[This is not investment advice. Do your own due diligence.]

Instant Delivery is in overdrive. Billions of VC money has been poured into this space since 2020. Unicorns are made, even with less than one year of business history. Some companies are aspiring for a valuation of $40B! As a reference, Uber is trading at ~$70B and DoorDash is at ~$35B.

Despite these dazzling valuation figures, I am increasingly convinced that Instant Delivery, and broadly speaking Grocery Delivery, most likely will NOT work in the U.S. Today’s valuation levels might later be seen as high-water marks, causing permanent capital losses to late coming investors.

Instant Delivery companies face enormous challenges that are hard to overcome. If these companies survive, they will likely operate as small and niche players.

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Why Does Food Delivery Work?

First, let me circle back to Food Delivery. Food Delivery, I believe, is probably the boundary between what works and what does not work in e-commerce.

Core e-commerce, like Amazon and JD.com, works because demand is real, and supply can be efficiently created. Think about how many times you use Amazon a month (real demand). Think about the ~800K square feet Amazon fulfillment centers and the countless Amazon delivery trucks (efficient supply).

Food Delivery also works. Meituan has demonstrated it. DoorDash, too. For several quarters, DoorDash has been generating positive Free Cash Flow. We eat three times a day (real demand), and drivers deliver food to us with speed at a reasonable cost (efficient supply).

Similar supply-and-demand dynamics, I believe, just do not exist for Instant Delivery nor Grocery Delivery.

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Instant Delivery

Instant Delivery has both a demand problem and a supply problem. In many cities, it is not needed. In the suburbs, it just does not work.

Demand Side: New York City attracts the world’s Instant Delivery companies. As of the end of 2021, at least six Instant Delivery companies were operating in NYC. Fridge No More. Gorillas. JOKR. Buyk. Gopuff. Getir. 1520 (is shutting down). But is Instant Delivery needed?

NYC has ~8M residents and ~10K bodegas. You can easily find multiple bodegas within one block. And it takes just a minute or two to walk across a block. At the ratio of ~800 people per one bodega, it is hard to argue that NYC residents’ need for convenience items has not been fulfilled by bodegas already.

Moreover, people love bodegas. Bodegas are community centers where neighbors line up to buy breakfast sandwiches and to say hi to each other. The person behind the checkout counters have probably been there for decades and can offer highly personalized services. They can even provide non-retail services such as helping customers find an electrician. The personal elements are so rich that bodegas will stock items that customers request. And there are “bodega cats” — just search for them on YouTube/TikTok. You do not find these elements on an app. Bodegas have style. Instant Delivery apps do not.

Take one step back, assuming Instant Delivery works in NYC, then how many NYC-ish densely populated areas are there in the U.S.? NYC has ~8M people. The 2nd largest U.S. city is Los Angeles with ~4M people. Instant Delivery’s TAM is tiny. Think about it.

Supply Side: About 70% of the U.S. population lives outside of the “urban core”; they live in “large suburban,” “smaller metropolitan,” and “rural” areas (source link). Take suburbs as an example. In a typical suburban space, it takes a few minutes to drive from a person’s house to the community entrance and another five to ten minutes to drive to the nearest downtown area. Given the vast space and the low density, it is physically and financially impossible to run an Instant Delivery business promising 10-min deliveries. Suburbs won’t work. For even less populated rural areas, it won’t work either.

Economics: Instant Delivery suffers terrible economics for several reasons. First, Instant Delivery is capital intensive, which means it cannot scale like Food Delivery. For Food Delivery, expanding into a new city means onboard restaurants, drivers, and consumers, and let them use the apps. Aside from marketing expenses, the marginal cost of expansion is almost zero. For Instant Delivery, however, every bit of new growth demands significant new capital to build fulfillment centers, procure inventories, hire full-time drivers, etc.

Read these:

• Gorillas’ UK General Manager Eddie Lee said, “every time we open a new warehouse, it is a new lease we are signing, or a team that we are building, or inventories we are buying. So, a lot of our money and capital goes towards that” (source link).
• 1520’s co-founder Maria Daniltceva said, “it’s a capital-intensive business since you need to sign leases and you need to store the inventory, so in a couple of months, we’re going to raise money again” (source link).

On a more detailed level, Instant Delivery companies also need to buy scooters and gears for drivers while Food Delivery carries none of these cost items. It is just too expensive to operate Instant Delivery. Unsurprisingly, Gorillas’ investors have expressed concerns for large losses. 1520 reportedly has already folded.

Average Order Value (AOV) is estimated at ~$28 for Instant Delivery. Yet some Instant Delivery companies are losing more than $20 per order (including marketing spend). By comparison, my calculations show that on a per food delivery basis, DoorDash currently generates $0.7–$0.8 of positive contribution profit (after paying drivers and after marketing spend). Versus Food Delivery, Instant Delivery’s AOV is smaller ($28 vs $35), order frequency is lower (2–3 orders per user per month vs 3.5–4.5 orders per user per month), and cost basis is much worse (signing leases and taking inventories vs asset-light). The challenges for Instant Delivery can probably never be overcome.

Aside from being capital intensive, Instant Delivery companies are hurt by extremely high Customer Acquisition Cost (CAC). According to a WSJ report in January 2022, Fridge No More’s average CAC is ~$70 per customer; by the same report, a Manhattan resident received “more than $400 of free cookies-and-cream ice cream, laundry detergent and other groceries delivered to his door” (source link). Given Instant Delivery companies lose money on a per order basis, the payback period for their marketing spend is never — i.e., your ROI is not only low, it is negative. If these companies stop marketing spend, their GOVs will shrink — they will become niche players that are much smaller than what they look like today.

Some industry operators have argued that Instant Delivery can be profitable because it creates efficiency gains: low real-estate costs, high utilization of store space, and no check-out time. But ask this question: haven’t those efficiency gains already been realized by Food Delivery? Where is the innovation then? Where is the value-add?

History Speaks: Serious investors should study history to look for examples. In 1998, Kozmo.com was founded. It charged no delivery charges and had no minimum order sizes. It operated its own distribution centers. It hired its own couriers, equipping them with scooters, paying employment benefits and giving out Columbia-branded jackets. It filed for IPO in March 2000, revealing a revenue of $3.5M and a loss of $29M (yes, you read that right). One year later, in 2001, Kozmo was out of business. Also in 2000, Kozmo’s competitor Urbanfetch.com discontinued its consumer delivery service due to a lack of financing.

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Grocery Delivery

Grocery Delivery can operate asset-light like Food Delivery, but it still faces challenges on both the demand and supply sides.

Demand Side: Demand for Grocery Delivery is likely to be much weaker than most people would expect. Across survey reports, American consumers have been indicating that grocery shopping is one of the least preferred everyday tasks. As early as 1990, American consumers ranked grocery shopping next to last on a list of 25 weekly activities (source link). However, reporting they don’t want to do in-person grocery shopping does not mean consumers will adopt online grocery services. History cannot make this point clearer. In the late 1990s, high-profile Grocery Delivery companies — Webvan, HomeGrocer, Streamline, HomeRuns, NetGrocer, Peapod, etc. — have all ceased to exist or shrunk into niche players. Demand didn’t show up and funding ran dry. Webvan IPO-ed in 1999, reaching a valuation of $8B; two years later, by 2001, it was in bankruptcy.

Today’s Grocery Delivery players such as Instacart face similar challenges. In mid-2021, it was reported that Instacart was trying to sell itself to DoorDash; around the same time, Instacart’s founder/CEO was replaced. If the COVID-19 pandemic cannot enlist enough users to sustain these apps and their valuation levels, I am not sure what on earth has to happen to create demand for Grocery Delivery.

In my view, the fundamental reason for the weak demand is the personal elements that are behind a great grocery shopping experience. Ask yourself: would you feel comfortable to have a stranger pick grocery items for you? Think of it. Really? I believe that for most consumers, they do not like the feeling of having a stranger pick groceries for them: I want my bananas to be greener this time; I want my apples to be bruise-free; I prefer round-looking peppers. The list of preferences is never ending. A better way is to have someone you know to shop for you. And historically that was how it worked: rich people have their butler/servants do their grocery shopping, because the butler knows the household members and their personal preferences for groceries. A great Grocery Delivery experience therefore calls for personal connections: the shoppers know you personally, so they can find great substitutes if items are out of stock, so they can alert you for clearance sales when you are not expecting it. Highly personal. Too much to ask for an app.

Similar “personal” problems do not exist for Food Delivery. Customers do not need to know the chefs in the kitchens nor the delivery person on their doorsteps. As long as the delivered food arrives on time and tastes great, it is still a great Food Delivery experience.

That, I think, is why demand for Grocery Delivery has always been weak.

Supply Side: It is hard to create efficient supply for a great Grocery Delivery experience. It is incredibly challenging to do grocery shopping for other people — if you do not believe it, please sign up on Instacart and try it yourself. An average grocery store carries 15,000–60,000 of SKUs — it takes a lot of time to locate the specific items users requested on the app. Items are frequently out of stock — so shoppers need to communicate with users to find proper replacements. The checkout lines can be long — wasting shoppers time waiting in line. No wonder Shipt CEO Kelly Caruso said that having skilled shoppers is the key, because it is the customer relationships that let the platform retain customers and increase sales (source link). Great shoppers eventually become personal friends to app users, getting to learn about users’ preferences for groceries: how to replace out-of-stock groceries; how to pack them; any food allergies. Translating it to another language: it means “shopper supply” is very limited; most people are not a good fit to do grocery shopping for others. A limited shopper supply drives up the cost of Grocery Delivery, hurting bottom lines.

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Conclusion

Too much money is chasing too few growth opportunities. The game has changed to — to make money out of companies that do not make money. That is probably why we are seeing those Instant Delivery and Grocery Delivery companies.

Instant Delivery companies are cannibalizing each other. As a company grows, its expense scales faster than its revenue — that is a mathematical proof that the business does not work.

Excessive money supply initially stimulated demand, and eventually stimulated supply, leading to intense supply-side competition.

As I was wrapping up this article, I just received an email from a famous Instant Delivery company, titled “FREE snacks & more delivered FAST.” Another $20 of free money. I have lost count of these FREE snacks, paid for by Instant Delivery investors.

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