Why Ultra Fast Delivery Companies are Struggling
Once the COVID-19 pandemic hit all things eCommerce took off. Retailers that couldn’t get their goods delivered quickly were viewed as dinosaurs. Traditional brick and mortar retail was dead and fast delivery took over. This irrational exuberance led to the launch of several ultra fast delivery companies that promised to deliver items like Tylenol, snacks and and toilet paper in less than 30 minutes. Then venture capitalists jumped in sensing an opportunity and poured billions into the sector.
But then something happened. As the COVID-19 pandemic eased many people went back to their old habits of shopping more offline. As a result many of these ultra fast delivery companies are struggling now and some have even shut down. How could the promise of these companies which was so strongly felt last year fade so quickly? If you are curious there are five main reasons why the ultra fast delivery industry is in panic mode, laying people off and in some cases shutting down operations.
1. High unit economics. Delivering goods is an inherently unprofitable business especially when the items ordered are of a low value. Many ultra fast delivery companies including Fridge No More and Buyk do not have a delivery fee or a minimum order value (both of these companies shut down earlier this year). That means if you ordered an apple there would be no minimum delivery fee (sounds like a good deal to me!). Even large companies like Walmart have a minimum order value. For Walmart it’s $35 in Canada and it also charges a standard delivery fee of $7.97. The benefit to consumers of placing orders with the likes of Gopuff is clear. If you need something urgently let’s say baby diapers it’s easy to place an order with Gopuff and the diapers can arrive in as little as 30 minutes and it’s not cost prohibitive to do so.
While you are waiting for your apple to arrive the costs begin to add up. For every order made through an ultra fast delivery company the dollar value of the order must cover the cost of the items ordered, the delivery cost, marketing costs, miscellaneous costs and any corporate overhead the delivery company incurs. While a customer loves the idea of ordering chips and a pop before settling down at home to watch a movie, you can quickly see how that gets very expensive for the delivery company.
That sentiment was echoed by food delivery company Grubhub when it wrote the following in a letter to shareholders: “In 2015, we added delivery capabilities to enable restaurants that didn’t have delivery to join our platform. We did this as a means to an end - we knew it would be valuable to have those restaurants on the platform. But, we didn’t then, and still don't believe now, that a company can generate significant profits on just the logistics component of the business. It is a commodity and there are significant variable costs that are hard to leverage even with technology and scale.”
To put this into context Fridge No More’s average order value last September was $33 but it incurred an average loss of $3.30 per order even when advertising costs of $78 per order were not taken into consideration.
Source:The Wall Street Journal
Many ultra fast delivery companies typically hire couriers as employees instead of using independent contractors like Uber does which is a more expensive model. “The economics are brutal,” said Damir Becirovic, a principal at a venture-capital firm speaking about the ultra fast delivery industry.
Why stay in a business with such poor economics? The belief is that if these companies consolidate one day profitability metrics will improve. “It’s the model we saw with Uber a decade ago of heavily prioritizing growth over profits to be able to rapidly seize first-mover advantage,” said Alex Frederick, a senior analyst at PitchBook. But this model “requires high burn, high capital investments to continually expand into new markets, attract customers and retain them,” says Frederick. Take a look at Uber, 13 years after going into business it still has yet to make an annual profit even though it is a dominant player in the ride-hailing and delivery businesses.
2. A collapse in venture capital. eCommerce surged in 2020 because of the COVID-19 pandemic. With companies like Amazon, Target and Walmart riding a wave of higher than normal eCommerce orders many thought the boom would last indefinitely. Along with the eCommerce frenzy came people hungry to cash in. Among those people are venture capitalists who put $5.5 billion over the last two years into the six dominant ultra fast delivery companies in New York.
But the desire to be outside and connect with others was not diminished by the pandemic it was heightened as millions of people grew weary of being trapped inside. You are not alone if you appreciate a trip to the grocery store more now than before. eCommerce growth is now slowing with eCommerce sales in the second quarter of 2022 in the United States making up 14.5% of retail sales. That’s in contrast to a spike of 15.7% in the second quarter of 2020.
Not only is eCommerce growth slowing but there are numerous issues affecting venture capital spending including: high inflation, high interest rates, a potential recession and tech stocks which are taking a beating in the stock market. Venture capital in many ways is the reason why ultra fast delivery companies exist. If you have a business model without a clear path to profitability and high customer acquisition costs you need something or someone to fund it. That’s where venture capital comes in. But with a turbulent macro environment venture capitalists want to bet on things that are more certain. "Given what's going on with the economy, given what's going on in the investment community, all these companies have now got a limited window to figure this out," said Gary Hawkins, CEO of the Center for Advancing Retail & Technology. "The phase of cheap money is gone.”
3. Too much competition. Before a wave of shutdowns there were a slew of ultra fast delivery companies operating in the United States including Jokr, Gorillas, Getir, Gopuff, Fridge No More and Buyk. In any industry high levels of undifferentiated competition tends to drive prices down. That’s why meal delivery companies like Blue Apron often offer large discounts. Their services aren’t too different from one another. Then over time customers are trained to select the services of the company that offers the largest discount. This is a zero sum game. You can’t win in an industry where such a large part of the value proposition is a discount. Think about a retailer like Gap. Don’t you wait until the item you want to buy is on sale before you buy it? Everyone does this creating a never ending cycle which makes it hard for Gap to have high enough margins to adequately cover its costs.
A new idea or service often leads to copycats making it very difficult for anyone to win. Perhaps if venture capital wasn’t flowing as freely as it was before there would be less players making it easier to have a model that wasn’t so heavily based on taking out the competition.
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4. High marketing costs. It’s harder than you think to market a business that doesn’t have a lot of stores. One of the reasons you buy pastries from the bakery down the street is because you walk by it every day. The smell of freshly baked cookies can get even the most disciplined person who has vowed to cut back on sugar off track. If that bakery moved you might notice after a few months it’s a little easier to wiggle into your favourite pair of jeans.
Ultra fast delivery companies have to incur high marketing costs not only to get you to notice them but so that you order from them and not one of their rivals. In April nearly 30% of orders on Gopuff, the largest ultra fast delivery company in the United States were discounted. A high level of discounting always signals there is a problem with a company’s value proposition. Lululemon rarely discounts. The excitement on TikTok is loud whenever Lululemon is having a sale and people are showing off their hauls. Why can Lululemon get you to pay regular price (and one that’s higher than many clothing companies)? It’s not just because their leggings look cute on Saturday afternoon walks. It’s because those leggings are among the most comfortable on the market because Lululemon has invested for a long time in fabrics filled with technological innovations so that you don’t have to shimmy into your leggings, they easily slide on and feel great all day.
If you have a business like many of these ultra fast delivery companies that isn’t differentiated then the first course of business is often to reduce prices and pay a lot in advertising to entice customers to give you a chance. If your customer acquisition costs are high but you have a lot of repeat customers then that is a better scenario. But in general people jump between delivery companies because they have been trained to do so as they search for the best deal.
5. A lack of a compelling reason to exist. An existential question is how fast does delivery need to be? We can all agree two weeks is too long. On the other spectrum same day delivery makes a lot of sense. Maybe you are preparing to make dinner and realize a lot of the ingredients you need aren’t in your pantry. Getting your groceries delivered in a few hours is now a perfect solution.
But in what cases do you need to get something delivered in 15 minutes? Items like toilet paper, diapers and Tylenol are often bought using these ultra fast delivery services. But if you live in an urban area where these services are often located you can in many cases walk or drive to a nearby store and get what you need. It’s not that a 15 minute service doesn’t have value but if it’s too expensive to operate then why bother?
If ultra fast delivery is in such great demand then why won’t consumers pay full price for it? Is competition the issue or is the issue that there really isn’t an underlying need? The recent pullback in eCommerce growth is making people come to terms with the fact that maybe we don’t want everything delivered, at least not in North America. If you have an emergency which would translate into a demand to have a product right away, lets say in 15 minutes, wouldn’t you typically have that product in your home already? Don’t most people already have Tylenol at home in case they need it desperately? Just because a service is used doesn’t always there is a compelling need to have it.
What has really happened in the ultra fast delivery industry is that consumers are simply switching back to many of their pre-pandemic habits. If I am running low on toilet paper I will run out and get it. Convenience is important but the definition of convenience might mean I wait a few hours to get what I need or I will go to the bodega across the street. 15-minute delivery is a “gimmick,” says Brittain Ladd a supply chain consultant. “It hooked people, it generated a lot of publicity, it became something of an oddity.”
Without a sustainable business model and slowing eCommerce sales many ultra fast delivery companies are either shutting down or are laying off employees. Gorillas has laid off 300 employees. Getir laid off more than 4,000 employees and is losing as much as $60 million per month. It is estimated that Gopuff will lose over $100 million this year. Fridge No More and Buyk shut down in March and in total more than 8,000 jobs in the sector have been cut.