The delivery market is coming down from its pandemic highs

·10 min read

During the pandemic, delivery startups -- whether focused on groceries, essentials or takeout -- became the darling children of venture capital firms. Early on, mandates and closures put up barriers to physical shopping, but as time went on, customers became more used to the idea of shopping online for everything from toilet paper to rotisserie chicken. In a 2021 survey from Coresight Research, nearly two-thirds of U.S. consumers -- 60% -- said that they were buying groceries online, up from 36.8% in 2019.

Delivery companies old and new reaped the benefits of the changed landscape. In 2020, a 500% increase in order volume drove Instacart's revenue to $1.5 billion -- attracting $1 billion in capital at a $39 billion valuation in 2021. On-demand grocery delivery startup Gorillas nabbed $290 million at a $1 billion valuation that same year. Within the span of a few months, Berlin-based instant grocery startup Flink secured $750 million at a $2.85 billion post-money valuation, while Gopuff, a U.S.-based rival, raised $1 billion on a $15 billion valuation.

According a report from AgFunder, total venture investment for "e-grocery" companies reached $18.5 billion in 2021. Between 2020 and 2022, investors poured more than $5.5 billion into New York City-based instant delivery companies alone, a separate analysis found.

The boom continued into early 2022, with startups like Getir, Zapp and Zepto raising mammoth rounds. But there are signs of a correction. Instacart, citing "market turbulence," last month slashed its valuation by 40% and slowed hiring. Publicly traded DoorDash and Deliveroo have seen their stock prices fluctuate wildly over the past year. (DoorDash executed a $400 million stock buyback program in May.) Gorillas, Getir, Zapp and Gopuff are among other delivery startups that have let go staff in recent months, despite fundraising. Some have been forced to shut down entirely, like Fridge No More, 1520 and Buyk.

The delivery sector can't be painted with a broad brush, necessarily. But -- taken together -- the developments suggest that the pandemic period of rapid growth is coming to an end.

"Some [delivery startups] are most certainly safe -- especially the ones with positive unit economics," Matt Birnbaum, the former head of talent acquisition at Instacart and now a talent partner at Pear VC, told TechCrunch via email. "The good delivery companies can slow their spend in growth areas like hiring and marketing and become profitable almost immediately. The companies that are in the most danger are the ones who don't have a clear path to profitability in the short or medium term. As access to capital has become more constrained, so has the appetite for growth at all costs."

Craft Ventures partner and co-founder Jeff Fluhr, the ex-CEO of StubHub, didn't mince words about the delivery market's woes. (Craft Ventures has invested in several delivery startups, including Shef, which enables home cooks to sell their food for delivery.) He blamed "ultra-fast delivery" marketplaces -- i.e. those promising food, drinks and household items delivered in roughly 30 minutes or less -- for dragging the overall segment down with low or negative gross margins, owing to the "very high" human labor expenses relative to the margin from product and transaction fees.

"The fast delivery space is the epitome of exuberance of 2021: investors were pouring money into cash guzzling companies with flimsy business models," he told TechCrunch in an email interview. "Fast delivery companies are capital-intensive. They require local infrastructure, local people, and local operations which are expensive to build out. As a result, all of these companies have been incinerating boatloads of cash over the past 12 to 24 months as they’ve expanded to new geographic markets. Of course consumers like the instant gratification of a pint of ice cream in 15 minutes, so revenues grew quickly, driven by a great consumer experience and word-of-mouth virality. Investors followed the growth paying no attention to the potential for profitability. But the notion that a startup can deliver on that promise profitably is a pipe dream."

To Fluhr's point, even for firms that buy goods at wholesale prices and sell them at a markup (unlike, for example, Instacart and GrubHub, which act as an intermediary between storefronts and end-customers), ultra-fast delivery has sky-high operating costs. Jokr, a New York-based grocery deliver venture, was reportedly losing $13.6 million on just $1.7 million worth of sales in 2021. Delivery vehicles as well as contract labor, including drivers and those responsible for packing or picking orders, are an outsize line item -- poor pay and benefits or no. So are the leased storefronts, warehouses and fulfillment centers, called "dark stores," that companies like Gorillas operate to meet their delivery pledges, which contribute to waste such as unsold perishables.

Buyt claimed to have roughly 800 dark stores in 25 cities at its peak. Getir has roughly 1,100.

Rafael Ilishayev, Gopuff’s co-CEO and co-founder, told CNBC in May that the company’s business model is predicated on in-app advertising for brands and "making margins on products." But promotions and marketing are eating away at these margins. According to The Wall Street Journal, Fridge No More spent $70 on advertising to win the average customer, an investment that resulted in a $78 loss for every customer that stayed from December 2020 through September 2021.

Birnbaum pegs the blame, too, on reckless hiring. During the pandemic, high-growth tech companies adopted a "gotta-catch-'em-all" approach to hiring, he said, making headcount decisions with the goal of accumulating as many "assets" as possible. Birnbaum was referring to technical hiring, but, on the general subject of hiring, Instacart added hundreds of thousands of gig workers to meet the surging demand early in the pandemic -- demand which has since dropped off.

"As companies look at their balance sheets, they're focusing their bets and no longer need to hire at the same pace they've been hiring over the last few years; hence hiring freezes," he said. "Companies that fail to adjust or don't have adequate runway to support their current headcount are going to be in an entirely different situation."

TechCrunch contacted a sampling of delivery companies to inquire about hiring status, including DoorDash, Delivery.com, Grubub, Grab, Deliveroo, Just Eat Takeaway and Delivery Hero. Several declined to comment or didn't respond, but respective spokespeople for DoorDash and Grubhub said that the companies haven't made any adjustments to their hiring plans.

"I think that, in general, it comes down to the model and whether it works or not full stop," Rob Kniaz, a partner at Hoxton Ventures, told TechCrunch via email. Hoxton was an early investor in Deliveroo and recently led a funding round in Bother, a next-day delivery startup based in the U.K. "DoorDash seems to work by whacking on fees to all parties to cover the operation costs. The 'quick commerce' companies [like Gopuff] were competing on price and speed and have lower basket sizes to boot, so it's much harder for them to reach a breakeven point. I think the model works where you can get away with very high margins and/or delivery fees, but this will never be an everyday, low-price model. It's a luxury business in my opinion."

A few surveys support the notion that delivery customers are a fickle bunch. One of the most pessimistic, out of Rensselaer Polytechnic Institute, suggests that over 90% of people who used online delivery services during the pandemic would likely revert back to their original way of shopping.

"When general market sentiment turned in the past few months, investors started scrutinizing profitability and cash flow. Investors who were once funding this segment are now rejecting it, full stop," Fluhr said. "As these companies faced the reality in the past few months that there would be no more free money, they realized they needed to cut burn, extend their runway, and have the benefit of more time to figure out a business model with better unit economics. That’s why we’re seeing so many layoffs in the fast delivery space in particular ... The layoffs and hiring freezes have really only just begun and will likely get worse before they get better."

Pundits say it's history repeating itself. In the '90s, California-based Webvan, one of the first rapid grocery delivery startups, was briefly valued at $7.9 billion before going bust. Rivals Kozmo and Urbanfetch went out of business after losses mounted.

But compounding the challenges delivery startups today face is the wider economic downturn. Inflation continues unabated, driving up food, rent and transportation costs. Supply chain disruptions threaten to delay the shipment of goods such as baby formula. And investors are increasingly wary of capital-intensive bets, preferring instead to put money toward segments like business software.

"If each delivery has negative unit economics, the only savior will be massive scale, which will drive down costs," Phil Haslett, the co-founder and chief strategy officer at EquityZen, told TechCrunch via email. "Getting to massive scale requires massive amounts of capital. In the current market environment, that's a tough sell to venture capital and growth equity investors."

Consolidation is on the horizon -- and indeed, has already begun. Just Eat Takeaway paid $7.3 billion for Grubhub. DoorDash bought rival food delivery app Caviar from Square and recently snapped up Wolt in an all-stock deal. In 2020, ahead of its purchases of grocery delivery startups Cornershop and Drizly, Uber finalized its acquisition of Postmates. And last year, Gopuff -- which has a partnership with Uber -- acquired Fancy and Dija.

Expect business models to change, too. Jokr and Buyk are introducing longer delivery times in order to fulfill more orders per drive. Before it went out of business, Fridge No More was looking to obtain a liquor license and invest in more private-label products for delivery customers. FastAF, a relative newcomer in the delivery space, specializes in high-priced and luxury items.

"The shifting of the goal posts will introduce discipline into this space," Fluhr said. "Companies will need to figure out a model that works or else die. Most will die, but perhaps a few will land on a new model that balances the value prop for the consumer with a model that can actually generate a profit."

Delivery companies could trim losses by increasing prices, selling their own brands, and driving up order sizes with pricier items like alcohol, investors say. Or they could invest in technology like robotics fulfillment, enabling couriers to carry more orders per trip.

"I think these models are reflective of the market in the sense businesses with tight or negative margins will be the first to take on water," Kniaz said. "That said, I think there are other interesting models of distribution that are just taking off that have lower variable costs compared to guys on a scooter delivering a banana for £1. We've done a few things like PillSorted and Bother that actually make sense in a down market where value is a factor as well as convenience."

Jared Carmel, a managing partner at Manhattan Venture Partners, an investor in Instacart and Postmates, added: "When it comes to startup investing, we aren’t evaluating our investments by vertical alone. We can expect to see some consolidation in this space and some startups are going to fare better than others. But in the long term, the pandemic served to change consumer habits. People got used to ordering groceries during lockdown and now they recognize the importance of and financial value of the time they save by not going shopping. As far as differentiating delivery startups, we’re keeping an eye on delivery startups with strong e-commerce and advertising plays and startups whose base structure doesn't rely on realestate plays, like renting out local warehouse space."