THE SPEEDY DOWNFALL OF RAPID DELIVERY STARTUPS by ARIELLE PARDES BUSINESS, WIRED MAGAZINE JUL 15, 2022 7:00 AM Companies that promise groceries delivered in 15 minutes surged during the pandemic, but are now in retreat. It only took eight months for Jokr, the superfast delivery startup, to become a unicorn, and just six months more for its strategy to start coming apart. Jokr had plastered New York City with splashy ads promising to deliver groceries within 15 minutes, for free, and with no minimum order! This promise allowed the startup to raise a total of $430 million in venture capital to continue blitzscaling across cities around the world. From Boston to Bogot, its turquoise-clad couriers whizzed around on scooters, carrying pints of ice cream and jars of pasta sauce. Jokr was also bleeding money. In the first half of 2021, the startup took in $1.7 million in revenue but suffered $13.6 million in losses, according to data reviewed by The Information. In April it shut down in Europe. This June, 14 months after launch and a year after touting plans to build 100 microwarehouses in New York City alone, Jokr announced that it was pulling out of the United States, and laid off 50 employees. The company still operates in cities like So Paolo, Mexico City, and Bogot. Other fast-delivery startups have also become fast-shrinking. In May, Gorillas and Getir, two of the largest companies in the sector, laid off thousands of employees and retreated from prime delivery cities around Europe. Gopuff, valued at $15 billion in 2021, vaporized 76 of its 500 distribution centers this summer. Those are the lucky ones. Others, like Buyk, Fridge No More, and Zero Grocery, have already gone bust, disappearing just as rapidly as they arrived. The downfall of superfast delivery reflects the sobering mood of 2022. In the last two years venture capitalists sunk nearly $8 billion into the six rapid delivery startups competing in New York City, encouraging fast growth and a land grab. Now, investors are increasingly demanding profitability. The sudden reversal strikes Thomas Eisenmann, a professor at Harvard Business School, as reminiscent of the 2000 dotcom crash, when buzzy startups like Kozmo (which promised one-hour delivery of groceries and DVDs) folded just a few years after collecting millions from VCs. "With these new businesses, what's changed?," he says. "It didn't work then and it's not working now." Eisenmann teaches a class on startup mistakes, and last year wrote a treatise on the topic titled Why Startups Fail. He says that rapid delivery companies are vulnerable to a common pattern of failure, where early gains and growth aren't sustainable. The first wave of customer interest comes easy and free, because people are willing to try out a new service with an incredible promise. But in order to keep those customers and earn new ones, a startup has to clarify its value proposition. For rapid delivery, that means finding people who regularly need things like BandAids or a banana delivered urgently, and are willing to pay a premium for it, rather than walking to the bodega to get it themselves. When new customer growth starts to dwindle, Eisenmann says, "you start having to offer $20 of free groceries on every order to get new customers." From there, the economics can rapidly deteriorate. A newly cloudy economic outlook and recent high inflation make it a bad time to try and persuade people to adopt a new premium service. Margins are already razor-thin for services that deliver groceries in hours or longer. On a $100 online grocery basket, about $70 goes toward the wholesale cost of the goods a customer ordered. The other $30 gets devoured by overhead costs like refrigeration and storage, the wages of in-store workers who pick items from the shelves and pack them into bags, and the cost of delivery. A recent report from McKinsey found that while the typical North American grocer makes 4 percent profit margin from in-store shoppers, they lose 13 percent on each online order. Companies like Instacart, which piggyback on the infrastructure and stock of existing stores by partnering with grocery businesses, have fared better, though Instacart is still not profitable. Demand for online groceries has surged in the last two years, largely because of the pandemic inspiring more people to try and avoid in-store shopping. In 2020 online grocery orders increased 50 percent; demand for instant delivery increased 41 percent, McKinsey found. "The consumer need is there," says Vishwa Chandra, a partner at McKinsey who co-authored the report. "The question is, how do you manage the economics?" Rapid delivery startups might be able to improve their businesses by keeping items in "dark stores," or microwarehouses designed to make it faster for a worker to pick out and pack a basket of goods than is possible in a conventional retail store designed for browsing. They can also pass on more costs to customers, selling a $4 loaf of bread for $6, for example. But building enough dark stores to serve all parts of a city within 15 minutes still requires massive investment. Managing inventory across them all to ensure the correct items are always on hand is also tricky. "It's more cost-efficient, but you need enough demand to make a return on investment," says Chandra. Rapid delivery startups also tend to spend more on delivery costs for each order than more conventional companies. When you can get what you want in minutes, people can feel empowered to make impulse purchases, like a late-night candy bar. But a delivery driver or a bicycle courier costs the same amount, whether ferrying a $75 bag of groceries or a $5 pint of ice cream. Batching orders together, so a courier makes multiple drop-offs on a single trip, can save costs but is difficult to pull off when orders must arrive within 15 minutes. The result? Many fast-delivery services "lose money on every transaction," says Eisenmann. Many rapid delivery companies have made their punishing economics still worse by offering generous promotions to try to lure new customers. New York-based startup 1520 offered 15- minute delivery with no minimum order or delivery fee in 2021. Cofounder Maria Daniltceva described the company's business model as "super-efficient," and suggested that 1520 could even improve on grocery stores' margins because it didn't have to invest in retail space. By the end of 2021, 1520 exhausted its funding and shut down. Those kinds of generous promotions aren't likely to continue. For superfast delivery startups to last until 2023, they'll have to prove that they can make their economics work-and quickly. Instacart, which has become a leader in same-day grocery delivery, is now working on its own service to bring customers their orders within 15 minutes. The winners in the category will be whichever startups can deliver on their promises the fastest, without defying economic reality. Assume that you are an OD practitioner who has been hired by Jokr due to your extensive experience in the field. Your primary task is to set out a plan to turnaround the company. Answer the following questions to guide your client going forward: 1. Think of the rapid delivery service as an open system. Describe all FIVE (5) components. (10 marks)