Catch them if you can: the $14bn rise of rapid delivery services
Despite Deliveroo’s disappointing IPO, investors are pouring money into ultrafast ‘dark store’ disrupters that have reshaped online grocery delivery during the pandemic
Dominique Locher, a veteran of online grocery services in Europe, realised the potential of a rapid delivery app at a board meeting of a Turkish supermarket chain in 2018.
As the directors gathered, some were offered coffee by staff; Locher pulled out his smartphone and ordered a can of Coca-Cola and some pistachios from Getir, an up-and-coming grocery delivery app based in Istanbul. Seven minutes later, Locher recalls, the Coke was on the boardroom table. His fellow directors were still waiting for their coffee.
Sold on the concept that ultrafast delivery services would revolutionise everyday shopping, Locher went on to invest in Jiffy, which launched in London in early April, with plans to open 20 warehouses across the UK this year.
“All the corner stores, all the smaller supermarkets, they were basically immune to the online supermarkets,” Locher says, because services like Ocado are designed around a large weekly shop. “This well protected castle has now been ripped open.”
Jiffy is just one in a growing crowd of rapid delivery apps that have become beneficiaries of a lockdown-fuelled funding bonanza. Investors have ploughed almost $14bn into on-demand grocery delivery services globally since the beginning of the pandemic, according to PitchBook Data, with more funding arriving during the first three months of 2021 than the whole of last year.
The long-familiar concept of a doorstep delivery service, whose origins might be found in the humble milk float, has been turbocharged by a combination of the pandemic and Silicon Valley’s hype machine.
“One huge benefit during the past year is all this forced adoption [due to lockdowns],” says PitchBook’s Alex Frederick. “It gave them [the delivery groups] a ton of consumer data to improve their products, and so you’re seeing these companies raise all this capital, to better serve what their customers want.”
Apps such as DoorDash and Deliveroo, focused on restaurants and takeaway meals, have proven consumer appetite for deliveries that are ordered online and arrive in as little as 30 minutes. But the new generation of start-ups eyeing the far greater market of groceries — estimated at $1tn in the US and more than €2tn in Europe — promise to deliver a basket of essentials in just 10 minutes.
For instance, Berlin-based Gorillas charges Londoners £1.80 to deliver anything from a 30p apple to a £10 case of cider, from frozen pizza to raw rib-eye steaks — with no minimum order value. Getir, whose name means “bring it” in Turkish, boasts that it can deliver more than 1,000 products “from detergent to dog food, crisps to condoms” and at the moment charges no delivery fee on orders above £10.
Customers range from frazzled parents needing emergency nappies to busy young professionals who do not want to plan their shopping days in advance. Then there are simply sofa dwellers with late-night munchies, like the two then-college students who in 2013 founded GoPuff, which pioneered the convenience-store delivery concept in the US.
These apps’ rapid delivery speed is accomplished through a combination of small localised warehouses, an army of couriers, a limited selection of household staples — and buckets of cash.
In March alone, Getir raised $300m, just two months after closing a $128m financing; Gorillas received $290m nine months after launching; Philadelphia-based GoPuff doubled its valuation to $8.9bn in the space of six months as it hauled in $1.15bn; and Spanish delivery app Glovo raised €450m.
“During Covid, everything changed,” says Glovo chief executive Oscar Pierre, who co-founded the company in Barcelona in 2015. Soaring demand from locked-down consumers has demonstrated the potential of instant online delivery to both investors and other retailers, he says. “There is now a very big appetite for groceries.”
Ophelia Brown, an investor at London-based venture firm Blossom Capital, says these are “unprecedented times for the amount of capital that goes into early-stage companies”, with the grocery trend being one of the most prominent examples. Some delivery start-ups were receiving significant funding with only “minimal signs of traction”, she adds. “It’s challenging to say what effect this amount of capital going into a space all at once will do because I don’t think we’ve seen anything quite like it.”
Even after Deliveroo’s disastrous stock market debut on March 31 — when its shares closed 26 per cent below its opening valuation of £7.6bn — investors say they remain confident in this latest twist on food delivery apps. “I don’t think investors will have cold feet,” says Locher. “The market is huge.”
Brown says that it would be “misguided” for investors to be put off grocery apps by Deliveroo’s initial public offering, which she blamed on “the shortcomings of the UK IPO market” rather than the appeal of food delivery services. “It would be like not investing in food after Ocado’s failed IPO,” she adds; the UK-based online grocer has seen the value of its stock increase tenfold since it listed in 2010.
'Faster than you’
If Ocado proved that there was a market for a regular weekly delivery, its would-be challengers are going after a more spontaneous — or perhaps lazy — shopper. The lure of near-instantaneous delivery is, in the slogan of Gorillas, that it’s “faster than you” — couriers can arrive in less time than it would take most people to pop out to their corner shop.
It is also great marketing, says Alberto Menolascina, a former Deliveroo executive who co-founded the London-based delivery app Dija last year. “It produces that ‘wow’ moment that [makes] people start talking about you,” he says. “It’s the disruption you create when you do something shocking . . . You don’t create electricity by incrementally improving the candle.”
In recent months, investors have been fighting to get in early to rapid delivery companies, many of them with little or no operating history before the pandemic began. Brown’s Blossom Capital, which has also backed fast-growing online payments company Checkout.com, joined Dija’s £20m fundraising last year before the company had even been incorporated, partly on the strength of its founders’ background at Deliveroo and other logistics ventures.
“This is a huge market to go after that hasn’t had any innovation for a long time,” she says, “since Ocado, basically.”
If there is broad agreement about the business opportunity, opinions differ about how to get the job done and how to make money.
Instacart, which pioneered online grocery deliveries in the US when it was founded in 2012, sends hundreds of thousands of gig workers into supermarkets across North America, to pick customers’ orders directly from the shelves. It then splits the revenues with its supermarket partners. Investors seem convinced its model is working: it was recently valued at $39bn, making it one of Silicon Valley’s most highly valued private companies.
The newcomers believe they can improve on Instacart, in both customer service and efficiency, by diverging from its “asset light” approach.
GoPuff claims its vertically integrated model — where it sources and owns its inventory, controlling both warehouse and delivery logistics — has achieved profitability in markets where it has operated for more than 18 months, though declined to give any further details. It plans to continue expanding across the US and eventually internationally, building on the 300 warehouses, or “dark stores” — so-called because they are closed to the public — it already has in America. Each is between 8,000 and 12,000 square feet.
The GoPuff approach has inspired many of the mushrooming number of European delivery start-ups. Many have even taken the integrated model a step further by taking on couriers and pickers as employees — albeit often on zero-hours contracts — to ensure enough people are always on standby to deliver to tight deadlines.
“We are Instacart and the supermarket [all] at the same time,” says Dija’s Menolascina. “We can tap into the whole pool of margin and return that margin to the consumer to be very aggressive on prices.”
Meanwhile, DoorDash, looking to capitalise on its position as the US market leader for restaurant delivery, is operating a hybrid model. Its gig workers pick up convenience items from existing stores, such as 7-Eleven, and its own network of about 25 “DashMart” dark stores.
Fuad Hannon, the DoorDash executive in charge of the company’s effort, says its existing network of gig workers, who deliver from restaurants, means it could quickly spin off its convenience store offering without needing to set up warehouses first. “You've got this liquidity of ‘dashers’ who are doing dashes all across the country,” Hannon says. “We think that’s allowed us to be successful, [regardless] of where the real estate is.”
GoPuff is sensitive to the suggestion that it let an early lead in the convenience sector slip, as some independent data indicates. It argues that ultimately its model will give it the upper hand when it comes to achieving faster delivery speeds. “[DoorDash] can scale faster because they can do partnerships with stores,” says Yakir Gola, GoPuff’s co-founder and co-chief executive. “But as a consumer, in order to get what GoPuff sells, you’d need to go to multiple different stores. That’s not ‘on demand’ any more, it’s going to take too long.”
Both companies are seeking to gain market share from Instacart, but the online grocer insists it has no desire to break away from its store partners. “No delivery or logistics company is going to take the place of the retailers that have earned the loyalty and trust of customers,” says Nilam Ganenthiran, Instacart’s president.
Yet Instacart’s retail partners are growing nervous about the scale of the online grocer, according to ecommerce consultant Brittain Ladd. “Instacart is now worth more than nearly every single grocery customer they serve,” he says. “What’s the fear? It’s that this little chimpanzee has grown up to be a big gorilla.”
In Europe, Deliveroo has struck Instacart-style partnerships with supermarkets including Sainsbury’s, Waitrose and Aldi, while Delivery Hero rolled out hundreds of its own dark stores or “DMarts” last year. Having previously been hesitant to enter the sector, Just Eat Takeaway has undertaken various trials with grocers, according to Andrew Kenny, its UK managing director, and is now “beginning to look a lot harder” at the opportunity.
As well as the size of the potential market, two key indicators have driven investor appeal in rapid delivery apps: customer behaviour and the profitability of the business model.
“The type of growth I have seen there, I have seen nowhere before,” says Christophe Maire, whose Berlin-based Atlantic Labs, which previously backed SoundCloud and GetYourGuide, invested in Gorillas last year. He says the company has “negative churn”, meaning people who start using the app tend to stick with it and increase their use over time.
Kagan Sumer, founder of Gorillas, says groceries are “much more profitable” than restaurant food. Order values are typically between 20 and 40 per cent higher and compared with dinnertime spikes, demand for groceries is more even from mid-afternoon into the late evening. “One warehouse can make €1m a month [in revenues],” Sumer says.
Welcome to the ‘dark store’
Whether they are called warehouses, dark stores or even “micro fulfilment centres”, finding the right local base is a vital ingredient for success. Railway arches, light industrial parks or even high-street stores vacated by traditional retailers during the pandemic are all popular spots. Inside, the store layout is optimised for speed.
But while the overheads are low, there are other factors to consider. Gorillas pumps hardcore techno music through their facilities to keep pickers’ energy levels high. Dozens of couriers can be waiting outside for the next delivery. As a result, local residents have begun to push back on planning applications for some centres.
For Pierre, whose company Glovo has been delivering a range of food, flowers and pharmaceuticals across about 20 markets for several years, logistical challenges such as planning disputes are just one reason why he believes his new competitors are often “too optimistic” about making the business model work.
“It’s not easy . . . we have worked a lot to make the unit economics profitable,” he says. “The margin you make on the products ends up paying the rent, the pickers and the delivery people.”
Making money requires increasing how much people spend — in London, at least £20 is usually necessary for an operator to be profitable on any given order — and optimising how pickers work inside the compact warehouses.
But even as Glovo plans to launch 100 new dark stores this year across Europe, the Middle East and Africa, Pierre is cautious about the “huge hype” surrounding rapid delivery apps, especially in London.
“I think the same thing is going to happen as with the Groupons of the world and a few years ago with [electric] scooters,” he says, referring to previous investor frenzies. Once the dust settles, only a couple of operators will survive in each city.
Michael Moritz, a partner at Sequoia Capital — an investor in Instacart and Getir — is even more blunt about the competition: “Many of the youngest crop of companies are going to get a brutal education.”