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June 28, 2021 - Our portfolio company RideOS (a San Francisco-based advanced routing, on-demand dispatch and fleet optimization company for the AV and logistics industries) has just been acquired by Philadelphia-based GoPuff in a deal valued at about $115m. GoPuff, an app that delivers convenience store items in 30mins or less, intends to use their technology to power multi-modal deliveries and reduce delivery times as they expand to denser cities and add new product verticals.

Launched eight years ago, Philadelphia-based GoPuff grew from an app to deliver snacks to college students to become a last mile delivery service for convenience items, focusing on a few key niches in in-the-moment desires (late night cravings, alcohol), sudden essentials (diapers, antacids), overnight travel needs, prescription meds and embarrassing OTC purchases (condoms) etc. It commits to delivery in 30mins and under for a flat $1.95 fee and is available 24/7 in most cities, leading to a highly compelling proposition for customers. It buys a curated list of inventories (~3000 SKUs) from brand owners at bulk prices and sells them through its 250 micro-fulfilment centers across 550 cities. They rely on gig workers for delivery; drivers make ~$15/hr on average. The pandemic has sent their revenue soaring, sales grew from $120m in 2019 to $340m in 2020 and is on track to do $1b (excl. BevMo!) this year.

Growth Plans
GoPuff’s growth has been supercharged by almost $2.3B in funding over 3 rounds in under 2 years (with a most recent $1.2B Series G round valuing them at $8.9B) by investors like Softbank and D1 Capital. Their recent rounds have provided them the war-chest to acquire BevMo! and Liquor Barn (giving them immediate access to a physical footprint and liquor licenses in the US) as well as Fancy (a mini GoPuff) in the UK. According to The Information, they have strong ambitions; intending to scale to $5B and 4x new customers signups in 2021 (from 1m to 3.7m). They are also interested to move into fresh foods and household goods, bundling even more product verticals into their app.

Strong Secular Megatrend
The pandemic has accelerated demand for last mile delivery solutions. Between the first week and the last week of 2020, convenience store online spending grew 4.46x, or a 346% increase, grocery grew 2.21x, or a 121% increase, and restaurant grew 2.12x, or a 112% increase. The convenience store market is expected to grow 5% in 2021 to hit $33B. At 8% online penetration currently and with surveys indicating 70% interest in purchasing convenience online, there is a lot of room for online delivery to grow.

The stickiness of online grocery delivery can also shed light on the stickiness of online convenience delivery post-pandemic. Even when stay-at-home orders ended in states like Georgia, Texas, and Florida, spending on grocery delivery have stayed 100% or more above pre-COVID-19 levels.

The strong secular trend has attracted more players into this space, both from established last mile delivery players who are moving into the convenience category (DoorDash, Uber) as well as new entrants promising ultra-fast delivery within 10mins (Gorillas, Getir). Although GoPuff is currently #2 in this space (23% market share as of Jan ’21), we believe the size and growth of the market can support more than 1 winner.

Profitability
Unlike food delivery peers who make revenue largely through the delivery fee, GoPuff makes their spread off the low cost of goods they sell and are contribution positive (revenue — variable cost) on first sale. Cities typically turn profitable after about 18mths. That said, the company itself is not profitable yet and might stay loss-making for longer as they invest in scaling and new product verticals.

Last mile delivery super-apps
There is a trend in the US last mile delivery space where the larger companies (Uber, DoorDash) are trying to be super apps — bundling multiple functions and daily services into one user experience with convenience and embedded payments at its core. Investors in this space believe that scale/market dominance and the ability to provide value through different channels engender customer stickiness and gives the company latitude to raise prices and attain profitability over time. Multiple product and service verticals also provide revenue diversification. As a result they trade at higher multiples compared to the pure-play food delivery companies (e.g Deliveroo). DoorDash in particular is seen as the 3rd banner ecommerce company after Amazon and Walmart. By moving into product categories outside of convenience, GoPuff is embracing some elements of this in its growth strategy.

Companies in developing countries have been early movers in building super-apps (Meituan, Wechat, Grab), most of whom are still loss-making. Meituan Dianping is the success story in this super-app strategy. Food delivery is notoriously loss-making but very useful as a lead generation tool for its other services. 85% of Meituan users first come onto the app for scouting restaurants or food delivery but more than 50% of its users on the platform for >3yrs have bought from 4 other top-selling services. This leads to greater customer retention and therefore more merchants and brand owners on the app who then spend more on advertising to increase visibility. Having the ability to bundle more non-perishable items with hot food delivery increases order density and revenues. This combination of advertising revenue growth and operational efficiency helped Meituan attain profitability. That said, it was a long slog; it took an end to the cash-burning subsidy wars with its main competitor Ele.me and 6 years before Meituan was profitable.

US last mile delivery companies are attempting a similar playbook, building moats in scale/market share, partnerships and execution. Partnerships have been critical for the US market in establishing dominance in verticals. Instacart has made it difficult for other online grocery delivery companies to make headway given their exclusive partnerships with large grocery chains like Costco. DoorDash has a tie-up with Chase where credit card holders are given complimentary DashPasses for 2yrs and enjoy free delivery on most orders. (Loyalty members in last mile delivery companies tend to order at greater value and at higher frequency.) GoPuff has recently partnered with Uber where customers can order convenience products on the Uber app to be fulfilled by GoPuff. It provides GoPuff with an immediate large new customer base and increased revenue per new micro-fulfillment center. I am excited to see how this partnership will evolve.

In addition, many US last mile delivery apps have had to deal with hyper-competition particularly in food without the benefit of high population density (the likes seen in Asia) that helps in increasing order densities. The leaders (DoorDash, Uber Eats, Instacart) have thus learnt to optimize to the cent and have very strong execution capabilities. In fact DoorDash white-labels their fulfillment solutions where customers keep branding front and center, retain customer data but pay a fixed fee to DoorDash to deliver. In the case of GoPuff, RideOS will greatly enhance their ability to batch, route and deliver more efficiently.

Investors have so far been patient with these high growth, loss-making companies and that optimism needs to hold for future rounds to be accretive. While we do expect some level of blitzscaling, the other 2 largest competitors in the online convenience space — DoorDash and Uber — are public and have been demonstrating greater financial discipline in recent quarters. In 2Q21, we also started seeing a greater pass-through of increased driver costs (due to lower supply as US opens up) to the consumer. (GoPuff does not have surge pricing and has to absorb the higher driver costs.) These upcoming months will be a good litmus test of how demand and these gig business models hold up as an era of significant subsidies come to an end.