mile is seeing disruption from new business models that address customer demand for ever-faster delivery. This megatrend is more recently influencing startups in cities from emerging economies were there’s a real need for alternatives to the unreliable postal services in the region. Additionally emerging economies have a growing middle and upper class wanting to have their meals and groceries delivered to them as fast and cheap as possible.
In Colombia the startup Rappi has set its mission to become the everything store of Latin America. Rappi, unlike Amazon, focuses on instant deliveries. Like Amazon they want to have a wide variety of products and services. Currently they will deliver groceries, food, alcohol, pharmacy products and, more recently, apparel and electronics. They also offer a courier services which will run your errands, pay bills and deliver cash.
Rappi is one of the many delivery companies worldwide with the aspiration to become a delivery king. In the U.S., Postmates, Instacart and UberEats are perhaps the best known. This industry has very low profit margins due to its high operational costs and small revenues per order. In addition, the complexity of managing hundreds of couriers, high labor costs, and tricky economics have caused many similar companies to cut jobs or shut down.
To overcome the thin profit margins in this industry Rappi has been implementing multiple strategies in the hopes of becoming profitable in the longer term.
- Rappi’s couriers are self-employed and earn money through delivery fees and tips. This allows Rappi to avoid all employee related expenses like vacation days, pensions and health insurance. 
- Rappi has built a secondary revenue stream by creating partnerships with CPG companies. Rappi will charge CPG companies marketing fees to guide consumers to their products within the app and to display adds. Some U.S. delivery startups, like Instacart and Postmates, have recently begun to strike similar deals with consume packaged goods companies.
- To increase the utilization of its couriers in low demand hours Rappi offers CPGs the opportunity to deliver sample products. By levering Rappi’s consumer data CPGs can choose specific customer profiles to send the sample product. Companies like Coca-Cola have sent as many as 100,000 bottles of gift products in one month.
- Additionally, the company has grown to cover more than 10 cities in 3 countries while leveraging their central administrative force in Bogota.
- Rappi is constantly adding new categories to the platform to achieve higher ticket transactions. They recently signed a deal with Sony to be the exclusive seller in Colombia of its PlayStation products like video games and other items.
- They have invested a great deal in technology to provide a faster service by creating better routing services for their couriers and integrating with restaurants and grocery stores to receive orders instantly.
Moving forward the company must focus on its growth and profitability
Sources of growth
Capitalizing on their data: Although Rappi has just begun to capitalize on their user data by sending product samples for CPGs other companies in the industry are now charging for access to this customer data. This data is extremely valuable because it is unavailable in a traditional grocery model. For example, Instacart’s data indicate consumer preferences for replacement items when existing items are out of stock.
Growth into new regions: Latin America has a very low penetration of digital delivery services and most countries have the right economics to support a profitable business (e.g. low wages, no competition, heavy traffic). Rappi should continue leveraging its lean management structure while expanding internationally.
Sources of profitability
Data analytics: Rappi should use data analytics to minimize costs. Instacart is currently using its Data & Analytics team to optimize staffing plans and to optimize fulfilment at the store and on the road.
Invest in people: This industry has a very high turnover rate. By investing in choosing better couriers and providing the correct training Rappi can easily avoid cancelations, fraud, and delays.
Growth into new categories: Rappi might want to explore growth into adjacent industries with a higher profitability. Asian player Go-Jek has built a diverse suit of services for its customers including payments solution, an e-commerce solution, and a transportation solution. Over fifty percent of Go-Jek user base started using Go-Pay within ten months since it went live.
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1 Martin Joerss, Jürgen Schröder, Florian Neuhaus and eds, “Parcel delivery The future of last mile,” McKinsey & Company
2 Kia Kokalitcheva, “Colombian Startup Rappi Wants to Deliver ‘Everything’” Fortune, November 8, 2016, [http://fortune.com/2016/11/08/rappi-delivery-latin-american/], accessed November 2017.
3 Rappi App
4 Luke Tugby, “Rappi app lets users shop for groceries by swiping smartphone screens – and delivers goods ‘in minutes’,” Reatailweek, February 12, 2016, [https://www.retail-week.com/topics/technology/rappi-app-lets-users-shop-for-groceries-by-swiping-smartphone-screens/7004793.article], accessed November 2017.
5 “Rappi consolida su posición mediante alianzas con grandes marcas,” September 19, 2017, El Espectador, https://www.elespectador.com/tecnologia/rappi-consolida-su-posicion-mediante-alianzas-con-grandes-marcas-articulo-713931, accessed November 2017.
6 Felipe Gomez Herrera, “Rappi: Colombia’s Version of Amazon.com,”Open Knowledge Block, Harvard Business School, November 18, 2017, [URL], accessed November 2017.
7 Jeremy Stanley, “Data Science at Instacart,” Medium Blog, February 17, 2016, [https://tech.instacart.com/data-science-at-instacart-dabbd2d3f279], accessed November 2017.
8 Pearl Lee, “Being profitable is hard. Being profitable through same-day delivery is harder,” Tech in Asia, February 1, 2017, [https://www.techinasia.com/same-day-delivery-profitable], accessed November 2017.
9 Antonia Timmerman, “Go-Jek’s food delivery beats all Indian food startups combined: Piotr Jakubowski,” Deal Street Asia, April 10, 2017, [https://www.dealstreetasia.com/stories/after-foodpanda-go-jeks-food-delivery-beats-all-indian-food-startups-combined-piotr-jakubowski-cmo-69821/], accessed November 2017.
Student comments on Can Colombia’s one-stop App become profitable?
There are two elements of Rappi’s approach that appear to be key to allowing them to survive despite thin margins, but are a cause for concern moving forward. One, avoiding vacation days, pensions and health insurance for employees is an effective way to control costs early in life for technology companies, but is a strategy that will attract public and regulatory pushback as the company grows. Even if Rappi is able to sustain such policies in its home markets, it will likely have to adjust its approach as it enters new markets. Second, allowing couriers to handle cash is a departure from what similar firms are doing in the U.S., and will leave both the customer and the company vulnerable to fraud and losses. Given Central and South American countries rely more heavily on cash transactions than is the case in other parts of the world, it makes sense that cash have a place on the platform, but Rappi should be exploring ways to minimize cash exchanges in its business model moving forward.
This was interesting – thanks for the unique topic. Though the idea of “instant” or “fast” delivery is still fairly new even in the US, it actually hasn’t been all that ingenious in other parts of the world for quite some time now. For instance, in South Korea, it is very common for product deliveries to happen on the same-day; I certainly don’t think the public would be open to a standard 5-business-day delivery, like the ones we’ve had in US retail. It’s obviously much easier to provide such fast delivery in Korea than in the US because the country is so much smaller; it’d be the equivalent of deliveries occurring only in New Jersey. Having said that, I find myself wondering how Colombia’s infrastructure will allow for the expansion of a business like Rappi. How expensive would it be for Rappi to expand? Would they have to target very urban markets first?
Also, there were several references to Instacart, which I found interesting. Instacart has always been highly valued, and I think a lot of that has to do with investors feeling like they missed out on businesses like Uber and betting on the momentum on-demand business brings. That has a lot of risks – Instacart, as far as I know, isn’t profitable, and at a certain point, investors aren’t going to love shedding cash with the hopes of one day expanding. I’d be curious to see how expansion unfolds for Rappi.
I believe that one of the most important factors to consider here with a “network” business like Rappi is the first mover advantage. As mentioned in the article, on-demand delivery businesses like this are usually highly unprofitable in the growth stage and are sustained by heavy outside investment and the outside investment is contingent on believing that the Company can reach a scale at which it turns profitable. A big part of this thought process for an investor is the competitive dynamic in the market.
Take Uber & Lyft for instance. In a world where these two companies weren’t competing head-to-head with eachother, with the main differentiator being price (at least in most geographies), the path to profitability would be much easier. As such, I’d be encouraged by Rappi’s profitability prospects if they could position themselves in markets without competitors of meaningful scale. One of the most important factors in considering new geographies for Rappi is the competitive landscape and whether or not they can achieve a first mover advantage.
Thank you for sharing – interesting read. I noticed that many of the recent developments you’ve laid out are on the supply side (i.e., partnering with CPG companies and Sony). I’d be curious to hear what Rappi has done on the demand side to successfully generate more volume (i.e., marketing to new customers, promotions to retain existing customers). You mentioned that Rappi should focus on growth and profitability, but is it possible to do both at the same time? Going back to the demand side, I’ve seen several of the U.S. companies you referenced spend heavily on sales and marketing to acquire new customers. As a result, they have prioritized growth over profitability in the short-term. I think this strategy also makes sense for Rappi, so that they can build brand awareness and win market share, making it more difficult for competitors to enter.
Thank you for this interesting article Daniela!
After you posed the question: “can Rappi become profitable?”, the first question I asked myself was: “what do the experts think?” And things look good! Rappi’s two lead investors are Andreessen Horowitz and Sequoia Capital (aka, the “Dream Team”). This same duo invested in DoorDash and Instacart. [1,2]. It also doesn’t hurt that one of Columbia’s first tech successes was ClickDelivery.com, which sold to Delivery Hero in 2015 for an undisclosed amount .
The reason I immediately look towards funding, is that I think it will take a lot of it to be both profitable and expansive with this opportunity. ClickDelivery may have provided some limited consumer education, which helps, but I don’t believe that it’s substantial enough for Rappi to take a “lean” approach to this opportunity. Like we saw in class today, with Uber and Lyft versus Sidecar and Fasten, a digital marketplace like this requires scale on both sides of the equation. In my humble opinion, that won’t happen without significant marketing dollars (including promotions and discounts on consumers and deliverymen), as well as significant dollars spent on the product itself to ensure that Net Promoter Score (NPS) is high on both sides of the equation. Many studies have shown that NPS has a dramatic correlation with long-term revenue trajectory .
The last point I’ll make regarding funding, largely in response to your point around Rappi’s impetus to maintain “lean management”… Having worked with two startups, both under 50 people, one with $13M in funding and the other with $100M… it takes money to make money. And its as true in HR as in any other factor of a business. Investing in experienced, talented (expensive) senior leadership pays for itself quickly. So, my advice for Rappi, if it is to become both big and profitable, is to think a little longer term, and dig deep in the Andreessen Horowitz and Sequoia Capital well, and grab whatever money it can to reinvest in itself.
Thanks again for a great article Daniela!
 Latin American Private Equity and Venture Capital Association, 2016 “Andreeseen Horowitz Invests in Colombian App Rappi”
 American City Business Journals, 2016 “‘Smart money’ VCs continue to back food delivery startups”
 Axon Parnters Group, 2015 “Axon Announces that an Exist from ClickDelivery is on the Menu”
 Wootric Inc, 2017 “There is a Correlation between CX and Revenue Growth – and Here’s the Data to Back It Up”
Daniela, thank you for sharing this article that presents a model more and more relevant in markets in which congestion/transit times are making delivery services more relevant to consumers. As previous comments mentionned, not running out of money and keeping a close pulse on the competitive landscape will be key as the company finds its path to profitability. I am especially worried about their ability to keep a harmonious working relationship with the partners making the deliveries – that is key as you add on products to your service that may already offered by other players. I would add to that point, the importance of customer segmentation to understand people’s incentives and expectations – there are probably additional revenue/savings to be realized by offering a differentiated level of service.
Thanks for sharing Daniela. To me, Rappi presents an interesting value prop. They are delivering a lot of things that people want and need and everyone wants things as fast as possible. Additionally, they have a unique ability to scale quickly and maintain a stickiness through their technology platform. That’s a combination that is rarely seen and when people get it right, it can win big! The company serves two parties and they seem to be serving both in a unique way. They serve customers uniquely by being exclusive distributors of samples and of certain products and they provide an important technology platform to their couriers.
My biggest concern here is that the services being offered by Rappi are too varied. As we have seen in various cases, it’s really difficult and/ or expensive to be all things to everyone. I wonder if the company might consider narrowing the services they provide (maybe their top five most requested) and really making sure that their distribution network is perfecting those services. That way they can get good at some key deliverables instead of having business taken away by entrants that might focus and perfect specific services such as food delivery.
Thanks Daniela. You mentioned Go-Jek as being a similar company in South-East Asia (also shares some VC investors I believe). I’ve noticed that Go-Jek has a worked to develop more products – in addition to their original on-demand services – to build a moat around their business, making switching more difficult for Go-Jek users. Specifically, in addition to their payments app, Go-Jek has created their own loyalty program through which Go-Jek customers can redeem earned points and tokens at partner retailers and restaurants. This is very similar to credit card or hotel loyalty programs in the US, as it disincentivizes home-sharing and encourages more transaction through Ge-Jeks apps and payment processors. I believe a similar loyalty program would help Rappi reach profitability by increasing customer lifetime value. Do you know if Rappi is moving in this direction?
After reading your article and the some of the bibliography you mention, I believe that an outside-of-the-box idea that could be great for them would be to have their own warehouses and their own relationships with manufacturers in certain areas. I do think that they should have enough data right now to observe which products are being sold and where. For example, if the data shows that shampoo H&S is sold a lot in a residential area, it could be a great idea to negotiate directly with H&S and to store them.I know this is another business but I am sure that for very demanding products in certain regions it will help to become more profitable.
Thanks for your article, Daniela.
Rappi seems to be doing an outstanding job and was able to attract high-profile investors. I worked in Venture Capital in the past in Brazil and we looked in 2012 at a few companies that tried to do the same service in the country. Those companies were not able to attract the amount of capital, and therefore the amount of users to generate the minimum network effect needed so the company can operate. Maybe now, five years later, with apparently a very good team and a decent amount of capital, Rappi can become the platform for last-mile delivery in Latin America.
When we look at Instacart, Postmates, UberEATs, Amazon and several other players, it is still very unclear which model is going to win here. They may even co-exist successfully. I think Latin America has at least three advantages when compared to this “battle” in the US that may help Rappi succeed in the region.
First is lack of competition. There are much fewer competitors in the space and none has achieved critical mass. In Sao Paulo, Rappi has launched recently and is acquiring users aggressively simply because there was no one doing it with scale (or capital) before.
Second is poor logistics infrastructure. E-commerce companies and even physical companies such as grocers depend on last-mile providers that have much less capabilities and infrastructure than UPS, FedEX, or USPS. Therefore, shipping tends to be more expensive and to take longer in Latin America. As a result, the value proposition of having a player such as Rappi doing real-time delivery increases relatively to other alternatives that a customer may have.
Third is the popularity of motorcycles. Motorcycles are relatively cheap and very popular in the region. They have been used as a way to quickly deliver documents and goods for decades. During rush hours in metropolitan areas, the only cost-effective way to quickly transport goods is by motorcycles. Considering that a sizeable part of the population owes a motorcycle, it makes a lot of sense for Rappi to use these assets in its favor.
Hope Rappi can thrive in Latin America, despite all the challenges it will face.
Rappi, like many startups in emerging markets is attempting to overcome many digital and standard infrastructure related problems. 1- credit card penetration has yet to meet developed markets standard in these markets. Many companies like Rappi are cash-on-delivery, a liability across cash collection, a hit against your margin for the man power to process it, and lack of credible and reliable data. 2 – as mentioned by Ivan, last mile logistics is a large pain point, where addresses and GPS systems are largely lagging in these markets. 3 – the relative lack of scale and unit economics of this business model is a large pain point for growth and reinvestment in new technology.
I genuinely hope companies like Rappi can scale across geographies like Latin America, but many constraints remain ahead. Thank you for sharing your view, Dani
Thank you for the interesting read. All the talk of autonomous vehicles over the past few days has reminded me of an initiative that Amazon started recently to address the low margins in last mile deliver: Amazon Air. This delivery system uses unmanned drones to fulfill orders in 30 minutes or less.
While this method currently has many limitations, such as weight, range, and weather conditions, I think that this might eventually cause the death of these one-stop delivery apps. Should Rappi follow suit and invest in UAV technology to address the challenges you raised?
Thank you for sharing, Daniela. I’ve heard of similar services in Kenya, and it was helpful to read your analysis and learn more about the business model.
As you mentioned, thin margins, high labor costs and tricky economies can be worrisome to run startups like Rappi. However, I agree that Rappi selected Bogota as the right location to start the business and grow its profitability. This kind of business model seems to be looking for specific business environments in which it operates, and it works the best in big cities in emerging economies including Bogota. The income gap in those urban areas make it possible as labor costs are low enough to provide sustainable margins to the company, the growing economy creates an attractive market with high level of demand, and flexibility in regulations allows room for expansion. There are similar services in the U.S. which offers deliveries of meals and groceries, but I don’t think they are able to expand to courier services that run errands and become the everything store due to extremely high costs and inefficiencies as well as information security regulations. I find it amazing that technology advancement can sometimes do more disruption to lives of people in developing countries than developed countries.