🍿 A Deep-dive into goPuff's Strategy to Conquer the Grocery Market

Overlooked #44

Hi, it’s Alexandre from Idinvest. Overlooked is a weekly newsletter about underrated trends in the European tech industry. Today, I’m digging with Thibault into goPuff which is a US-based food delivery company delivering essential products in 30 minutes or less. A special thanks to Rafaël at Totem. He is the first person that put the goPuff’s model under my eyes and he is also the most knowledgable European entrepreneur in this space.

goPuff is the most overlooked US company in the grocery/food delivery market. Most players in this market are bottomless cash wells and have unsustainable business models. goPuff has entered the market starting on the steepest road with a fully integrated model with its own small warehouses which distributes across the country your orders of essential products in 30 minutes or less. It's harder, way harder, but goPuff is nailing it. With sound unit economics and a total control of the customer experience, goPuff is winning the market, but you don't know it - yet.

goPuff is at the crossroads of many patterns that I love in tech: (i) super young founders who are outpacing themselves constantly (both are only 27 years old), (ii) a company born in Philadelphia far away from the noise of the Silicon Valley, (iii) a fully integrated model as a strong initial thesis to win in the long run in this market.

As an European, it was extremely frustrating to write on goPuff without being able to try the service. Now, I just want to take a flight to Philadelphia to spend a week ordering exclusively from goPuff, to visit their warehouses and headquarters, to meet the founders and their employees... Hopefully, goPuff will come to Europe one day or another and in the meantime, I have my eyes wide open looking at the race between European startups to conquer this category in Europe.

A Quick History on goPuff

In 2013, Yakir Gola and Rafael Ilishayev were students at Drexel University in Philadelphia. They decided to start an on-demand delivery service for hookah and other smoking products. This initial idea was quickly abandoned but that gave the logo and the name to the company.

They pivoted towards selling convenience products for students to satisfy their cravings. They started to set up a small warehouse with 100 items, they built a mobile app with an outsourced Ukrainian development team and started doing everything operationally themselves. During the first six months of the business, Yakir and Rafael were doing all the deliveries themselves between midday and 4 am. Yakir on this period: “We did orders, inventory marketing, bookkeeping, customer service — every part of the business, A to Z. We couldn’t afford to pay anyone.” They wanted to offer a really on-demand offering to students who had to wait hours if not days to get their products delivered.

From day 1, goPuff built a vertically integrated player with their own warehouses. Yakir and Rafael learnt how to manage a warehouse, to source products from resellers and GPG brands, to optimise deliveries and manage a fleet of riders. Contrary to most players in the food delivery space, they did it by building a model with positive unit economics even in the early days.

During the first two years, the company opened its first three cities without any external funding. Yakir and Rafael really applied this idea to go slow in the early days to nail the model before going fast into scaling the business. Every new warehouse would break even after 6 months of operations. goPuff started to serve all universities in Philadelphia before moving to other cities with numerous universities like Boston, Washington and Austin to replicate their playbook.

The company funding history is not crystal clear. We know that goPuff raised a Series A round in 2016 led by Anthos Capital, a $109m round in November 2018, a $1bn round in the summer 2019 led by Softbank and a $380m round led by Accel and D1 Capital in November 2020 at a $3.9bn valuation. We know also that Accel was an investor before Softbank invested into the company and that other funds like eVentures and Valor Equity have also poured money into the company at one point in its journey.

The covid pandemic has been a tipping point for the company accelerating a key shift in its model from a convenience offering that was mainly dedicated to millennials towards a broader essential offering serving several demographics (millennials, pet owners, families, elderly people).

Millennials were already more susceptible than other generations to buy from convenience stores. goPuff has managed to build a better value proposition for them by understanding their behavior, building an attractive brand for young people and bringing even more convenience through fast delivery.

Using shopping data, goPuff has been able to identify new customer demographics and behaviours. It's much easier for them to adapt or expand their product assortment and customer experience than it is for any other player in the space. Covid has accelerated emerging consumer behaviours and goPuff is the best positioned player to benefit from them. Numerous consumers who were not digital natives started to use goPuff during the pandemic and carts have expanded from cravings to many more products. If you want to know more about this period in the goPuff’s history, they wrote an amazing study following their consumer behaviours week after week during the first lockdown. You can access it here.

In November, goPuff also stepped into physical retail by acquiring BevMo for $350m from a private equity group called Towerbrook. It's a physical retailer operating 161 stores across three US States selling alcohol. goPuff will leverage BevMo's customer base to promote its delivery services and will convert certain stores into micro-fulfilments for its delivery operations. It's fascinating to see startups acquiring retailers to expand their businesses and become true hybrid players working on both offline and online channels. It reminds me of Amazon buying Whole Foods or of GOAT acquiring Stadium Goods.

A Vertically Integrated Player

goPuff competes more with convenience stores like 7-Eleven than supermarkets like Walmart meaning that the company (i) is offering prices that are at-par only with convenience stores and (ii) has a reduced number of SKUs and does not sell fresh products like supermarkets. To compete, goPuff has built a more convenient option than walking 10 minutes to the convenience store next to your place. They differentiated themselves with ultra-fast delivery (20-30 minutes from order to delivery) and a much better shopping experience thanks to the mobile app.

With a fully integrated model, it's harder to scale but you don't have any limitation to reinvent the shopping experience. If you are an intermediary in the space like food delivery platforms or if you own only the last mile of the value chain like a grocery delivery platform, you are dependent on third parties. goPuff is controlling the full customer experience from sourcing to shopping and delivery. You are not dependent from retailers like Instacart or from restaurants like UberEats or DoorDash. You are not a front end that is built on top of an existing infrastructure. You are building both the front end and the back end. I'm convinced that is the only way to reinvent retail.

By controlling the whole value chain, goPuff is also able to build a business model with proven positive unit economics - which is not the case for most other digital players in the food delivery market. On the supply side, goPuff is able to cut intermediaries and order products directly from GPG brands that it will resell to the end customers with a healthy premium. On the delivery side, goPuff's warehouses are used only for delivery and are optimised perfectly to do so. It's not a restaurant that will lose focus by serving both delivery and on site customers. It's also a more attractive model for goPuff's riders as they have a unique picking point and they don't need to wait for the restaurant order.

It's also a data-driven machine. You have unique insights on consumer habits and consumer trends evolution. You can iterate on your sourcing based on your learning and you can also offer valuable services to CPG brands like digital shelf on the mobile app, sample campaigns, etc.

A Category Defining Company

When you dig into goPuff's journey, you discover that they have built something truly unique in the grocery market. In the long run, I am convinced that goPuff will be bigger than Instacart and will win this market. goPuff took numerous contrarian bets and focused on crafting a sub-category in the grocery market that they were able to dominate and expand from.

In Play Bigger, the authors explain that all the companies end up into a category and that the best companies are the ones able to build their own category instead of being positioned into a category. Tier one companies create new categories that generate a "gravitational pull on the market". These companies don't just sell a better product or service. They sell something different. Customers discover a new point of view on the world and will rush towards this new category. There is obviously a premium to be the category definer and winner: category kings eat up 70-80% of category's profit and market share (cf. Apple's iPhone in the smartphone market, Tesla's electric cars in the electric vehicle market).

goPuff has managed to build a category around convenience (mainly snacks and drinks) that is now expanding into instant needs (e.g. baby products, home essentials, pet food). goPuff stands for a different way to consume groceries. You don't have to lose time to go to a physical supermarket. You should have the possibility to order anything from a mobile app. You have a modular offering able to answer your cravings but also to make your weekly grocery shopping. goPuff has built the perfect grocery service for the millennial generation which put convenience at the top of its priority.

It's interesting to see that in the past 18 months, this behavior has been adopted by other demographics. Before Covid, goPuff was already used by elderly people, pet owners or young families. Covid has accelerated this expansion into new demographics. goPuff is now defining its category as essential shopping to better target new demographics and to add new product categories to their offering.

goPuff has really built this instant needs category to be the best possible option for numerous situations in our lives: I have a craving but nothing to eat or drink, I cannot leave the home because of my kids, I'm too old to carry grocery shopping bags, I've forgotten something to cook tonight etc.

A Smart Subscription Program

When you order from goPuff, you have to order for $10 minimum and you will pay a fixed $1.95 delivery fee. The delivery fee is offered when you are ordering more than $49. The fee structure is already super attractive compared to other food-delivery players, but goPuff has decided to go one step further with its membership program.

For $5.95 per month, you’re part of the goPuff's Fam. It's a subscription that gives you free delivery on every order and also doubles all your goPuff's reward points on orders above $30. The subscription plan is not here to make goPuff's unit economics on every order more sustainable. It's much more aggressive than this: goPuff wants its users to increase their order frequency and their basket size. I'm still working on a deep dive on subscription plans for food delivery players but I can already tease you that goPuff has one of the best subscription plans in the market.

Moreover, the subscription program is integrated into the goPuff reward program. Any article in goPuff is associated with points. You gain points on every order and you can redeem them against offers like a $5 coupon or a 5% discount done on every order done during a week. The FAM subscription allows users to double their points on any order over $30 making the reward program even more compelling.

A Unique Mobile First Shopping Experience

We also did with AppFuel a deep dive on the mobile app because we believe that they have a unique experience. AppFuel is on a mission to empower mobile app builders with products and resources that save their time and give them inspiration when working on their projects. If you want to have more analyses like this, you can join the waitlist here.

goPuff is also working because it's providing a unique shopping experience on its mobile app. It benefits from the maturity of mobile app stores which offers the necessary variety of payment and identification options as well as subscriptions and geolocation options.

I also believe that food delivery apps and ride-hailing apps have paved the way for more complex purchasing behaviours. People are now willing to make their grocery shopping from a mobile app.

In the mobile app, there is a strong focus on human behavior in the purchasing experience: it must be as quick, smooth and rewarding to order from goPuff as it is to buy an ice cream in a small shop from your favorite neighborhood.

Below are our main learnings:

• Being a fully integrated player offers significant advantages in terms of UX: Unlike DoorDash, Postmates or Instacart, goPuff does not aggregate supply from restaurants or shops. The user has direct access to goPuff products from the homepage; whereas a user has to first pick a shop and then browse through the product list of the selected shop in other delivery apps. This direct immersion into the products is a key advantage for goPuff.

• Straightforward and frictionless onboarding: goPuff has designed a very simple onboarding, requiring as little information as possible: first name, email and phone number. No password or email verification is required, no need to leave the app during the process. goPuff has a mobile-first approach and uses much more text messages than emails, contrary to many delivery apps that have a more conventional sign up process.

• Data-driven experience: there is no big surprise here, but goPuff customizes the home page according to your historical purchases. The "Buy it again" section is a good example.

• Playful and customized text messages in line with goPuff marketing strategy: goPuff has an original and quirky communication on social media. Text messages take the same approach and strengthen the goPuff brand. Every product page is also a unique experience. goPuff has added a funny description to all its products ("Drake told us to drink Sprite so we drank Sprite") and every product gives to what seems to be a random number of goPuff points.

• Navigation in goPuff relies on widespread UX practices - like carousels: Carousels are a very common way to browse in lists in mobile apps, because it improves product discovery and allows its users to find and add items to cart quicker. It is also a way to narrow the choice of users that have only access to a selection of items at first click (they need one more click to see all). goPuff is in line with Hick’s Law which states that the time it takes to make a decision increases with the number and complexity of choices. goPuff’s promises of quick process is not only about the delivery, but also about the shopping experience.

• A header navigation allows users to visit a new category at any moment in the app: In the latest version of the app, goPuff has introduced a list in the header that allows the user to go from category to category, no matter where he is in the app. This navigation system is not so common in the delivery mobile app space, but puts efficiency first.Thus, the home page is no longer a navigation page but a landing page. goPuff added this navigation menu after trying multiple A/B-tested designs as it turned out to be the best solution to improve product discovery and reduce check out time (source here).

• Dynamic categories improve product discovery and make convenience shopping less boring: goPuff features dynamic categories depending on time, location, special events, etc. For instance, you can see the selection of products for a Game Day, the most popular products in your city or the items that can be exclusively bought in your area.

• Rewards: Rewards are a major part of goPuff's strategy and so are they in the mobile app. goPuff dedicates an entire item of the menu to rewards. Also on rewards, the number of points earned pops up when you add a product to the cart. This micro interaction is delighting and engaging.

• Upselling before Checkout: goPuff has some tricks to increase the basket size of its customers, like suggesting to change an item for the larger-sized one or offering other products based on the cart. goPuff bets on impulsive purchases as most people come to goPuff for in-the-moment desires.

What's Next for goPuff?

Below are some ideas of what goPuff could do next in the upcoming years:

• Adding breadth and depth to its operations in North America. goPuff still has a long way to go to cover and penetrate the US market: opening new cities, adding product categories to its offerings, tapping into weekly grocery purchases by adding fresh products etc.

• Expanding geographically beyond North America. I would love to have them in Europe. Getir has built a similar and also successful model in Turkey. Similar players are on the starting line to conquer the European market. Nonetheless, I believe that goPuff has the right playbook to penetrate key cities in Europe like Paris, Berlin or London.

• Building a truly unique shopping experience for each customer based on the data they have. A millennial should have a completely different offering on the app compared to a family with a baby.

• Building the western super app by adding additional services to the app. You start with an app that is used 3-4 times per month and you have detailed data on your consumer behaviours. The logical next step would be to add adjacent services like GoJek, Grab or Rappi have been doing in other geographies.

• Pushing forward the vertical integration by making goPuff labelled products like what we have seen in brick and mortar retail stores.

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Thanks to Julia (🦒) and Thibault for the feedback! Thanks for reading! See you next week for another issue! 👋 If you want to talk about this topic or want more resources, don’t hesitate to send me an email at ade@idinvest.com.