More than 70% of households in the U.S. ordered groceries online in 2021. In metropolitan cities like New York, San Francisco, and Chicago, the figure is even higher.
Interest in online grocery delivery peaking during COVID, with companies like Gorillas, Food Rocket, Getir, and Gopuff rushing to fill the void. They found greater access to shoppers in high-density areas, like New York and London, and an untapped demand for ultrafast delivery.
That early concept — delivering something as simple as an apple in 15 minutes or less — has ballooned into what’s called the “instant needs” market. Some of the industry’s biggest players, including Amazon, Instacart, and DoorDash, have responded, also pushing into the 15-minute space. Instacart and DoorDash are opening nano-fulfillment centers to deliver orders faster in select markets, while Amazon is thinking even bigger with its Prime Air delivery program that uses autonomous drones guided by GPS for last-mile delivery.
“These conveniences are increasingly turning into something that consumers see as customary when it comes to their retail consumption experiences,” says Adam Wacenske, U.S. head of operations at Gorillas. “When people experience that convenience for the first time, they’re hooked.”
Location is everything
Getting deliveries out in less time than it takes to bake a frozen pizza requires networks of micro hubs, where ultrafast grocers stock anywhere from 1,500 to 5,000 items. Most micro hubs are located in existing storefronts or small warehouses. Some allow for in-person shopping, but most do not. What nearly all micro hubs do have in common is a heavy reliance on technology, like the barcode readers workers use to scan items, increasing efficiency and decreasing human error.
The business model works best when deliveries are limited to consumers living within a mile and a half of each hub. That makes dense urban areas a prime target. But that also has community leaders concerned about how ultrafast delivery could irreversibly change the landscape in metropolitan areas and put family-owned storefronts out of business.
In New York, for example, Manhattan Borough President Gale Brewer has asked city agencies to look into whether delivery startups are skirting existing zoning laws by operating micro hubs, or dark stores, in residential neighborhoods. Since micro hubs are a new type of business, they aren’t specifically mentioned in existing zoning regulations. They tend to occupy spaces zoned for commercial use, but actually serve as warehouses for storing products, which means many of these micro hubs may be out of compliance with local zoning laws. Opponents also worry that ultrafast delivery encourages consumers to place smaller and more frequent orders, leading to increased road congestion and pollution from delivery trucks. They note too that, unlike traditional grocery stores, micro hubs don’t generate foot traffic for nearby businesses.
Like their American counterparts, European consumers have demonstrated an insatiable appetite for ultrafast delivery. Glovo, an on-demand delivery app that’s popular in Spain, Italy, Portugal, and Romania, is reportedly experiencing a growth rate of more than 300% year-on-year, with more than 12 million orders delivered globally. Venture-backed grocery delivery startups raised more than $1.5 billion in Europe last year, up from $687 million in 2020. But the number of new micro hubs and increasing scooter traffic from deliveries hadn’t gone unnoticed either, with European cities Amsterdam and Rotterdam pushing a one-year freeze on dark stores.
Gorillas, one of the leading players in Europe and the U.S., enjoyed a massive success early on in Europe, reaching a $1 billion valuation in just nine months. But labor disputes between riders and management began to plague the company in 2021, around the same time Gorillas entered the North American market. Already, Gorillas has changed its model from a 10-minute delivery promise, which it unveiled at its launch in the U.S., to 15 minutes, even as it defends how it runs its business, especially in New York, by following local guidelines.
“In New York City, those guidelines include allowing customers to be admitted to a space, as well as providing them a place to wait for their order to be prepared and delivered to them in person,” says Wacenske.
The struggle of small orders
Ultrafast delivery startups say they keep their delivery costs low by buying in bulk from manufacturers, and saving on rent because their micro hubs are small. Micro hubs don’t require employees to help shoppers either, with deliveries made to their door. But achieving long-term sustainability means finding a clearer path to profitability and funding.
“The fate of the ultrafast delivery business is still in question,” says Lee Hancock, founder of SmartPoint, a company specializing in micro-location technology.
Hancock believes the ultimate challenge in 15-minute delivery is the “upside-down financials of small-order delivery.” Access to technology for improved accuracy for localized delivery could make these businesses more efficient. But stricter city regulations, coupled with growing pressure to keep delivery prices low, still pose an existential threat.
As U.S. cities like New York follow their European counterparts by contemplating a crackdown on 15-minute deliveries, some early startups have begun to fold. Buyk and Fridge No More both shuttered in early 2022 after failing to secure capital, underscoring potential challenges in the ultrafast delivery model.
While venture capitalists invested almost $4 billion in ultrafast delivery in 2021, up from $500 million the year before, labor costs are high and tough competition is forcing startups to offer discounts in a bid to capture market share. Reaching profitability for an early-stage delivery startup means having warehouses and inventory, along with a strong customer base. The ultimate goal is to generate revenue through selling goods, not just charging delivery fees.
Instacart recently cut its valuation to about $24 billion from $39 billion, citing market turbulence. However, many investors see the challenges facing on-demand delivery as a reflection of poor market conditions and rising interest rates, rather than an indictment of the model itself.
Regardless, Gorillas’ Wacenske sees incredible opportunity in the space for companies that are willing to pivot and innovate based on the individual marketplace needs.
“This is an extremely exciting space — as grocery delivery technologies and methods evolve, so does the opportunity to meet consumer needs quickly and efficiently,” Wacenske says. “The demand is growing, and that growth is only going to continue — you won’t see this going away.”