For years, we have heard about a looming retail apocalypse as more people shunned malls and retail stores for the convenience of online shopping. Urban planners wondered what would happen to our city centres as less trafficked retail areas became ghost stores and ghost malls. Two years after the Covid-19 pandemic began, North Americans and Europeans are seeing the first signs of what cities of the future will look like.
If you have walked around New York City, Chicago or San Francisco over the past year or so you have probably seen the carnage. Abandoned stores and restaurants all boarded up or store fronts papered over. More recently though there have been some signs of green shoots in North American city centres. Whole rows of old stores are being converted to mini fulfilment centres, ghost kitchens and dark stores to cater to a booming e-commerce business.
Catering to a growing army of online shoppers is now seen as the key to the future of the cities. E-commerce now accounts for 14% of total US retail sales with Amazon making up just under half of US online sales. Before the pandemic, almost 9% of US restaurant sales were through food delivery apps. During the pandemic lockdowns, most restaurants only delivered through food delivery apps or did kerbside pick-ups. Post-pandemic sales through delivery apps has stayed steady at just under 30% of restaurants’ total sales.
To get food or grocery to customers in a timely manner and at affordable costs, e-commerce or delivery firms need to be as close to their customers as possible. That means taking over prime city centre real estate abandoned by stores or restaurants whose business has migrated online and turning them into dark stores, ghost kitchens or fulfilment centres.
The convenience of online shopping and our ability to work from home has opened the door for a whole new experience of grocery shopping: Ultra-fast delivery. Companies like GoPuff, Fridge No More, Jokr, Buyk, 1520, Getir and Gorillas have sprung up promising to get your grocery bag to your door in just 10 to 15 minutes.
Online grocery was a niche market before the pandemic. If you live downtown in a big city, like I do, and want to pick up a milk carton because you dislike black coffee in the morning or fancy an avocado, you’d just walk to the nearest store yourself. There is a cosy convenience store literally three-minutes’ walk from where I live and a supermarket around the corner which takes me about no more than five minutes of brisk walk. Even in suburban housing areas, for most people a supermarket is often no more than five to 10-minutes’ drive away unless you live way out.
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Grocery delivery never took off until Covid-19 hit in early 2020 because most urban dwellers are not fundamentally lazy. We would rather get up, dash or drive to a nearby store and get whatever we want than go online and search for the right milk carton on an app and then wait for it to be delivered. With grocery delivery there was always a chance of receiving battered avocado or sour milk and trying to figure out how to complain, get a refund or replacement goods.
But the pandemic taught us that it was not just about that brisk walk or quick drive to a nearby store but also about safety and convenience. We do not mind bumping into our neighbours in the supermarket aisle but we are all worried that we might catch the next deadly variant of Covid-19 or some other new contagious disease. So if someone can deliver that carton of milk and a ripe avocado in 15 minutes you might be able to squeeze out some time from your Peloton bike.
New growth driver
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Online grocery delivery orders across the US grew a whopping 80% in 2020. In the first 11 months of last year, orders for online grocery delivery were up another 18%. With the start of Omicron in the last several weeks of the year, 2021 is likely to end up as another year of strong growth for online grocery delivery. Online grocery is currently just under 10% of the total grocery market in North America. A vast majority of people are still walking or driving to the nearest supermarket for their milk cartons, loaf of bread or toothpaste. Now as the ultra-fast 10 to 15 minute delivery is rolled out across more cities in North America, online grocery may have found itself a new growth driver.
The ultra-fast grocery delivery firms need a lot of resources and labour to make that dash to your door in 15 minutes. For starters, they need a network of micro warehouses throughout the cities where they operate. To get that milk carton to your door in 10 minutes, the delivery firm needs to be no more than a five minutes bicycle or scooter ride away from your home. Forget delivery by van or because finding parking space, navigating traffic lights can cost them several minutes.
The Great Delivery Race began about 16 years ago when Amazon launched its Amazon Prime platform. For US$100 a year (or US$10 a month), it initially promised two-day free delivery. Prime membership has since been raised to US$119 ($161) per year and comes with a huge selection of entertainment including free movies and TV shows as well as next day delivery. In many US cities, Amazon now has a same day service. Before the pandemic restrictions began in March 2020, Instacart — the granddaddy of grocery delivery — already had one-hour service. But locked inside our homes for months, we yearned for more speedier deliveries. Necessity is the mother of invention and the 15- minute delivery was born.
Will ultra-fast delivery become the New Normal? As you contemplate whether you would rather just laze around just wait for a delivery in your lounge chair or get out of your comfort zone and walk to the store, consider the costs. The super-fast delivery does not come free. Right now to popularise the service many ultra-fast grocery delivery firms are subsidising new customers. Some companies charge US$1 or US$1.49 for the lightning fast delivery round to your home. Others deliver groceries for free.
Meanwhile, venture capital (VC) firms are pouring billions into fast grocery delivery. Clearly, that is not going to last. At some point, they would be forced to charge you what it costs them to deliver plus a small mark-up for profit. While most analysts think that is still several years away, just beware that ultimately you will have to pay for the real costs.
Disrupting low margin business
If you look at food delivery, restaurants, grocery stores or all the other traditional businesses that the likes of GoPuff, Jokr and Fridge No More are trying to disrupt, you will realise that most are known as low-margin businesses. Unlike ride hailing firms which rely on parttime contract workers, ultra-fast grocery delivery firms for most part are relying on fulltime staff who are hanging around inside or close to the dark stores or fulfilment centres and who can quickly pick up their bag of groceries you ordered and deliver it to your door.
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Because they collect a lot of data on you, the algorithms of Jokr, Buyk, Gorillas and others know what you want — milk cartons, loaves of bread or beer cans. If you go to a supermarket the stuff that sells most like milk cartons is right at the end of the store. So, the supermarket forces you to walk around the aisles where they stuff things that you might buy on impulse like cookies, chocolates or potato chips and all sorts of junk. As mothers walk along aisles, kids reach out for those things and put them in the cart. And supermarkets make sure that kids can reach that stuff without trying to climb the shelves.
Moreover, dark stores or fulfilment centres of ultra-fast delivery firms stock up only on things that are in great demand. Many like GoPuff are turning to their own private label goods so instead of buying Nescafé coffee you might be able to buy GoPuff coffee for 20% less. Rapid grocery delivery firms want to move huge volumes, make it so convenient and so fast that you do not ever have to go to a supermarket or a grocery store again. Maybe you will still make an occasional trip to the supermarket but as long as they have a bigger share of your wallet, they will be in good shape.
Little wonder, then, that VC money has poured in huge buckets over the past 18 months. Gorillas raised US$1.3 billion, including a recent US$ 950 million round led by Europe’s Delivery Hero. Jokr recently raised US$170 million. Philadelphia-based Gopuff — whose investors include SoftBank Group’s Vision Fund, private equity giant Blackstone Group and mutual funds behemoth Fidelity Investments — is now preparing to go public in the second half of this year. Figures of US$50 billion are being bandied about for the IPO valuation despite rising interest rates and a deteriorating environment for long duration assets like tech firms that currently have no near to medium term visibility of profits. GoPuff is currently in the process of raising US$1.5 billion at a whopping US$40 billion valuation. It raised US$1 billion in July at US$15 billion valuation after it announced two small acquisitions Dija and Fancy to help it expand in key European cities but another acquisition fell through: Fast-growing German Instant delivery player Flink whose investors include DoorDash. Flink was reportedly being courted by Amazon before DoorDash bought a stake in it. And it is not just American and European ultra-fast grocery firms that are raising a ton of money: Zepto, a 10-minute grocery delivery app in India, raised US$100 million last month.
Transforming city centres
In the long run, ultra-fast grocery delivery firms will dramatically transform cities as we know them. As more retail sales move online and more shop fronts are shuttered or papered over, only to be replaced by dark stores, the look and feel of cities will change. Office towers are losing workers because more people are working from home rather than city centres. Entire cities were built with mass rapid transit to bring people to downtown office blocks from suburbs and neighbouring towns and disperse them back to suburban enclaves in the evenings. Increasingly, even those who live in fancy downtown apartments want to move out. People bought expensive down real estate because they could walk to malls, boutique stores and fancy restaurants. Who wants to live in an area full of dark stores, ghost kitchens, warehouses and fulfilment centres?
Until now, the smart city concept was all about using cutting edge technology to deliver an array of services to keep us connected and drive productivity. Ultimately, we are all time constrained and wonder if we could just have another hour to do things we really want to do instead of spending time commuting to offices, grocery stores or malls. Ultra-fast delivery firms are using abandoned retail space to deliver food, groceries, quickly and cheaply, so we have more time for our families, our loved ones and to work out in the gym, attend a yoga class or watch another show on our favourite streaming service.
Assif Shameen is a technology and business writer based in North America
Photo: Bloomberg
