There is an operative sentence in the detailed report on the instant delivery industry’s current woes: “The Gopuff founders knew little of this history.” Here is a quick recap of 1998 through 2001:
Many remember the rise and fall of first-mover Webvan. At its peak it maintained a $178.5 million run rate with close to $530 million in expenses. It offered customers the ability to have orders delivered within a 30 minute window and operated in 26 markets. In 1999, a company called Kozmo maintained a run rate of $3.5 million with a net loss of $26.3 million after raising $250 million (to include $60 million from Amazon). In both cases, it was growth that hindered Webvan and Kozmo. Webvan even contracted the construction of $1 billion-plus in warehouses prior to going out of business.
In March of 2022, 3% of Gopuff’s global workforce was let go. Another 1,500 followed in July and, according to Bloomberg, Gopuff shuttered roughly 12% of its warehouse network. After the most recent layoff 0f 250 employees, reported just four days ago, the tone changed and a critical view of Gopuff’s business model resulted.
Bloomberg’s inference is that Gopuff could go the way of Webvan and Kozmo, a complete toppling of the house of cards built by instant grocery delivery startups over the past three years.
The pandemic made it seem like not only was quick-delivery grocery possible, but that it was necessary. We entitled it The Parasite Economy. A few things have happened since that 2020 report: the pandemic concluded and inflation rose. More consumers were willing to travel to stores to offset the rising costs of food and fewer Parasite Economy workers were willing to hurriedly work for an unforgiving category of professional pursuit that may no longer cover the costs of life that it once had.
Gopuff was eyeing a $40 billion valuation as recently as January. By March, investors were selling off stakes at valuations down to $15 billion. While nothing is written in stone, it is shaping up to become just one in a long list of similar startups who have seized on the opportunity to fill the supposed need for under 30-minute convenience delivery propped up by VC funding. Competitors, some of which have come and gone, include Getir, Jokr, Gorillas, Just Eat, Fridge No More, Buyk and Food Rocket.
This one seemed best positioned to have the chance to pull ahead. Gopuff went as far as to develop a private label brand to promote profit margin. Back in March, that was still a risky bet. What was apparent then, which 2PM reported, is that one-hour-and-under delivery is a back-breaking competitive space that’s nearly impossible to make profitable. Even Amazon relies on other business mechanics to accomplish this with Whole Foods. The infrastructure needed could sink a business. This is one advantage of traditional grocery: the technology is now the commodity and the infrastructure is the competitive advantage. Most consumers will still find that they can go pick out their groceries themselves. And grocery stores have been investing in their own technology that makes them more competitive in the next-gen retail race. We wrote in March:
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.
Now, the new report from Bloomberg puts the precarious nature of this class of startups into even clearer focus. Gopuff put a spin on the GrubHub and Instacart models to make itself more efficient by opening warehouses, stocking them, hiring people to man them as well as contractors to make those speedy deliveries. The problem is that few of these models, by all accounts, can scale profitably. Valuations have fallen across the board. Many startups have gone out of business. Instacart, which saw a pandemic-era explosion, is pivoting its model to be the technology service provider for grocery chains that want to compete on that level. The deliveries aren’t its ticket to growth. Bloomberg’s report lays out the current Gopuff situation as plainly as possible.
By their own admission, the Gopuff founders never imagined this scenario. After the company burned roughly $700 million in expansion mode in 2021, in recent months it’s laid off almost 2,000 employees, withdrawn from parts of Europe, shelved grandiose plans for new categories, raised fees on customers, and halted a planned initial public offering as its valuation has plummeted. Almost 25 years after Kozmo.com’s infamous flameout, Ilishayev and Gola are scrambling to figure out if it’s still possible to crack this particular Silicon Valley obsession. Or if the billions poured into it are destined to simply gopoof.
Gopuff appears to be heading down the path laid by its delivery service ancestors. These startups label themselves as disruptors of sleepy, wonky industries that leave something to be desired for the customer. This class of real-world technology perpetuates growth thanks to venture capital, promising category domination that would reward investors and launch a new era of business backed by technology. When that promise fails to materialize, the investment dollars grow thinner and the cost is transferred to customers. Uber rides are far more expensive than they used to be. Airbnb has received a growing swell of backlash to its mounting fees as customers have begun to question the value in the service over staying at a hotel – the establishment competitor that Airbnb set out to disrupt.
There is a limit to how much people will pay for convenience, and coupled with inflation raising prices on grocery, more will begin to consider what their time is worth versus their dollar. And it’s not just inflation and economy working against Gopuff – legislation is out for it as well. We wrote in March that Gopuff was most likely to be best positioned to stand up to legislation in New York that would crack down on “dark stores” and worker safety. It circumnavigated it by making their warehouses shoppable. From a Vice report earlier this year:
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.
But now, these facilities are at risk. Gopuff, which was launched to meet the needs of college students with late-night cravings but no cars (making for a relatively niche addressable market), doesn’t have the scale of a 7-Eleven or the existing infrastructure of a grocery store. When you consider all of what the company is up against, it’s difficult to imagine that the company will maintain without some good fortune and inflation shifting towards “transitory.”
The smoke is clearing, and Bloomberg details a business running on fumes, dealing with perishables gone bad and restocking shelves by relying on Instacart’s supply chain. Consider that in New York City, Gopuff’s biggest market: orders are down 27%. PYMNT’s consumer inflation sentiment report explains the issue with fewer than 20 words:
Four in five affluent consumers are cutting back their spending, and retail purchases are taking the greatest hit.
Not all pandemic-era behaviors were ever going to become long-term consumer trends. The elusive 30-minute delivery may become one of the first to go. Gopuff will need to slim its offering, establish regional and/or national long-term grocery partnerships, and do whatever else to find the margin required to survive. Gopuff does not have to follow all of Webvan or Kozmo’s footsteps.
Read the larger picture in letter no. 886.
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