Memo: Webvan (Again)

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.

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

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 

Memo: GoPuff and Basically

When a retailer launches a private label, it means they’ve achieved a critical mass. According to Placer.ai data, Gopuff’s launch of “Basically,” is right on time.

A lot can be said about the state of the retail industry, and the modern consumer, by looking at the companies that are expanding their store footprint most aggressively. Recent data from Placer.ai reported the top ten retailers to watch in 2022 based on their expansion plans. The list, which features fast food chains, Dollar Store spinoffs, and a store-in-a-store partnership, confirms that today’s customers are drawn to physical stores when there’s a reason to visit them, and the companies that best deliver are those that are most aware of current consumer trends: DTC, bifurcation, instantaneous delivery, and convenience.

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.

The Gopuff model does what retailers like Target are trying to retrofit their stores to accomplish: functions seamlessly as order fulfillment centers by serving both in-person and online customers simultaneously and sustainably. One look at instantaneous delivery data shows that Gopuff is not optimizing for sub-15 minute delivery:

By building its retail business off the back of its delivery business, Gopuff is poised to meet customers exactly where they want to shop: either online, at home, with instantaneous delivery, or in person when they’re out already and it’s easier, or they want to avoid additional fees.

Getting customers to build a Gopuff habit both via delivery and physical retail will place the nine year old company in a league of its own. With the launch of Basically, – Gopuff’s private label – and the in-store model that only DoorDash’s Dashmart comes close to in function, and Gopuff could present a case for why it may lead the convenience delivery market in the years to come. According to YipitData, as of now, DoorDash leads with 45% to Gopuff’s 23%. Instacart and Uber have earned 16% and 15% of the market.

This could – and should be – a wake up call to grocery and convenience store chains that have slowly turned to delivery. From Grocery Dive:

Gopuff is hardly the first online retailer to move into physical stores, joining a long list that includes large companies like Amazon and niche players like Warby Parker. This underscores the importance of bricks as well as clicks to companies’ retail strategies, even as the pandemic has boosted online shopping. But a strictly digital ordering model for in-store shoppers is unique among grocery and convenience stores, and could prove to be a useful test of shoppers’ expectations for convenience and store experience.

Gopuff’s physical retail strategy isn’t the only one to watch.

DTC brands are the new mall brand. Placer.ai also lists Warby Parker and Allbirds, both of which IPO’ed last year. More stores are integral to both DTC brands’ plans as they’re massive money makers, with customers who shop both in store and online spending more than customers who only shop online. In last week’s member brief on Glossier, Skims, and Savage x Fenty, I explained:

Malls need them, and they’ve effectively built passionate customer followings supported both by savvy marketing and products that people want to buy.

That also applies to Allbirds and Warby who are representative of the future of mall retail: they have enough of a following online that customers seek them out, and they are both pushing to build enough of a national retail footprint to allow existing consumers to buy more impulsively (a benefit of owned retail). They are also benefiting from cheaper customer acquisition costs as new consumers are introduced to them through more efficient channels.

Beauty is a sales driver, but only for certain retailers. Ulta and Sephora have amassed an in-store beauty monopoly to the detriment of department stores. Retailers that have won their business have gained from their statuses as retail destinations for beauty fans. Placer.ai found that Kohl’s stores with Sephora locations inside drew more foot traffic than those without Sephoras. And Target is already expanding its partnership with Ulta after a successful start. What’s more interesting is what’s happening online in this space, much to the dismay of Glossier:

Notice the shift from brand eCommerce to marketplace eCommerce as a preference in beauty. As companies like Sephora, Ulta, and Walmart have grown their eCommerce presences, Glossier has avoided partnerships with them (both in-store and digital). Walmart recruited nearly 100 beauty brands over the trailing 12 months, Ulta has partnered with Target, and Sephora is within Kohl’s.

Retailers are following customer bifurcation. Two brands on Placer.ai’s list, Arhaus and pOpshelf, reflect the continued trend of consumer bifurcation. Furniture brand Arhaus is targeting high-income households, particularly those in suburban areas, as an alternative to RH, with 70 stores and showrooms so far. pOpshelf, meanwhile, is the Dollar General spinoff designed to appeal to wealthier, younger, suburban shoppers who turn the nose to the Dollar General but appreciate the treasure-hunt shopping experience known at stores like TJ Maxx.

The bottom line? Rightsizing is still underway as overly stretched retailers with weaker online presences and less relevant brand names shrink their footprint. Waiting in the wings is a new class of retailers that more closely mirror today’s consumer, with digital innovation in stores and omnichannel cachet becoming top competitive advantages.

The internet has reshaped class and how the affluent shop. What the Placer.ai data shows is just how great the influence of eCommerce on retail real estate seems to be.

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