Getting a bunch of bananas and avocados from your favorite 15-minute grocery delivery company at 3 a.m. might be the greatest thing since sliced bread, but some of these companies are finding themselves in somewhat of a cost-related pickle in such a low-margin business.
While covering the recent news of Misfits Market acquiring Imperfect Foods, Misfits Market founder and CEO Abhi Ramesh noted it was difficult to reach profitability in the industry as sales leveled off in the past two years. Some companies have made layoffs or left markets due to “burning a tremendous amount of cash and not raising capital.”
With online grocery shopping in the U.S. poised to be a $187.7 billion industry by 2024, up from $95.8 billion in 2020, we found ourselves exploring whether other consolidation possibilities are in the pipeline, as well as the future of IPOs for startups in this space.
Experts say grocery startups are keeping a watchful eye on what happens with Instacart’s looming IPO as an indicator of additional public listings to come. But M&As could be part of the path to the public markets: Ramesh, for instance, said his company aimed to go public. The Imperfect Foods deal was a strategy for reaching profitability as one strong company.
Consolidation station
Instacart itself has been in acquisition mode lately. The delivery giant has acquired four companies in the past 12 months, including two in the past two weeks: Rosie, an e-commerce platform for local and independent retailers and wholesalers, and Eversight, an AI-powered pricing and promotions platform for consumer packaged goods brands and retailers.
Andrea Walne, general partner at Manhattan Venture Partners, a firm that in late 2021 invested a secondary market round in Instacart, confirmed Ramesh’s thoughts, telling TechCrunch that it will be difficult for last-mile delivery startups “to keep up with the unit economics that they were so inherently driven by originally,” which will lead to either more consolidation or companies leaving the market altogether.
Walne said delivery and grocery startups likely went to their investors and “promised that they can do a better job at managing their unit economics, as long as the velocity of customers and volume of orders kicked up.”
However, according to Walne, that velocity “just can’t exist across the board in a sustainable way.”
“That order volume can’t be sustainable,” she added. “So what’s really smart about companies like Instacart is that they decided to go toward a very asset-light model, meaning that they just really don’t own much and instead are building out and acquiring tools from an e-commerce and advertising product perspective.”
That strategy — including the acquisition of Rosie — enables Instacart to reduce how much money it needs to spend on marketing and advertising, which are two areas that “eat into their margins,” she said.
Increasing volumes of orders and the inability to reduce the spend per order is where Walne believes some delivery companies are finding themselves in that pickle.
“You’re seeing companies, like Gorillas or Gopuffs, thinking they’d be getting a lot more order volume, similar to the very short-term delivery companies, and they are racing to figure out a model that works,” she added. “At the same time, the private equity guys and other major acquirers are knocking on their door and saying, ‘We’re gonna come buy you and we can turn this business around.’”
She also noted that for consumers who like short-term delivery, the inability to find a model that works could mean fewer and fewer of these types of companies survive — unless they can figure out a way to sustain what they are doing for the long term.
Route to partnerships or closures
For some startups, the path to long-term sustainability comes from partnerships with large retailers, which, in turn, have tapped into startups to bolster their delivery options. For example, before launching its own delivery service, Walmart relied on last-mile services like Instacart and others. Meanwhile, Gopuff and U.K. grocery giant Morrisons partnered in March for fast deliveries.
In April, convenience chain Circle K and delivery startup Food Rocket paired up to provide delivery from over 14,000 store locations. Similar partnerships kept coming, and in August, convenience chain 7-Eleven acquired Skipcart, a four-year-old delivery startup that has raised just $22.5 million in venture capital, according to Crunchbase data.
Sources told TechCrunch that this deal, like the others before it, shows that retailers are focusing on delivery, and by partnering with or purchasing delivery startups, retailers are able to quickly set up internal services that allow for deliveries.
Vitaly Alexandrov, founder and CEO of Food Rocket, said some of these partnerships have stemmed from startups trying to figure out more sophisticated business models that rely less on delivering bananas and avocados within 15 minutes and more on combining grocery staples with orders of, for example, alcohol and grab-and-go hot items.
He believes that not being able to make certain business models work will cause many grocery delivery companies to leave markets, especially the U.S., where he says delivery has not gained momentum as quickly as other markets, like Europe. This is already happening: JOKR abandoned the U.S. market earlier this summer to focus on Latin America. This was amid a handful of competitors, including Gopuff, Gorillas, Getir and Zapp, announcing staff reductions and market closures.
Alexandrov noted that some of these may be future M&A targets, but he doesn’t believe that companies like Gorillas or Getlr would merge with a U.S. company or with one in the delivery market itself.
“Unfortunately, they don’t have such a strong business here, so it doesn’t make sense,” he added.
Future M&A
The experts say we will likely see more M&A in the short term among grocery delivery companies and perhaps additional activity from Instacart.
Mikhail Doubnov, executive director at Winter Capital Advisors, predicted that some companies will try to combine their scale and purchasing power in more innovative and digital ways in order to get to scale.
“There will be very few winners because this is a big boy’s game,” he told TechCrunch. “You’re really building an infrastructure play, like the telecom business before that. You can’t build that with $10 million or $15 million — you need hundreds of millions of dollars. That means there are some champions that will do M&A between retail companies and delivery companies because retail companies need to show their shareholders that they’re modern, digital and that there is a place for them in this new world.”
Walne believes Instacart is not yet done with its M&A tear. In fact, she said, the company likely will try to complete as many acquisitions as it can before its IPO in order to face less scrutiny about acquisitions as a public company. Given the quiet period before a company goes public, she also thinks there will be “a bit of a mad rush to get acquisitions done right now before that listing.”
“There’s usually an immediate kind of jerk reaction from the public market, so I would expect to see that Instacart kicks more dollars toward M&A right now,” she added. “There’s a world where there’s a couple more that will get announced — that’s just my general opinion and prediction.”