Come on, this makes no sense, right? That’s the thesis of the Wall Street Journal’s look at the rise of rapid-delivery grocery startups, which includes companies like Gorillas, Joker, Getir and Fridge No More.
It’s not a new idea, as the story keenly notes: Kozmo.com was a 90’s internet darling that would deliver pretty much anything you could buy in a convenient store and DVDs (nostalgia, haha lol) in an hour. It was never profitable and went out of business in 2001
Most of these services have no fee, no minimum order and are losing, even by Silicon Valley standards, a ton of money. The WSJ spoke to venture capitalists and executives in the industry who said that some of the rapid-delivery companies are losing $20 per transaction when all costs are accounted for.
The only way for these companies to even exist at their current scale is that investors have poured almost $5 billion into the six rapid-delivery grocery companies operating in New York in the past year.
As of September, the story reports that Fridge No More was spending $70 on ads to acquire each new customer and then losing $78 for every customer that used the service for 10 months.
This makes no sense, right? No. There’s no way this makes any sense. (An interesting side note is that one reason why these companies are so unprofitable is that they have to hire all their workers as good-old-fashioned employees because they cannot physically get things to customers fast enough if they use the Uber contractor model, where time is wasted canvassing contractors and waiting for one to accept a job.)
But how might it work? First, let’s set aside the idea floated to the WSJ by Damir Becirovic, a venture capitalist Index Ventures: maybe, eventually they can become profitable by “[building] a giant business with efficiencies from scale.” That’s just the thing you say when you have no idea how to make an unprofitable business profitable. (Index Ventures has not invested in any of the rapid-delivery startups, which gives you a clear picture of just how likely Becirovic thinks his efficiency-through-scale possibility is.)
There are as I see it, two ways this might work. They’re far from certain, but they have that tangential connection to reality and loose analytical rigor that investment pitch decks are made of.
First, real estate. These companies rent out store fronts in the neighborhoods they serve and use them as mini-warehouses and dispatch centers. Nick-named “dark stores” because no customers go into them, they are relatively small. Commercial real-estate in New York is in massive flux slash crash right now depending on who you ask and what day of the week it is and independent stores have had a much harder time weathering the pandemic than national chains.
A Covid-induced urban commercial real estate bust, or even a dip, would be a huge boon to these rapid-delivery companies, allowing them to cut out a significant portion of their costs.
Two, people working from home. Midtown is depopulated and restaurant delivery apps have seen booming business during the pandemic. Is there some way that a continued existence of some form of work-from-home for white collar workers could scramble spending patterns so that buying a couple of grocery items and having them delivered in a few minutes is just as normal a part of a weekday as Chopt used to be? Sure, why not.
Like I said, I’m not saying that this is how things will pan out, but if I had to chart a course from the present state of this obviously making no sense to a future state of it making some sense, I’d say lower prices for small-format commercial real estate in cities and a big chunk of the white collar class in those same cities working from home kind of forever is how I’d do it.
Of course, this new crop of 15-minute delivery companies clearly know they are vulnerable to what Harvard Business School should call “the 8 Minutes Abs Problem”: competitors have an obvious route to one-up you.
Fridge No More and Gorillas, for instance, launched in my neighborhood with a barrage of ads promising 15-minute delivery. Then Gorillas upped the ante by ditching 15-minute delivery for 10-minute delivery last year.
Eventually, Amazon will offer 5-minute delivery for the residents of the Prime Apartments located on top of its fulfillment centers.
Or, more likely, even as the obvious unprofitability of rapid delivery is proven out, again, a relatively large supermarket company worried that it can no longer compete with Amazon will acquire one of these companies and then quickly write down the assets to nearly nothing.