PipeCandy Memo: Instant delivery – Will it all go poof again?

Delivery apps are the creation of convenience culture, catapulted by the cosmopolitan inhabitants of big cities into a nationwide new normal. From being demand-constrained early on, delivery service marketplaces inverted rapidly during the pandemic and went on to be supply constrained almost overnight.

Webvan was the original mother of all grocery delivery in the US, owning all its buildings, warehouses, software and delivery vans. With CAC as high as USD 210, the internet sensation flourished and perished just as fast, at the turn of the century. Kozmo.com was another delivery pioneer that flooded big cities with bike messengers in the 1990s. Funded by the likes of Amazon, Starbucks and SoftBank, Kozmo bought most of its inventory at wholesale rates and sold it with a retail markup, capturing the 30% to 40% gross margin of the typical convenience store. Servicing dense pockets of customers from pricey urban warehouse spaces and delivering goods for free made the unit economics a continual challenge. Unable to get out of its long-term warehouse contracts, Kozmo imploded. Delivery services fell out of the market’s favor for about another decade.

The arrival of Instacart and DoorDash in the early 2010s rekindled investor interest in the space. Fueled by a growing economy and fast-tracked by the pandemic, instant delivery apps kept increasing their reach into consumers’ wallets. Most players in this space use the high-priced approach of sending in a gig worker – a valet shopper – into the store, shopping the order and making the delivery, in order to enable a 2-hour (or less) delivery service level. Upstarts like Popcorn claimed to deliver quicker response times than even 911.?

GoPuff operated slightly differently. Like Kozmo did in the late 90’s and Amazon does today, GoPuff bought and stocked SKU’s at its own mini warehouses staffed by full-time employees. It then employed contract workers to deliver the products to consumers’ doorsteps for USD 1.95 an order. Category expansions to tobacco and alcohol kept the tills ringing.

All this time, the biggest deliverer of all Amazon, was notching a 40% annual growth rate. Amazon has built a network of 46 sub-same day delivery stations, a combination of mini fulfillment centers + delivery stations under one roof, across the country. These facilities are much smaller than a typical Amazon fulfillment center and are designed specifically to prepare products for immediate delivery. The sub-same-day facilities enable Amazon to deliver its top 100,000 SKUs to customers within a 60-minute radius of drive time.

In Q1 2022, the overall ultrafast food delivery apps market grew downloads by 127% YoY worldwide. Downloads for companies like GoPuff and Getir have been growing quarter over quarter since Q3 2020. By June 2022, Instacart had delivered a y-o-y growth increase of +71% in app downloads.

Now, as the peak pandemic transitions to a new normal and as the economy reels under inflation, shoppers return to stores looking for discounts, weakening the momentum for delivery apps. Even as 2022 Q2 came to a close, the ultrafast delivery apps market posted its first quarter-over-quarter growth loss at -30% (worldwide). Delivery companies?Getir,?GoPuff?and?Gorillas?all announced layoffs.?

Desperate times, disparate playbooks?

Both by app downloads and visibility in the media, delivery platforms are trending lower. To continue growth and to be revenue positive called for diverse measures. Attempting to incentivize users to download its app, GrubHub offered free USD 15 lunches but couldn’t handle the 6000 takeout and delivery orders that came in every minute during the peak of the promotion. Both DoorDash and Uber Eats teamed up with grocery chain Albertsons to offer in-store promos and express delivery services. DoorDash has also partnered with streaming services provider Roku to bring one-click buy experiences to Roku’s 70 million members.

Instacart has since pivoted toward developing software to help supermarkets run their websites.?Staking its claim over tech stack development, management and distribution duties, “Instacart Platform” is its repositioning bid to arm its grocery partners. It’s also a more sustainable long-game modeled on the SaaS/managed services sector, moving away from a B2C brand-first strategy.

Though only a fraction of the size of traditional retail media networks, there is value in the apps’ proximity to consumers. Brands such as Danone are happy with the targeting and day-parting opportunities available on platforms such as Instacart and Uber Cornershop, where it is “gaining share” with encouraging ROI. Optimizing media mix and experimenting with newer channels that have hitherto not been available creates opportunities to explore conversion and lower-funnel activities, driving efficiencies via rebalancing of ad dollars.

For instant delivery platforms, 2023 will be a year to bookmark as the model morphs in its quest for profitability.?

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By Sathish Rangarajan?

Industry Analyst -?PipeCandy