In May 2020, the Germany-based company Gorillas launched a new business model referred to as rapid grocery delivery. Instead of groceries being delivered in hours or days, Gorillas created a model using small retail locations called “dark stores” to store the most in-demand products and cut delivery time down to just 15 minutes.
Here’s how it works: Inside the dark stores, Gorillas’ associates manually fulfill grocery orders received through the company’s grocery shopping app. Due to the small number of products, picking the products off shelves to fulfill an order took less than five minutes. Once the order was filled, the remaining 10 minutes allowed another Gorillas associate to deliver the order to the customer via bike.
Gorillas didn’t just start a company, Gorillas created a movement. The rapid grocery delivery industry has grown quickly, led by Getir, DoorDash, Buyk and Gopuff; each is a competitor of Gorillas. The primary purpose of each rapid grocery delivery company is to deliver groceries in 15 minutes or less.
Large and small institutional investors are convinced that rapid grocery delivery is the next big thing, and they have invested over $14 billion (paywall) into the industry since 2020. Gorillas alone has raised over $1 billion and is valued at $3.1 billion.
What appeared to be an unstoppable business model, however, has begun to run into myriad issues that are raising concerns about the future of rapid grocery delivery and companies like Gorillas.
The Graveyard Of Empires
In the United States, the epicenter of rapid grocery delivery is New York City. Six of the largest rapid grocery delivery companies operate in New York City (paywall) including Gorillas, Gopuff, Fridge No More, Jokr, Buyk and Getir.
In recent weeks, the rapid grocery delivery industry has come under fire from city and state officials complaining of the number of dark stores being opened throughout the city, the number of couriers riding bikes delivering groceries and the negative impact rapid grocery delivery apps are having on the thousands of bodegas that operate within the city. Many officials want to change zoning laws to minimize the ability of rapid grocery delivery companies to compete. Other officials want to ban rapid grocery delivery companies altogether.
I’m not surprised by the pushback, and when writing about grocery delivery companies, I have previously referred to New York City as “The Graveyard of Empires” due to the challenging delivery conditions in the city. For example, the rapid grocery delivery company Jokr, which raised an additional $260 million in capital in December 2021, has experienced excessive losses operating in New York City. Last year, Jokr was reportedly (paywall) losing an average of $159 on every order they fulfilled.
To put this into perspective, imagine a customer places an order for five items that total $30. Jokr buys their groceries at wholesale and then sells the products at a higher price. Let’s assume Jokr generated $5.00 of profit on the sale of the groceries. However, due to the high operational costs of running the business (labor, rent, utilities, etc.) and marketing costs to try and acquire customers, as well as the low number of orders received on a daily basis, Jokr earned no actual profit on the order. Instead, Jokr lost $154 on the order. $159 – $5 = $154. Jokr isn’t the only rapid grocery delivery company losing money either. I’ve never seen a more inefficient, unprofitable and unsustainable business model than rapid grocery delivery. Without major changes to the model, I don’t believe the rapid grocery delivery industry can survive.
The biggest challenge facing the rapid grocery delivery industry is that the need for speed may be delighting customers, but it’s killing operational efficiency within the business model. In reviewing micro-fulfillment center technologies, I have found no automated or robotic solution that can pick from among 2,000 products to fulfill an order in five minutes, thus giving couriers 10 minutes to ride to the customer and make the delivery. What’s interesting, however, is that if rapid grocery delivery companies made a decision to only offer one- to two-hour deliveries, it could open up all kinds of opportunities to improve efficiency, reduce costs and still delight customers with consistent, fast deliveries.
For example, one of best investments that can be made by rapid grocery delivery companies is installing micro-fulfillment systems inside warehouses to automate the majority of processes required to fulfill online grocery orders. An added benefit of automation is that it provides rapid grocery delivery companies with the option of increasing the number of products they offer to customers. Depending on the micro-fulfillment center selected, rapid grocery delivery companies can offer 30,000 or more products to customers. My advice is always select a micro-fulfillment system with the fastest picking speeds, and one that has an ability to hold a minimum of 15,000 products.
A truism in the grocery industry is that if consumers are offered more products, they will purchase more products when they shop online, and it will take longer to fulfill their orders even with automation. This is why slowing down the delivery promise is so important.
In addition to automation, I strongly encourage rapid grocery delivery companies to collaborate. In fact, I believe without collaboration, the rapid grocery delivery industry will struggle to scale. There is a growing movement in countries, cities and states to ban the use of dark stores. Based on my research, it’s conceivable that in the United States, 10,000 or more dark stores will be required to meet customer demand for rapid grocery delivery—that number is staggering. I believe the optimal solution is for rapid grocery delivery companies to collaborate on using the same dark stores to meet demand. Collaborating will reduce the number of stores that are needed and make it easier for the industry to introduce automation.
What’s certain is that the status quo cannot remain. As I see it, for the rapid grocery delivery industry to survive, it will have to transform and slow down.