Inside the economics of 10-minute grocery delivery startups, which eke out higher margins with pricier convenience store goods and less choice

  • European VCs have put $1.5 billion into superfast grocery delivery apps in 2021 so far, more than all of 2020.
  • Apps like Gorillas and Getir have sprung up to promise on-demand grocery delivery in 10 minutes.
  • We dug into how these apps can be valued so highly when online grocery delivery is famously low margin.
  • See more stories on Insider’s business page.

Walk around parts of central London right now and you’ll spot outdoor ads for an array of new startups promising grocery deliveries in 10 minutes or less.

Insider has spotted ads over the last week for Getir, Weezy, and Gorillas. Others also operating in the UK capital include Dija and Zapp. All are trying to out-compete each other in various European cities for customers. 

These ads have ballooned in volume over the last three months, funded by an influx of venture capital cash into the sector.

The apps are also pushing a slew of money-off deals that give savvy users the opportunity to buy £15′ ($20) worth of groceries for as little as £1 ($1).

An outdoor ad in London for German grocery delivery service Gorillas.Callum Burroughs/Insider

Startup investors have been fighting to invest in these firms, meaning they are already valued in the hundreds of millions, or even billions, of dollars despite being only weeks or months old in some instances.

According to data compiled for Insider by Pitchbook, venture capitalists have plowed $1.6 billion into grocery delivery startups in 2021 so far across just 15 deals.

That’s more than the entirety of 2020, which saw startups in the sector raise $687.5 million across 45 deals.

Europe’s tech investors are plowing cash into 10-minute grocery delivery apps, according to Pitchbook data.Pitchbook

But are these startups really going to mint a new generation of tech billionaires?

The way these startups operate will feel familiar to anyone who has ever ordered takeaway from Uber Eats, although there are some variations between each company.

A customer downloads the app, picks out groceries and convenience store items, places the order, and the startup will deploy a rider to ferry out the items. Getir treats its riders as employees while others, like Gorillas, rely on gig-economy workers who are paid per delivery.

Consumers are getting great offers for now as apps try and outdo each other with huge discounts. But does the business model make any sense in the long term, and what’s the point of promising 10-minute delivery when many big grocers offer next-day?

“When something is faster, people like that,” says Nazim Salur, the founder of Getir, whose yellow-and-purple uniformed delivery drivers can be spotted scooting around inner London. “Whether they need it or not, nobody complains because you deliver their groceries faster.”

Drivers for Getir, which has raised fresh funding from Sequoia and is expanding across Europe.Getir

Getir is the Turkish-headquartered grocery delivery app that is expanding across Europe with big financial backing from blue-chip technology investors like Sequoia. Founded in 2015, it’s now valued at $2.6 billion after a funding round announced last month.

To understand how these startups think they can make money, it broadly helps to think about how big grocers, like Tesco and Sainsbury’s in the UK, turn a profit on online delivery.

For the most part, they don’t, according to Bain retail expert Joelle de Montgolfier.

“It is literally impossible to make money,” she says. For big grocers, online delivery involves employing someone to pick out and pack items of the consumer’s choice, and in most instances deliver it to the customer’s home, she explains. Customers expect cheap grocery store prices. This bites into grocery retail’s already narrow average gross margins of, de Montgolfier estimates, about 4%.

This tallies with big grocers saying they are struggling to turn a profit from online delivery.

The likes of Getir and Gorillas hope to make money by tweaking the model here and there to be more efficient, according to another Bain retail expert, Ruth Lewis.

One way to achieve this is “dark stores”, mini stockrooms in unloved parts of the city, like railway arches, that store goods ready to be ferried out to nearby customers.

“First of all, they have ‘hyperlocal’ fulfilment centers,” Lewis says. “A [large] grocer might have one or two fulfilment centers supporting an area of London — these guys will have small fulfilment centers that are max one or two kilometers from the desired population they are selling to.”

A press shot of a Gorillas “dark store.”Gorillas

She adds that it will be easier for dedicated grocery pickers to navigate these smaller stores, while pickers for bigger brands are either picking up items in-store, a less efficient process, or running around bigger warehouses.

Getir’s Salur affirms this, adding that for big grocers, “their main business is customers coming to their stores — when pickers walk into stores, customers are not happy with that. Logically, doing it all from the same store makes sense, but in real life it doesn’t really work.”

The startups also don’t try and offer a comprehensive range of products, unlike big grocers. When, like typical millennials, Insider looked for avocados on Getir, they weren’t listed.

Getir’s app, which offers a range of convenience store items.Shona Ghosh/Insider

“They’ll typically only have 1,000 and 5,000 SKUs, an individual product, meaning they can have much smaller fulfilment centers,” says Lewis.

Finally, adds Lewis, startups are behaving like bigger grocers by buying products wholesale, negotiating hard on price, and then charging consumers for the convenience of speedy delivery. “If you’re buying from these guys, you’re not thinking ‘I want Aldi prices.’ They can operate at a premium.”

She points to the fact that these startups are focused on convenience store items — treats like cigarettes, alcohol, and chocolate — rather than basic goods.

“These guys are in the game of every order being profitable, but it is literally a fraction,” adds Bain’s de Montgolfier.

The two analysts estimated that, with a focus on convenience store items, startups could hope for average gross margins of 5% to 7% — higher than the 4% that bigger grocers achieve.

This is corroborated somewhat by Getir’s Salur, who won’t discuss costs but says: “We may be a little more expensive the regular supermarket. I may be 10% higher in price, but that 10% is £1 or £2. If I’m selling something worth £1,000 at 10% higher, that’s a problem. At the lower end of shopping, the convenience we create rightfully deserves the extra we charge.”

He adds that Getir has to think about everything between sourcing products to getting them out to the customer, a process that covers logistics, technology, and retail. “Most offline businesses that are good at retail are not that good at tech,” he says. “Most good logistics companies are not good in retail, and most tech companies aren’t that good at offline. So we at Getir make sure we’re good at all three.”

Pressed on where Getir is creating efficiencies, he says that it mostly boils down to having a tight grip on data: What consumers are buying; when they buy it; and stocking accordingly. “Our waste percentages are less than regular supermarkets,” he says. “In the beginning it was three times more than them, now it’s less than them.”

With parts of Europe anticipating a return to something like normality this summer, demand for superfast grocery delivery may fall as consumers embrace dining in restaurants and going to the shops. Perhaps in a year’s time, there will be fewer billboard ads pushing steep discounts.

Getir’s Salur says he wants to keep consumers loyal in the long-term by differentiating on the fine detail. “Let’s say everybody does 10-minute delivery, which is quite hard, but let’s say they do it,” he says. “The game doesn’t stop there, it’s the variety, the freshness, it’s how we treat you as a customer.”

He adds: “It’s not going to be like Uber versus Lyft, or Uber taking over the world. In grocery, nobody is going take over the world. This is going to be a multiplayer thing going forward, and I made my plans accordingly. I’d like to be the leader in the markets I operate in, and I welcome the competition.”

De Montgolfier confirms that the most profitable startups will likely be the ones that focus on data above everything else.

“They are less focused on solving a portion of a legacy business, so they can come up with more creative ways of approaching the problem,” she says, referring to the issue of poor profitability in online grocery. “The people who redefined retail are the ones who are not coming with legacy assets, and consider the main asset to be the data, and the customer knowledge.”

Despite the spiraling valuations and the sheer amounts of venture capital flooding into this space, de Montgolfier says superfast grocery delivery will likely remain a fairly niche sector.

“There is latent demand for that service,” she says. “It is a specific subset of the market, so by no means is it solving the bigger conundrum of online grocery. It’s an interesting model, but it’s never going to be the most pervasive model.

“It’s solving for what happens in city centers, but by no means is it always relevant for less urban, less dense territories. It isn’t solving that whole ‘I need a full basket, carried to my doorstep.'”

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