Inside the Great 15-Minute Grocery Delivery Rush
While much of New York City retail has been in a tailspin during the pandemic, one type of tenant has been expanding very aggressively over the past year: venture capital-backed delivery services that promise to bring New Yorkers groceries in 15 minutes or less.
These startups, which include Getir, Buyk, JOKR, Fridge No More, Gopuff and Gorillas, have been in a mad rush to lease the funkier storefronts in prime Manhattan and Brooklyn neighborhoods since last summer. As more of these companies launched in New York City during 2021, they were all, increasingly, competing for the same spaces in pricey residential neighborhoods like the Upper West Side or Greenwich Village.
Retail landlords — who spent much of 2020 and 2021 reeling from a lack of customers and businesses shutting their doors — seem to be wising up too. In one instance, Buyk offered to pay 18 months worth of rent up front — $350,000 — to secure a prime storefront on the Upper West Side, beating out a few of its competitors, according to sources familiar with the deal.
However, much of this seeming success should be taken in stride.
The economics of 15-minute grocery delivery in the five boroughs are so tricky that some companies have already gone belly up, while others are looking to sell their New York City business.
A company called 1520 — named for delivering groceries in 15 to 20 minutes — quietly shut its doors in December 2021. JOKR, which was founded by former SoftBank executive Ralf Wenzel, is reportedly in talks to sell its New York City business seven months after launching, according to tech website The Information. The firm expected to burn $74 million in 2022 and $84 million in 2023, the outlet said. The Wall Street Journal reported last month that Fridge No More lost $3.30 on every order placed, after factoring in the costs of paying delivery workers, products, rent and utilities. It also spent roughly $70 trying to win its average customer, resulting in a $78 loss for each regular customer who used the service through September, per The Journal.
Most of the fast grocery delivery startups in the city operate under the same basic business model. They lease small retail storefronts that function as mini warehouses, serving anyone who orders within a one-mile radius. The companies pay their employees as full-time workers, rather than the much-maligned contractor model of food-delivery services like DoorDash and Uber Eats, and they equip delivery staff with e-bikes, rain coats, winter jackets and boots.
In terms of labor, Gopuff is an outlier because it relies on traditional gig workers, as well as full- and part-time employees, and markets itself as delivering in 30 minutes or less. It formed a partnership with Uber last May, and is integrated into Uber Eats’ delivery service.
And, with several companies jockeying for a narrow slice of the grocery market, it seems inevitable that a few will fail, while one or two may survive long enough to be acquired by a larger company.
“There’s going to be consolidation in the industry,” said Kunal Lunawat, who runs a real estate-focused venture capital firm, Agya Ventures. “We’re going to see some of these businesses fail. There’s going to be a lot of money burned before we get to that point.”
Those that survive will do so despite competition from traditional grocers and bodegas as well as more-established delivery services like Amazon and FreshDirect.
“We think they’re offering two different services,” Lunawat said. “You look at the Amazons, Whole Foods and FreshDirects of the world, that’s more planned grocery. These guys are turning grocery into utility; they’re commodifying groceries. Whereas the Amazons of the world are streamlining” what would be a weekly shopping trip, he explained.
Real estate observers were much more skeptical.
“I question how such a low-margin business can pay rent and sustain this kind of overhead,” said Chase Welles, a retail broker and partner at SCG Retail. “In their current form of paying market rents and stocking a limited amount of low-margin items, I think that it’s a big capital burn and the model will have to evolve to survive. I know how much the traditional supermarket loses on each delivery — it’s a lot. And on paying the person to package it up and get it over to you.”
John Catsimatidis, a real estate developer and owner of Manhattan grocery chain Gristedes, said, “I think the commitments they’re making to deliver groceries in 15 minutes are ludicrous. It’s a license to go broke.” As a landlord, “I would only sign a lease with one of these businesses if they paid a year of rent upfront. If they only paid the first month’s rent upfront, and it was hard to evict them because of the pandemic, then the landlord is going to be stuck.”
The delivery start-ups also face potential regulatory hurdles. Former Manhattan Borough President Gale Brewer, who now represents the Upper West Side on the City Council, penned a letter to the city Department of Buildings last October arguing that the grocery delivery start-ups were in violation of zoning laws by operating warehouses in retail spaces.
“I am concerned that these services compete with existing supermarkets, bodegas and other food and beverage establishments, and occupy spaces that are now no longer available to the public,” she wrote. “They deaden our streetscapes, as windows are sometimes papered over and there is no ability to actually enter and shop, thereby reducing foot traffic, which ultimately impacts adjacent small businesses.”
Brewer, along with city Comptroller Brad Lander, the Bodega and Small Business Group and Brooklyn City Council member Lincoln Restler, recently held a press conference calling for more regulation of these kinds of businesses. Brewer, who dubbed them “quick-service fulfillment centers,” felt that they threatened the existence of bodegas and posed potential safety issues for delivery workers forced to work under tight time constraints.
“All we got from the Department of Buildings and City Planning was ‘we’re talking.’ That’s not good enough,” she said, according to neighborhood blog West Side Rag. “We’re going to work with the new [Adams] administration. These dark stores are illegal.”
A Gopuff spokesperson told Commercial Observer that customers could walk in and purchase things from its dark stores (which are usually papered over to prevent people from peering inside), and that each of its locations had a point of sale system and a cash register.
In addition, Gopuff “currently has one front-of-house Kitchen in Manhattan that both enables delivery of freshly prepared food and serves walk-in customers for to-go or pickup orders. At that location, walk-in pickup orders account for almost half our transactions,” the spokesperson said in an email.
Getir, which launched its business in Turkey in 2016 before expanding to the U.S. last year, said in a statement that its “stores are compliant with New York commercial zoning regulations—all are currently ready for walk-in pickup. While we do not currently sell alcohol, we are exploring options to make it available in the future.”
Operators like Gorillas and Buyk, meanwhile, typically post signs on their storefronts specifying that shoppers cannot walk in. Gorillas, Buyk and Fridge No More did not return requests for comment by press time.
Attorney Mitch Korbey, who chairs Herrick Feinstein’s land use and zoning group, said he felt that the city needed to create new zoning for the grocery delivery start-ups.
“If you can’t walk in there and buy potatoes, then that’s a warehouse,” he said. “The zoning code doesn’t have ‘quick fulfillment center’ in it. Maybe what the city wants to do is create a category for these mini warehouses. There may be a way to permit them in certain commercial zones, where there may not be a risk of displacing badly needed food stores. We could rezone certain commercial areas and allow them on a particular block.”
Then there’s the question of delivering booze — a possibility that may push many of these unprofitable companies into the black.
“The holy grail for them is alcohol,” said Steven Soutendijk, a retail broker at Cushman & Wakefield. “From what I understand, if they are not customer-facing stores, they cannot get a liquor license. If you can’t deliver beer and wine, you’re always sort of capped out. That defeats the whole purpose of being on 35th Street between Seventh and Eighth avenues. They may have to remodel all their stores to accommodate that. How much does that cost and how does that change their stores — if you took the front 500 feet, and turned it into a bodega?”
He pointed out that the liquor store trade groups had already fought aggressively against to-go cocktails, which the state permitted and then banned again over the course of the pandemic.
“What do you think the liquor stores are going to do when JOKR and Gopuff are delivering vodka?” he asked. “They’re going to the mattresses.”
TapRm, a beer delivery startup with a store by the Brooklyn Navy Yard, teamed up with JOKR and GoPuff last year to deliver beer, hard seltzers and hard ciders in New York City, the company confirmed to CO. The company—which was started by former Anheuser-Busch exec Jason Sherman—has 15 mini fulfillment centers citywide that it uses to fulfill orders for the quick grocery delivery operations, according to Sherman. None of the other fast grocery delivery start-ups deliver beer, wine or hard liquor in the five boroughs. One company is negotiating a liquor license agreement with the state and would add a walk-up window or retail component to its stores in order to comply with state law, sources told CO.
Soutendijk pointed out that the grocery start-ups are, in some ways, ideal tenants, because they are willing to rent spaces that few other retailers will take.
“They’re generally taking space that is not ideal for other types of retail,” he said. “Columns, low ceilings, side streets — a lot of these spaces are not A-plus or B retail locations. They’re taking funky space because the rest of their business model is expensive. The margins are very thin in the grocery business in general so they have to keep their occupancy cost very low if they want to keep their business sustainable. My gut is that all these guys are angling for market share, so they can say they have the most customers and get bought by Amazon. It’s all about customer acquisition at any cost, and they don’t care if it costs them a fortune because at the end of the day it’s a race for market share.”
A member of the expansion team for one of the quick grocery delivery start-ups — who requested anonymity because he was not authorized to speak on the record — said that the companies typically try to lease spaces between 2,500 and 3,000 square feet. He said that landlords have shown him “warehouses, basements, second floors, really off-market, undesirable stuff. We’re one of only a handful of retail concepts that will look at these off-market spaces.”
He added that “we would prefer turnkey spaces that have a sealed concrete floor, HVAC and a bathroom. In other cases we have to do full construction, add HVAC systems. Typically we can open in just a couple weeks. We have a lot of advantages as a tenant, because we’re not really asking for anything. As a landlord I only need to put in $10,000 or $15,000 worth of work, like maybe a new wall.”
In terms of profitability, the goal for most of the locations is to deliver at least 200 orders a day, he said, and up to 500 or 600 orders a day in two to three years.
As for what might happen to all the competing 15-minute grocery services in New York City?
“I don’t think a lot of the players are in a position to be acquired,” he said. “I think JOKR will want way too much money to sell it outright. Maybe a third party like Uber comes in to acquire 10-plus stores and the entire New York business. The JOKR stores are terrible. A lot of theirs are very narrow, which means you have one long, narrow shelf down the whole store, and a lot of congestion. They were trying to open these stores as fast as humanly possible.”
He felt that “all of the players will stick it out for about 18 to 24 months. By the end of 2023, we’re going to see a wave of people capitulating” and going out of business.
Rebecca Baird-Remba can be reached at email@example.com.