🤔 Did 10 min delivery ever make sense?
The coming carnage in the quick commerce sector
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As investors have switched focus from growth to profit, we’re seeing a wave of quick commerce flame-outs and layoffs.
What’s been happening?
Layoffs: Getir - 14% (link), Zapp - 10% (link), Airlift - 31% (link), Gorillas - 50% of Berlin HQ staff (link), GoPuff - already gone through two rounds of layoffs (link)
Flameouts: Jiffy (link), Buyk, Fridge No More (link) [literally]
Consolidation: Appetito acquires Lamma in MENA (link)
WTF: Zepto (link) just raised $200m and Yummy (link) raised $47m 🤔
Was there ever a point?
Grocery isn’t as bad a business as people think: A lot of people mistakenly think grocery is defined by razor thin margins. In reality, many products (”SKUs”) have quite high gross margins. The trick is to get customers through the door to buy them - say with a luscious $5 rotisserie chicken. The first step is to exist nearby customers, and the second is to lure them in with attractive offers. Once they’re inside, they can monetize the attention of people in their stores. That last part is the key.
Attention is the most important part of retailing: About 1/4 of CPG revenue is reinvested into advertising, a major portion of which is paid to stores - e.g. to keep your brand at eye level. When a brand launches, it has to plow hundreds of millions into getting people to pay attention and it turns out ads & paid placements in stores are more effective than Instagram.
Being “the default” place consumers shop is therefore key - it means you are the place brands “pay to play”: Amazon and Instacart became the place many people now start their buying journeys by delivering a lot of stuff for not much money. They have enormous operational costs to do this, but it doesn’t matter - by being the starting point, they generate huge ad revenues that make them whole. In 2021 Instacart generated $550M in ad revenue, while Amazon generated a monster $31.2B.
Quick commerce’s play to win the attention game: The proposition of “10 minute delivery” is unique, whimsical and more attention grabbing than the typical loss-leading rotisserie chicken. And remember, the question isn’t if it makes money - but that it doesn’t lose too much. What if you could sell **mostly high margin SKUs, have a lower real estate cost structure than the average corner store, and beat legacy retailers at the ads game with a purely digital storefront?
What’s the future?
If you look at the numbers (as we did in 2020-2021 looking at Gorillas and others) - well, it almost just possibly makes sense. Almost. When Walmart acquires one of these companies, this will be the reason: like the rotisserie chicken, 15 minute delivery may never need to make money. It just needs to be a shiny toy that keeps you a loyal subscriber to Walmart+ or Amazon Prime.
Meanwhile, the problem with layoffs for startups is they signal the end of growth. Startups can discount salaries through stock-options and get discounted capital on the promise that the future will be way better than the present. But that dream can only be sold when things are going up and to the right. When that stops, even the best advertising can’t help.
This article was first published in the RedBlue Newsletter on June 2, 2022.
100% agree that non-economically-sustainable, only-profitable-at-massive-scale approaches are unlikely to work.
But the reason that this space is so alluring - and why I think there is a point - is that the vast majority of retail still happens offline (in excess of 80%, if not more, in most western countries). Many comment that this is because, while 2-day free shipping has done wonders for the consumer soft goods space, we still focus the majority of our spend on food, grocery, convenience items, and "general" (US Dept of Commerce term for WMT, Target, etc).
So there's a huge prize there for the taking - if you can make it work. Which is where small, safe autonomous vehicles that can credibly (and cheaply) perform last-mile delivery come in.