What’s Going on With Third-Party Delivery?

As the pandemic wanes, grocery and food delivery startups face mounting expenses, sluggish investor interest and layoffs.

December 02, 2022

By Chrissy Blasinsky

ALEXANDRIA, Va.—By now you’ve likely seen the headlines that on November 30, DoorDash reduced its corporate headcount by about 1,250 people. CEO Tony Xu explained the factors that lead to the decision, including a post-pandemic bust.

“Prior to COVID-19, DoorDash was actually undersized as a company. The pandemic presented sudden and unprecedented opportunities to serve the evolving needs of merchants, consumers and Dashers. We sped up our hiring to catch up with our growth and started many new businesses in response to feedback from our audiences,” he said.

Quick growth led to higher operating expenses that, “if left unabating—would continue to outgrow our revenue,” said Xu, adding that DoorDash was “not as rigorous as we should have been in managing our team growth. That’s on me. As a result, operating expenses grew quickly.”

Post-Pandemic Problems
Many third-party delivery startups were just getting started when the pandemic hit, going from a nice-to-have to a necessity. That type of growth is tough to sustain without investor backing.

In “The Speedy Downfall of Rapid Delivery Startups,” WIRED magazine writes that the downfall “of superfast delivery reflects the sobering mood of 2022. In the last two years venture capitalists sunk nearly $8 billion into the six rapid delivery startups competing in New York City, encouraging fast growth and a land grab. Now, investors are increasingly demanding profitability.”

Thomas Eisenmann, a professor at Harvard Business School, told WIRED that the struggles grocery delivery apps are experiencing are “reminiscent of the 2000 dotcom crash, when buzzy startups like Kozmo—which promised one-hour delivery of groceries and DVDs—folded just a few years” of securing millions from venture capitalists. “With these new businesses, what’s changed? … It didn’t work then and it’s not working now,” he said.

(In memoriam for those who don’t remember the rise and fall of Kozmo…)

The Atlantic article “Of Course Instant Groceries Don’t Work” lists three headwinds failing startups are grappling with: space, time and reality.

“For basically all of the startups in question, the elevator pitch is convenience,” notes the article, adding that pandemic or not, “delivering highly perishable goods to millions of people, often with the promise that those goods will arrive in as little as 15 minutes, has proved a very tricky business: The unit economics are bad, the margins are bad, and the logistics infrastructure necessary to make the actual service function, even unprofitably, is extraordinarily complicated (bad).”

During the past seven years, Gopuff has amassed a network of more than 250 micro-fulfillment centers that service 650-plus U.S. cities in 41 states and Washington, D.C., and it recently acquired 161 BevMo! Stores. Amid its growth, Bloomberg writes that Gopuff is also trying to solve the issue of time and money: “Can an e-commerce company whisk products to your house in under an hour? And more important: Can it actually make money doing so?”

In “The Fantasy of Instant Delivery Is Imploding,” Bloomberg suggests that post-pandemic consumer behavior has essentially “interrupted the party” for Gopuff, adding that “Once-wary shoppers have returned to stores looking for discounts, inflation is back, and the economy has foundered.”

According to Bloomberg, in recent months Gopuff has “laid off almost 2,000 employees, withdrawn from parts of Europe, shelved grandiose plans for new categories, raised fees on customers, and halted a planned initial public offering as its valuation has plummeted.”

Down Under Delivery Falters
This year the Australian market has seen several third-party grocery delivery apps fall by the wayside. Send collapsed in May, U.K.-based Deliveroo ceased its Australian operations in November and Voly abruptly shut down following a slew of layoffs.

Inside Retail reports that all three companies lacked diversification and scale, according Mal Chia, director and co­founder of Ecom Nation. “When you contrast [these businesses] to Uber, for instance, Uber has multiple facets to their business—it does food delivery, but they also do ride sharing, as well as couriers, and they do freight in the United States,” Chia said.

Delivery times proved to be a factor. Steve Fanale, founder and CEO of last-mile delivery firm Drive Yello, told Inside Retail that the 10–15-minute delivery windows are difficult to achieve without access to capital.

“Voly and Send tried, and Milkrun is trying, to compete directly with major corporations such as Woolworths and Coles; however, their key differentiator of delivery in 10-15 minutes isn't sustainable," said Fanale, adding that these companies also suffered from not having a viable economic model from the start.

“They had a lot of costs ... and tried to solve the problem by throwing cash at growth; however, their growth was never going to be fast enough to counter the burn needed to sustain the business,” Fanale said.

Don’t Let History Repeat
Michael Davis, vice president of member services at NACS, agrees that delivery startups played an important role during the pandemic. Today, however, some of these companies are realizing that a lack of a profitable business model and unrealistic delivery time promises caused their brands to suffer—both in reputation and product quality and consistency.

Davis suggests that retailers around the globe pose some serious questions:
  • Are current delivery/quick convenience models still viable?
  • Will third-party players continue to consolidate, and if so, which ones will be the winners?
  • How should retailers adapt, compete or cooperate going forward, and how should they invest?
"The disrupters have been disrupted by the lack of profitable business models, disgruntled investors, inflation, labor shortages and a bad economy,” said Davis.

At the upcoming NACS Convenience Summit Asia in Bangkok, Davis said that attendees will hear from industry leaders on the future last-mile delivery and the financial challenges companies like Grab, Gojek, Foodpanda and others have been facing. “It’s an opportunity to assess where convenience operators in Asia need to focus and invest,” he said.

Chrissy Blasinsky is NACS digital and content strategist. She can be reached at cblasinsky@convenience.org.