Memo: Instant Needs Industry

Whether we are post-pandemic or not, some behaviors are beginning to return to the way things were. Of them, quick delivery grocery appears to be one of the pandemic practices that may not reach the zenith that was once predicted. And now, the fall out. On the heels of a recent report by the New York Post, Petition published a deep dive on a struggling sector. From the NY Post:

Investors in Gopuff — a Philly-based delivery service that’s backed by Softbank — were eyeing a valuation of up to $40 billion in January as the company enlisted Goldman Sachs to help prepare for an IPO. But investors have lately been scrambling to unload their stakes at valuations as low as $15 billion — and have still been unable to find buyers, The Post has learned.

Petition places GoPuff in the same category as the 15 minute competitors that are competing in a crowded market. In addition to GoPuff, Petition rattles off Getir, Jokr, Gorillas, Just Eat, Fridge No More, Buyk and Food Rocket in the lengthy list of upstarts wanting to compete alongside DoorDash, Uber Eats and GrubHub.

The category has seen massive growth padded by venture funding, but the smoke is starting to clear, and market capitalizations have plunged as investors look to cut their losses. The problem, at its core, is that grocery retail is an industry built atop of stubborn customer habits – people fall back to their old ways, especially when prices rise. But larger competitors are not faring much better. Instacart has been marked down and Amazon has yet to find profitability in grocery delivery, according to sources. If Amazon can’t figure it out, it’s bad news for the VC-backed category. Petition sees the entire category “going puff.” Investors are turning their backs, legislative forces are cracking down, and customers may be realizing that hefty delivery fees and tips aren’t worth paying for in exchange for quick service.

Petition’s insights are rarely wrong. But as we discussed in Consumer Trends 2022, there is potential for GoPuff to separate itself from the likes of Gorillas, UberEats, DoorDash, Getir, and Jokr. The quick delivery service recently launched its own private label and has begun the process of verticalizing its business (with one critical fault that may hinder margins for the foreseeable future). In Consumer Trends, we explained:

Most notable on the list is Gopuff, which has turned some of its micro-fulfillment sites into customer outlets after building up a business based on ultra-fast delivery. Gopuff is expected to IPO this year, after Reuters reported it has hired banks to help it go public, with a valuation of close to $15 billion. The physical locations could make Gopuff even faster by bringing customers to the delivery point, cutting down on time workers take to get items to customers at home. The stores are not typical convenience stores, but ordering hubs, where customers use digital kiosks to place orders that are then fulfilled from the warehouse. To facilitate this omnichannel strategy, GoPuff acquired companies in a land grab, with 161 BevMo stores and 23 Liquor Barns now acquired.

This is a timely separator between GoPuff and the other brands that rely on the storefronts of convenience stores and small retailers. To further circumvent any potential legislation, GoPuff will have to further invest in its physical real estate. This is a recent point on regulatory scrutiny made in a recent report by Vice:

Ultrafast delivery companies like Gorillas, Jokr, and GoPuff are facing increasing government scrutiny at the same time as profits for their services are failing to materialize. The Information reported Jokr is looking to sell its New York operations to a competitor in the face of losses of some $150 per order, which Jokr denies. And GoPuff, in an attempt to prove its storefronts are not warehouses and avoid regulatory scrutiny, have claimed its New York locations will also sell directly to walk-in customers, although the New York Post found even such “retail” locations are unmanned and have no prices listed on items.

GoPuff wants to be less reliant on third-party vendors by using its warehouses like retail stores, but it will likely find that operating retail stores is by no means an easy fix to future-proofing its business in an unstable market for pureplay delivery services. By layering delivery on top of the stores, GoPuff wants to do both. But does that really put it in a position to compete with the likes of Amazon? Or by splitting its attention, is GoPuff undermining both sides of its business without successfully pulling in customers to its stores? As Seeking Alpha reported:

The goal is to make GoPuff more like Amazon than like Uber. That was the elevator pitch captured in a recent Axios profile, with vertical integration that hasn’t even occurred to its competitors. Whereas the aforementioned companies rely on someone else to provide the goods, Gopuff has almost 600 micro-fulfillment centers, up from 380 in 2020, filled with the staples of daily life. Cutting out the third-party vendor, Gopuff ships directly to its customers who are saved a trip to 7-11 or the corner grocery store.

So what we are beginning to see is that the service side of the quick delivery business may not make it with a solid vertical operation attached. As Amazon has learned, this gives the advantage to the grocery retailers whose foundations are built atop physical retail penetration.

Whether it is for margin protection or product availability (after publishing Consumer Trends 2022, it was noted that GoPuff sources some products through Instacart to maintain stock), big grocery’s eCommerce pioneers will be the traditional companies who’ve built the technology atop their existing storefronts. This mirrors the world’s of GPG and digitally native brands. Though eCommerce began as a digitally-native sport, its accelerated adoption means that the old guard is employing many of the tactics pioneered by modern brands. In this respect, the grocery industry is no different.

Petition was correct in a number of its statements. The funding and the IPO markets for such services seems to be drying up for now. But if there is one exception to the quick delivery rule – it may end up being GoPuff. They are steps ahead of impending legislation in New York, its biggest market. But in the longer term, they will have to contend with the same reality that Instacart and others are now contending with – the advantage goes to the delivery company with the inventory on hand. Refer to the graph above. True digitally native vertical brands don’t always begin online. In grocery, it appears quite the opposite.

By Web Smith | Edited by Hilary Milnes with art by Christina Williams 

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.