The instant grocery delivery sector has had its share of ups and downs over the last few years. Startups that sought to deliver groceries and other small items to customers within 30 minutes or less saw the same rush of capital, and the resulting inflated valuations, in 2021 as many other categories did. Now they are crashing back down to earth alongside them.
But unlike other categories, where economic conditions had more to do with demand fluctuations and the broader sector’s decline, instant grocery delivery companies seem to have a bigger problem: their business model.
Last year was fractious for the sector. Fridge No More and Buyk, both focused on the U.S., closed down for good in 2022, and other startups in the space have struggled to fundraise. Gorillas was sold to Getir at the end of last year for €1.1 billion, less than the $1.3 billion it had raised until then. Getir is also rumored to be raising money at an even lower valuation than its last cut in December, according to the Financial Times.
But not all quick grocery delivery companies are struggling. Indeed, those that have continued to grow in 2023 all have something in common: They aren’t focused on Western Europe or the U.S.
JOKR, which left the U.S. in 2022 to focus on Latin America, starting in Brazil, raised a $50 million Series C in January with a higher valuation than its last — a rare feat for a late-stage startup this year. And India’s Zepto last month raised $200 million, propelling its valuation above $1 billion.
Larry Aschebrook, a managing partner at G Squared, which has backed numerous companies in the category, including Gorillas and JOKR, feels there’s definite demand for instant delivery services, but he admits that it’s not meant for every region. “You’re right, I don’t think it works in every geography.”
Tight margins are largely why the business model fails to make the math work out in developed markets like Western Europe and the U.S. On the other hand, these companies can shore up margins due to the overall lower cost of operating in emerging markets, which helps them thrive there.
Labor costs play a big role in that equation. Aschebrook said that the nature of the labor markets in regions like Latin America allow for companies to spend less on fulfilling each order than they would in a market like the U.S. Consumers also tend to spend more on an order in an emerging market than in the U.S. too, Aschebrook said. The combination of the two means each order in markets like LatAm costs less and brings in more money while in a market like the U.S. it’s the opposite.
“In Western Europe, and the U.S., it’s all about average order value,” Aschebrook said. “[Quick delivery grocery startups] have to have an average order value closing in on €30, or $30 in the U.S., and you need to increase the delivery time to 20-plus minutes. It just doesn’t work otherwise.”
Ralf Wenzel, the co-founder and CEO of JOKR, has seen the differences play out firsthand. JOKR pulled out of the U.S. because the instant delivery business wasn’t working for the startup in the country, but now, after a year of operating in Brazil, that part of the startup is already profitable, he said.
Wenzel pointed out other financial factors that make emerging markets a more fruitful geography for startups like JOKR. He said that Daki, JOKR’s subsidiary in Brazil, works directly with food producers and growers, cutting out middlemen and importers, which helps it compress margins. Startups in the U.S. and Western Europe can’t do that.
“[In the U.S. and Western Europe] you always have to work through distributors,” Wenzel said. “This intermediate middleman, they are very established food producers or beverage producers consolidated by distributors. There is hardly any way to [go around] that system.”
The strength of incumbent grocery store chains also plays a role. The majority of folks who live in densely populated areas in the U.S. — the key ingredient to making the instant delivery business model work in any market — are surrounded by a dense selection of regular supermarkets, while cities like São Paulo are densely populated but don’t have a plethora of grocery stores to match.
“The inconvenience of doing offline grocery shopping is significantly higher, and the time it takes is significantly higher,” Wenzel said about emerging markets. “Most of these supermarkets and incumbents don’t have an online offering, and if they do have an online offering, it is very unsophisticated.”
Wenzel said that part of Daki’s success is that it gives its users more options beyond 15-minute delivery. Users can choose between getting a full cart load delivered at a set time or getting a few items in 10 minutes, which means the company can own the full grocery needs of its users through one service in areas that don’t have a lot of other options.
Aschebrook feels companies focused on the U.S. and Western Europe need to offer more than just 15-minute delivery to survive. He said that Getir has been able to hold its footing and continue to operate in the U.S. because it offers numerous other services, including ride hailing, food delivery and finding local employment in its native Turkey, all of which balance out some of the margin issues.
“I think it will be very difficult to have a stand-alone quick-commerce app business,” Aschebrook said. “You are not going to be able to get to the scale that you want in the dark warehouse model in enough markets to have a large enough business just based on that.”