Diego Rodríguez
Logistics Practice Director
AMI
Lautaro Musiani
Analist
AMI
This article aims to understand Rappi’s operational transition in the region to forecast the future operational model of ultra-fast e-commerce deliveries in Latin America by 2025 through a concrete case study. Before I kick off the article, I want to introduce you to AMI. We are a market intelligence firm that produces free analytical pieces and conducts custom research studies in the logistics industry for global companies. Through this piece, we showcase our expertise in the region, so decision-makers like you gain a better understanding of the main operational attributes of the main last-mile logistics, storage, and order fulfillment providers. We can help you size the logistics industry’s market in Latin America’s e-commerce, find potential partners or acquisition candidates, and much more; feel free to contact us.
Now let’s dive into Rappi.
The super app Rappi has become synonymous with ecommerce and agile logistics, with a presence in 9 countries (Mexico, Costa Rica, Peru, Ecuador, Chile, Argentina, Uruguay, and Brazil) and a unique service of deliveries in less than 10 minutes for thousands of products through its brand TurboFresh. Thanks to its wide range of products and services, it has transformed the way people shop in Latin America, taking the service and delivery experience to an almost instantaneous level and forcing retail and traditional logistics companies to offer faster deliveries to their consumers.
As a result of Rappi’s accelerated growth, the company is initiating an evolutionary process focused on transforming the order fulfillment and delivery process that will turn its operations around.
In this article, we will explore what Rappi is, how its service and logistics work, why it has been so successful, and where its business model is evolving in 2023.
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Last Mile Logistics in Latin America
New international players are coming to compete in the region. Meanwhile, Mercado Libre is maintaining its innovative proposal in the market. Infographic Analysis by Americas Market Intelligence.
What is Rappi?
Rappi is a mobile app that was founded in 2015 in Colombia. One of its first services was RappiFavor, whose central promise was to ask a delivery person to perform a simple task such as delivering a letter or buying a sandwich and delivering it at a different location.
The service later became a platform connecting restaurants, consumers, and hundreds of couriers delivering orders. However, seven years later, Rappi has become the Latin American “super app,” offering users multiple services in one place.
While Rappi’s core business continues to be logistics for restaurants, supermarkets, pharmacies, florists, and eCommerce stores, Rappi has expanded its offerings. For example, it now also offers cash deliveries (Rappi ATM), insurance, financial services through RappiPay, and travel packages through RappiTravel.
Much of Rappi’s success among its users is due to its simple subscription model, in which RappiPrime provides access to free shipping, discounts, and other additional services through different cost ranges. In addition, the delivery service is ultra-fast, with delivery windows between 10 minutes to 2 hours, with payment methods standardized to all affiliated merchants. Undoubtedly there has been a significant evolution in terms of quality compared to earlier times, in which people would order online and then had to wait days to receive orders.
Colombia: Its First Market and Its Model Of Success
Colombia is Rappi’s third largest market in sales, after Brazil and Mexico. However, it is the market leader in the country thanks to its coverage of around 50% of the territory, more than 30,000 affiliated businesses, and about 3 million active shoppers. About 150,000 delivery drivers are estimated to be registered on the Colombia platform.
The restaurant and consumer packaged goods categories account for most merchants affiliated with its platform. According to estimates from Sacra, a consulting firm focused on private equity, and the newspaper La República, these categories generate around 80% of Rappi’s revenues.
In Colombia, approximately 92% of Rappi’s partners are SMEs, and they average around 4,800 orders per month with an average ticket of COP 273,000 (USD 57). Rappi reportedly saw a 300 % increase in orders early in the pandemic, and the company is now valued at US$5.2 billion. Based on our internal calculations, goods, groceries, and restaurant sales will be above US$5.5 billion in 2022.
Understanding the Logistics Behind Rappi and The Evolution of Its Operations In 2023
Rappi’s success lies in the logistics behind its service. For example, when a user logs into the app and makes a purchase, Rappi notifies the store or restaurant that made the sale so that it can start preparing the order. On the other hand, through an algorithm, the app identifies a rider (a “Rappitendero”) near the area and notifies him about the order to be delivered. In 2021, Rappi created the “auto accept” function so that delivery riders receive orders automatically without having to accept them manually: they are automatically assigned the closest order.
This logistics model is called “point-to-point,” with single orders originating at decentralized points and delivered to single customers at the indicated location. This model allowed practically no progressive cost reductions and worked well before interest rates skyrocketed—and cheap money vanished from venture capital markets. It is no longer enough to have thousands of affiliated delivery drivers and merchants on the platform to ensure rapid growth if the operation’s profitability does not take center stage.
Since October 2022, couriers have started to bundle packages, and now the platform consolidates orders with couriers by delivering multiple orders per courier. In addition, it offered users faster deliveries at higher prices if they wanted their goods shipped directly to them without stopping at other locations along the route.
Moving towards a Hub-And-Spoke Model
Over the past two years, Rappi has been aggressively investing in growing in the retail vertical and has generated efficiencies in product consolidation using the hub-and-spoke model. This transition is important for Rappi as it seeks to improve profitability, customer loyalty, and delivery speeds.
In this model, the best-selling products are stored in small or medium-sized warehouses (“dark stores,” stores that only Rappitenderos can enter) in different parts of the city to deliver in less than 10 minutes within a radius of less than 2 kilometers around the city.
A third party primarily operates the dark stores and warehouses with expertise in logistics, responsible for setting up and identifying the facility, preparing and fulfilling the orders received, and hiring the personnel required. At the same time, Rappi is dedicated to developing much more accurate data on consumer tastes and preferences at a geolocated level to determine the variety of inventory needed per facility.
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Last Mile Logistics in Latin America
New international players are coming to compete in the region. Meanwhile, Mercado Libre is maintaining its innovative proposal in the market. Infographic Analysis by Americas Market Intelligence.
The transition to the hub-spoke model is of utmost importance for Rappi for two reasons…
The first is increasing its efficiency and participation in the retail and grocery segment. The advent of Quick Commerce (deliveries in 1 hour or less) during the pandemic generated greater demand for products offered on Rappi’s platform vs. prepared foods, which allowed it to expand its share of traditional e-commerce at an accelerated rate. Thanks to the increase in sales of retail products and the drop in prepared food deliveries with the end of the pandemic, it became more critical for Rappi to develop scale models to reduce delivery times and centralize the dispatch of best-selling products. In addition, dark stores make it possible to store much more inventory because physical space is better utilized, allowing dozens of vendors to keep their products in the same environment at a lower cost.
The second reason is the reduction of costs under an economic context in which the company still needs to make a profit, and investors begin to demand profitability and business growth. The decrease in venture capital funding at the international level so far in 2022 makes us foresee that venture capital funding may fall to the levels seen in 2020, evidencing the end of the easy money period and a shift towards profitable and self-sustainable operations in 2023.
Delivery Drivers: A Double-Edged Sword That Drives the Consolidation of Operations
Why is this occurring?
On the one hand, Rappi’s delivery person model has allowed it to expand rapidly into new cities at a low cost—and very flexibly, given that a delivery driver’s compensation depends on the orders they deliver.
This flexibility ensures that Rappi can offer its platform clients access to delivery drivers and delivery services at meager hourly costs. This model frees Rappi from multiple expenses passed on to the delivery driver. The delivery person must procure their vehicle (and maintain it), their cell phone with internet access, as well as the famous orange backpack used to store the products. In addition, the Rappitendero does not enjoy benefits such as health insurance and paid vacations.
It is likely that leftist governments in Latin America, including Colombia and Brazil, will adopt legislative changes on labor issues in the next 24 months to restrict the non-labor relationship between Rappi and its riders.
On the other hand, this forces Rappi to attract workers to its platform constantly. This situation becomes increasingly challenging as turnover and attrition among its delivery drivers rise. It is an open secret that Rappi’s delivery drivers are overwhelmingly Venezuelan immigrants in Colombia, Chile, and Argentina, who choose to deliver orders as their first job. Still, once they adapt to life in their new countries, they seek higher-paying jobs. In addition, due to the economic renaissance, the number of Venezuelans returning to their home country will impact the pool of available delivery drivers by 2025.
It is likely that leftist governments in Latin America, including Colombia and Brazil, will adopt legislative changes on labor issues in the next 24 months to restrict the non-labor relationship between Rappi and its riders. Proof of this is the action of the Colombian Ministry of Labor which opened an investigation against Rappi for alleged non-compliance with occupational health and safety standards in mid-November 2022.
These three elements lead us to believe that Rappi’s objective in 2023 will be to aggressively expand its Turbo Fresh model in the retail category in the cities it currently offers the service to increase the supply of products. This evolution in operation is the next natural step in the process of expanding services to customers and sellers in which Rappi has repeatedly pointed to Turbo Fresh as the central axis in its strategy to capture a more significant portion of e-commerce spending in addition to offering logistics as a service to all types of businesses.
Next Steps
Contact us to learn more about the main operational attributes of the major last-mile logistics providers in Latin America, along with warehousing, order fulfillmnent and the size of logistics industry serving Latin America’s e-commerce industry.
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