ultra fast grocery

For about as long as I’ve been seriously watching the Internet industry, companies have been trying to make a business of home grocery delivery.

It started back in the late nineties when companies like Webvan and Homegrocer raised massive amounts of capital after convincing investors that food shopping would be largely done online in the future.

Webvan would raise almost $400 million in venture investing and another $375 million through an IPO. HomeGrocer raised $440 million in venture capital and almost $288 million going public.

None of it was enough. The two companies would eventually merge and went bankrupt less than a year later.

Of course, some online grocers survived, including some originating in the early days of the Internet. Ocado, conceived in the year 2000, continues to this day and is one of the biggest online grocers (and grocery automation technology companies).

But despite the occasional success story like Ocado, the reality is online grocery shopping is a tough business, one that seems to possibly work as part of a broader omnichannel market approach where grocers like Walmart, Kroger and now, yes, Amazon offer both in-person and online shopping experiences for the consumer. And even Ocado.com is essentially an omnichannel model, partnering in the early days with Waitrose.

Which brings us to the 15-minute grocery category, a model built around hyper-local delivery with distributed micro-fulfillment centers placed in dense urban markets like NYC, Philadelphia, and other locations. Startups in this space focus on convenience, offering a limited set of items, not unlike you might find in a convenience store like 7-Eleven (but usually with a little more fresh food sprinkled into the mix).

The market, which in some ways kicked off with GoPuff’s founding a decade ago, witnessed a whole bunch of new entrants enter the market over the past couple of years, including companies with similarly weird names like Gorillas, JOKR, Fridge No More, Weezy to name a few. These companies feasted on a downright frothy venture capital market, raising a breathtaking $4 billion last year alone:

However, with the worldwide economic climate facing significant uncertainty in the face of decades-high inflation, rising interest rates, and a war in eastern Europe, the easy money spigot has been shut off. As a result, some of these companies are either falling into the deadpool, getting scooped up by other competitors, or like JOKR and Gorillas, attempting to cut costs through layoffs and market pullouts to preserve capital runway as they try to survive what looks to be a long economic winter.

Of course, all of this begs the question: Why did all these startups get so much funding in the first place? As the early online grocers demonstrated, building out a network of stores and warehouses and a delivery infrastructure to get a basket of goods to consumers is an extremely expensive business.

Don’t believe me? This chart from a recent McKinsey report on online grocery shows just how tough the margins are for a standard online grocery business before we even consider the extra costs of accelerated delivery.

For a typical e-grocery business, COGS (cost of goods – i.e. groceries – sold) are the biggest expense, around 70% of a total order. The leftover 30% is eaten up by in-store and pick-and-pack labor, last-mile delivery expenses, and associated e-commerce fees. When it’s all said and done, a typical online grocery order has a negative 13% margin.

Of course, fast-grocery startups might offer slight markups in pricing and also make money through delivery fees (which range from $1.80 to $5 per order) and membership subscriptions, but what’s somewhat surprising in retrospect is that fast-grocery companies don’t have drastically different pricing or fee structures compared to that of traditional e-grocery prices.

Beyond the negative marginal profit of each order, the biggest expense driver for these companies and what likely ate the lion’s share of the billions of dollars in the collective capital runways is the buildout of their fulfillment centers and dark store networks. Being fast requires lots of points of presence to be within a 15-minute delivery window (or shorter, since fulfillment and delivery driver load-in takes at least a few minutes once the order comes through), which means lots of construction, equipment and technology costs.

Indeed, the venture community must have seen something here in a business – online grocery delivery – that has shown itself to be historically unprofitable. My guess is the rationalizations for writing these large checks fell in the following categories:

Customers will pay for convenience: We’re living busy lives and sometimes we just want what we want. If someone can get me a six-pack of beer, a steak, and a bag of chips to my house in 15 minutes, I’ll choose that option.

The pandemic changed the game and converted us into an e-grocery nation: In the early days of the pandemic and throughout 2020, we saw unprecedented conversion rates to online grocery as many consumers were forced to use it for the first time. Surely once they went e-grocery, customers wouldn’t return to the old way of doing things.

The siren song of the giant TAM: Food is a huge industry. I’m sure pitch-deck-making founders convinced investors they could convert a large enough percentage of food shopping customers to their business to take home a healthy percentage of the total available market (TAM) in the long run.

Long-term, technology & automation would drive costs down: I am sure many fast-grocery startup founders thought if they could just amass a large and loyal user-base, they could apply technology and automation to bring down the costs and increase margins as they moved past the large-scale infrastructure buildout of the early years.

These rationales for the fast-grocery business may make sense in a vacuum, and I am sure the impressive growth of early-growth pioneers like GoPuff helped convince many startup founders and eager investors there was some long-term gold to be found in those fast-grocery hills. But therein lies the problem: a closer look at these prospective businesses and anticipation of changing environmental factors – both in the form of the global macro-economic situation and the rise of competitors with built-in cost advantages – should have been enough to turn away some of the investors who jumped into this space.

Consider the e-grocery boom of 2020. While many of us thought that the rapid adoption of e-grocery would likely have some staying power even as the pandemic faded, it was never clear how just how much an average e-grocery shopping consumer would buy online once they had the opportunity to head down to their corner grocery store or load-up on staples at their warehouse store. From the looks of it, many consumers are returning to their local stores.

As for the promise of convenience, even if we assume sub-hour delivery time does offer some value to consumers, that value is reduced if there is a convenience store on the corner where one could just go pick up the goods instead.

And, say, a customer did occasionally use these services, was there any reason to assume they would continue to be that impatient? Amazon and Walmart often can usually deliver within an hour or two. Customers who want something quicker can always use a DoorDash or another food delivery app to get something to you quicker.

In reality, these adjacent competitors should have been the most significant reason investors stayed away from this space. These companies are all logistics-optimized, well-capitalized businesses that are eyeing the same TAM of the newer entrants. They also have legacy businesses with which they’ve built customer lists in the tens of millions in some cases.

We’ll see more consolidation of this market, and my guess is one or two of these startups have a chance to emerge on the other end as long-term survivors. With its early start and a warehouse network that’s largely built out, GoPuff looks like it could have enough of a customer base and capital in the bank to weather the storm. Gorillas, having just raised $1 billion late last year, may have sufficient runway if they can manage their burn rate through the downturn.

But no matter how this market shakes out, investors will be much more hesitant to sink capital in this market, particularly for companies with no discernible differentiation. Long-term, my guess is we might be talking about the fast-grocery boom of the early 20s for the next decade or more as a cautionary tale of a venture-capital fever investing, at least until the next boom cycle causes us to forget the lessons of the past once again.