It’s Groundhog Day — that is, if you’re watching the recent boom in ultra-fast grocery delivery services whose success hinges on achieving extraordinarily high order volumes, just like a generation of on-demand services hoped to a few years ago.
Why it matters: We’re already seeing market consolidation, companies going out of business, and desperation for new cash infusions as the realities of the ultra-fast grocery delivery business model set in.
The big picture: Over the past year or so, a number of companies promising to deliver grocery and convenience items in a matter of minutes have cropped up in U.S. cities. Some had already been operating in Europe, too.
- The pandemic’s restrictions were a boon for all kinds of delivery businesses while people were stuck at home.
Flashback: Several years ago, the popularity of on-demand ride-hailing services such as Uber and Lyft gave rise to a bevy of apps offering other services at a tap of a button. One such genre was the on-demand car parking valet.
- Several apps such as Luxe Valet, Zirx and Carbon vied to provide valet parking on demand to help customers avoid the hassle of looking for parking.
- Their business models depended on having just the right number of valets on duty to keep customer wait times low while ensuring the valets were idle as little as possible — idleness is when these companies would lose money.
- Achieving that proved elusive and the companies all eventually folded.
Today: Ultra-fast delivery companies are claiming they can strategically plant warehouses within a city, allowing both short delivery times for customers and efficiency for couriers.
- Again, making every transaction — and the overall business — profitable hinges on dense volumes of clustered orders with high-enough basket sizes.
- And as Vitaly Alexandrov, co-founder of Palo Alto, Calif.-based Food Rocket admitted to me last summer, delivering a single avocado is not a profitable transaction.
- Some of these companies are also hiring couriers as employees instead of independent contractors, to differentiate themselves from gig economy companies and maintain control over their staffing decisions. However, that also comes with higher costs, which makes the businesses even more expensive to operate.
State of play: So far, it’s not looking too good for these delivery services.
- Some of the smaller ones in NYC recently folded (Fridge No More and Buyk), while Gopuff is reportedly planning layoffs to trim costs, and Berlin-based Gorillas is seeking more cash after raising $1 billion in the fall.
- Companies like Gopuff are hoping that in-app advertising will pad their revenues.
- And as one investor familiar with this category points out, customers are more prone to turn to these services (and pay the fees) when they need a convenience item rather than to do their weekly grocery shopping.
What to watch: The big delivery companies are dipping their toes into the market, putting even more pressure on all competitors.
- Last week, grocery delivery company Instacart announced its own quick delivery service. DoorDash did too in December.
- Uber struck a deal with Gopuff last year to feature the latter's items and delivery service within its food delivery service.
The bottom line: Margins in grocery delivery remain very slim.
