🐑 A Pamphlet Against Getir & GoPuff's European Copycats

Overlooked #66

Hi, it’s Alexandre from Idinvest. Overlooked is a weekly newsletter about underrated trends in the European tech industry. Today, I’m writing about the rise of Getir and GoPuff’s European copycats.

In the past 10 days, Flink, Gorillas and Dija have all announced that they were entering the French market starting with Paris in which Cajoo started to operate 2 months ago. It's hard to find a better timing to write a pamphlet on what is happening in the European instant grocery delivery category.

I'm talking about startups building GoPuff/Getir's copycats in Europe. They want to reinvent the grocery market in large European cities with a vertically integrated model. They operate by deploying a network of dark stores from which they deliver groceries in less than 15 minutes. It should take customers less time to order and get items delivered by one of these players than to go to their local convenience store. The dark stores are small warehouses optimized for delivery that can be in tier-2 locations contrary to traditional retail stores which must be in prime locations and which are optimised for on-site shopping. With this model, you are supposed to have better unit economics compared to traditional retailers and you are more efficient than food delivery platform's grocery offering which is based on the infrastructure of existing retailers (hub and spoke model vs. pick from store model).

If you want to learn more about GoPuff, I wrote a deep dive on the company here. If you want to learn more about Getir, Rest of the World wrote an outstanding paper that you can find here.

What goes on in this space is against many convictions I have on the food sector, on entrepreneurship and on venture capital.

Obviously, "the views and opinions expressed in this article are mine only and don't reflect the views of my colleagues or the fund I work for." Moreover, I don't pretend to have a full understanding of these models as we did not have invested into one of these players and my knowledge of the food sector remains limited.

A full stack grocery delivery model is the hardest operational business a startup can launch

We are talking about an Amazon-like positioning in terms of operational complexity - even worst, we are talking about perishable goods. There is complexity in every step of the grocery delivery model value chain: sourcing, warehouse operations, delivery, mobile app, brand etc. It's extremely hard to get it right.

In their early days, it took a long time for category creators GoPuff and Getir to nail the model. As I wrote in my deep-dive on GoPuff's strategy, "During the first two years, the company opened its first three cities without any external funding. Yakir and Rafael [GoPuff's founders] really applied this idea to go slow in the early days to nail the model before going fast into scaling the business."

Newcomers in Europe don't have the time to nail the model while focusing on only few geographies (or only a few warehouses) because of the urgency to scale to stay one step ahead of its competitors. They will burn a lot of cash inefficiently to open new warehouses and show investors a strong top-line growth. They won't focus on operational efficiency, on building the right tech stack and playbook to scale and automate, they will have discrepancies between their different warehouses. In the end, these companies will burn a lot of cash to implement its supply chain because they did not have this initial "go-slow" phase to nail the model.

Capped network effects after a certain threshold

You need a minimal investment to serve a city: find micro-warehouses, build your supplier base, recruit a fleet of operators in the warehouses to prepare the orders and a fleet of riders to make the deliveries.

You may have a small first mover advantage but it's not a game changer. If you are the first in a city, you can start building your customer base, secure the best locations for your warehouses and cherry-pick your suppliers. But, you have no real barriers to entry against new entrants. Moreover, when you start operating, you are not on a white-field market as there are plenty of indirect competitors with the existing brick & mortar network of convenience and grocery stores.

Similarly to the ride-hailing and to the food-delivery market, fast-grocery delivery startups have capped network effects. You cannot become an ultra-dominant player as you don't have specific moats and all the players will have undifferentiated value proposition. You will compete infinitely for market shares with marketing dollars against your competitors.

Of course, these players tell consumers and investors that they are building differentiation through a green fleet of scooters and bikes, contracted riders, fresh products, partnerships with local shops, a white label offering, a subscription, etc. I think that these are too minor differentiations to stand out amongst the crowd.

A Red Ocean

In Europe, we have 10+ VC-backed players created in the past 12 months. I made a detailed table with the players that I know giving you some details on the targeted geography, the capital raised, the background of the founding teams and comments on their model.

In London and Paris, the competition is already extremely intense with 4-5 players (Cajoo, Flink, Gorillas, Dija in Paris | Getir, Gorillas, Dija, Zapp, Fancy in London) competing for the same customers, for the same real estate locations, for the same talents, etc. The situation will worsen in these two cities. More broadly in all major European cities, we can expect a similar competitive intensity.

Moreover, I believe that the most recent newcomers are lagging behind other players in the food delivery market in terms of competitive advantages:

  • Gopuff and Getir created this full-stack fast grocery delivery category respectively in the US and in Turkey. Both companies are coming to Europe. Getir is already in London and plan to expand in other European cities (Paris, Amsterdam). GoPuff is rumoured to have acquired Fancy in the UK. Creating the category gives them a competitive advantage because they have the operational playbook to scale the model from city to city and they have the economics of scale (better prices with suppliers, automation & digitalization of operations in place, etc.)

  • Instant grocery delivery is the logical next step for all food delivery companies. In the US, Doordash has opened dark stores to compete on the grocery category with GoPuff. In Europe, both Wolt and Glovo have been operating dark stores for several months to deliver grocery products. Deliveroo has to find the next chapter of its journey to bounce back from the IPO's failure and grocery is the most obvious bet for them to make. Their competitive advantages against newcomers are that they have a strong established brand and last-mile delivery network of riders.

In 5y, I'm convinced that the market will be consolidated around 2-3 players maximum per city. Knowing the key competitive advantages that incumbents (category creators + food delivery companies) have over newly created fast grocery delivery startups, it does not make sense to back them if you are aiming for a multi-billion dollar exit. These players have a marginal chance to be in the top 3. Even if they succeed, the price to pay will be extremely high in terms of capital efficiency.

Europe, a fragmented grocery market

  • It's hard, if not impossible to scale a one-size fits all model for Europe because it's a fragmented grocery market with many differences between countries:

    • ≠ shopping habits

    • ≠ networks of brick & mortar convenience stores

    • ≠ penetration rate of online grocery

    • ≠ city density

    • ≠ grocery value chain

  • Minor differences (offering fresh products, being open 24/7, ability to sell alcohol and tobacco) from one city to another and from one model to another completely change the equation.

Offering 10-15-min grocery delivery is not a compelling value proposition

The 10-15 min grocery delivery is rarely relevant. You can have emergency and impulse use cases. You can be the only alternative when you want alcohol or food when everything else is closed. It's not enough to build a sustainable habit for mass-market consumers. I don't see low and middle-class people becoming repeat customers.

Speed is not a key purchasing criteria when you order grocery delivery. Your focus is more on other factors like price, catalogue diversity and reliability. You have 30-min delivery options as retailers are now plugged on food delivery platforms like Deliveroo and UberEats. You have also 2h delivery options with retailers offering delivery from their website and apps. For most grocery shopping use cases, it does not make a difference to have your shopping delivered in 15 minutes or 2 hours.

On unit economics: can the model really work without being subsidized by venture money?

Grocery is a thin-margin business. Minors changes can make or brake the model. At the moment, there are many uncertainties around the unit economics:

  • Average Order Value and usage frequency: at the beginning, consumers try the service with a small basket. You want to increase this basket size overtime by filling more consumption use cases and you want to build a habit that is taking more and more space in this grocery shopping.

  • Gross margin: you start by working with wholesalers and logistic intermediaries which gives you a poor initial gross margin. There is a lot of unknowns around how far you can push the gross margin. It depends on (i) your scale to have a better bargaining power with suppliers, (ii) your ability to cut intermediaries and work directly with FMCG brands, (iii) the product mix - notably if you are able to sell high margin items like alcohol products, (iv) the introduction of a private label brand, (v) marketing deals with brands to advertise their products on your app. In the end, it's not the same to have a 30% supermarket gross margin or a 50% convenience store gross margin.

  • Unclear economies of scale: you need to have strong economies of scale to make the model work but there are many uncertainties around the extent of these economies (negotiating prices with wholesalers and FMCG brands, automating and streamlining picking and packing operations, optimizing waste management, etc.)

  • Riders: most contenders are hiring their riders, increasing drastically their operational costs compared to ride hailing and food delivery platforms. Moreover, the cost per delivery remains extremely high compared to the average basket (knowing that a rider can do 2-3 deliveries maximum per hour). I'm not convinced that the model is sustainable at scale and without being subsidized by VC money.

  • Will never be mainstream: it's a good option for urgency / convenience use cases but there is no way that it will capture the full grocery shopping as prices remain too expensive for most consumers.

  • Warehouses: most contenders are opening warehouses which are smaller than 300 square meters when GoPuff's warehouses are between 1,000 and 1,500 square meters. After a certain scale, this limited size can be an issue to streamline warehouse operations and absorb the growth of the business. Moreover, in the early days, all the warehouses will be operated without automation and without any warehouse management system. We are not sure that the operations won't break while scaling. If you are able to show top line exponential growth, investors will cover the costs of inefficiencies but it won't last eternally.

  • Marketing war: as you don't have a differentiated value proposition from other contenders, as long as you have other contenders, you will have to invest marketing dollars to retain your users.

European entrepreneurs should create and own new categories - not adapt existing & successful models from other geographies to Europe

The hype around the convenience grocery delivery space is a symptom of a deeper issue in the European tech ecosystem. Europe builds worldwide tech leaders like Spotify, Klarna, Supercell, Unity or UiPath and entrepreneurs are creating and owning new categories. When you are replicating and adapting an existing model from another geography, you reduce drastically your chance to build a uniquely transformative business for the world. Convenience grocery delivery startups were all started as copies of GoPuff and Getir which is capping from day one the value that they can create.

In Zero to One, Peter Thiel distingues two forms of progress:

  • “Horizontal or extensive progress means copying things that work—going from 1 to n. Horizontal progress is easy to imagine because we already know what it looks like.

  • Vertical or intensive progress means doing new things—going from 0 to 1. Vertical progress is harder to imagine because it requires doing something nobody else has ever done.”

If we want to step up as a European tech ecosystem, we need more vertical progress and less horizontal progress. We need more entrepreneurs willing to take the risk to create new categories. We need more singularity and less copies to compete with the US tech ecosystem.

I understand that it seems easier to build a copycat of a successful US or China-based model but it comes also with a capped upside. The category creator and leader will always capture a larger piece of the cake both in terms of market shares and profits.

Creating a category is harder because you need to find a unique market insight as a founder. You can find this insight in your previous experience or by digging extensively in a given market. Obviously, this takes time and you cannot improvise it, but it's the price to pay to have a shot at building something truly unique and remarkable.

Being contrarian and the hype threshold in venture capital

"I saw Bill Gurley say that you can only make money by being right about something that most people think is wrong. His logic was that you can’t make money by being wrong. And you can’t make money by being right about something everyone else knows. So you have to be right about something that most people think is wrong. I really like that framework." - Fred Wilson (hard to find a better combo in venture than Fred Wilson quoting Bill Gurley)

To produce outperforming returns in venture capital, you need to make contrarian bets on entrepreneurs, trends or market timing. You need to have a specific edge. When you invest in a European convenience grocery delivery startup in 2020/2021, you are on a mainstream market trend with entrepreneurs who don't have any specific earned secret on this trend. Don't tell me that being a former operator or founder in a food delivery startup gives you an earned secret because almost all these contenders have tier-one founders coming from this space.

On the contrary, I believe that many European entrepreneurs are going after the grocery market with unique value propositions. Below are some examples:

  • Totem (France): micro-office stores for employees. It's a super convenient alternative to purchase your croissant, your lunch meal, your "4 heures" and to top-up the items you need before going back home

  • Jow (France): recipe-based grocery shopping app mobile built on top of the existing retailers' infrastructure

  • Storelift (France): un-maned autonomous containers to bring items to rural areas

  • Kazidomi (Belgium): subscription based organic grocery retailer for monthly stock-ups with a great white label brand

  • Picnic (Netherlands): weekly grocery shopping / monthly stock up optimized for delivery with fixed timeslots using the old milkman model enabling up to 14 deliveries per hour

  • Crisp (Netherlands): fresh grocery online supermarket with a unique infrastructure without a central warehouse in which products are aggregated from suppliers and delivered to the consumer in less than 24 hours

Moreover, what happened in this space is also a great illustration of the state of venture capital in Europe. When you pass a certain hype threshold amongst venture capital investors, deals are becoming completely irrational. We see this everyday both at the sector level and at the deal level.

  • At the sector level, I will just quote Yacine from Heartcore who invested in the space with Weezy before it was hype. “I really didn’t think the investor mindset would shift this quickly. When Heartcore first backed Weezy, other investors questioned the decision: “‘Is the model really working? There’s already Deliveroo, does it make sense? Isn’t labour too expensive in Europe compared to Turkey?’ “In the space of three months, it went from investors saying it’s probably not going to work to every single VC rushing to make a bet in the category.”” Investors did not want to invest in this category 12 month ago. Then a tipping point happened and most European VCs decided to make a bet on the category with the ambition of building the European GoPuff/Getir.

  • At the deal level, Gorillas is a great example of a company who passed the hype threshold for the series A. It ended up raising at incredible terms with Coatue ($44m at a $200m premoney valuation) after being one of the most competitive deals in Europe in 2020. It was the tipping point that convinced many investors that they had to bet on the category.

These players don't build the future I want to live in in the next 10-20 years

I don't want Paris to be a ghost city dominated by dark stores and dark kitchens powered by underpaid delivery riders. It's an absolute dystopia. In the past few months, we had several trailers of this world when Paris was under lockdown and curfew with all local shops and restaurants closed. I'm sorry, but I don't want to see the full movie.

The trailer - Riders in Milan waiting to get on train during the lockdown in Apr. 2020

I agree that there is a massive opportunity to capture for startups digitizing the European grocery market. The online penetration in Europe in the grocery categories is extremely low (6.5% in the UK, 5.0% in France, 1.7% in Spain and 0.7% in Italy) compared to other categories. A ten percentage point increase in digitisation penetration implies a $220bn European grocery market pie.

In Europe, there are dozen of tier-one entrepreneurs who are reinventing the grocery market with singular value propositions and I'm sure that we will see many more entrepreneurs going after this category. As venture capital investors, we should back them instead of pouring billions of dollars into the instant grocery delivery category.

Thanks to Julia (🦒) and all the other people for their feedback! Thanks for reading! See you next week for another issue! 👋