Gopuff is dead. Long live Gopuff!

March 19, 2023Posted inIndustry Deep Dive
Reading Time: 8 minutes

Gopuff has made billions of dollars go poof. What might come next?

Original version posted on December 8th, 2022 on Medium.

For the last 100 years, startups working in and around the world of convenience stores & rapid delivery have operated under one basic assumption.

Simply put, they have worked to make life easier & more convenient for the American people. And thus, they have believed that any startup that meaningfully makes your life easier or more convenient will, inevitably, be successful.

This mindset — this singular goal to remove frictions — has led us to great achievements in the space in the last 100 years: the 24/7 convenience store, food & grocery delivery, and even Amazon Go.

Today, however, this assumption is wrong.

Recent history has taught us that, in some cases, consumers may prefer options that require more work for them. Companies cannot and will not be inherently successful by breaking down barriers for consumers. Removing friction is necessary but not sufficient.

For example, customers may universally say they will use grocery delivery. The hidden surprise, however, may be that they would actually rather walk up and down the aisles. A non-obvious friction that a large group of consumers actually love.

Ultimately, the thing that consumers really want may not be the thing they tell you.

To understand the future of convenience — to really unpack consumer psychology and build the next-generation of startups — we have to look back. We have to contextualize and immerse ourselves in the past to build a path forward.

We’ll explore the history of startups in and around convenience stores, examine some of the key problems in the space, explore the companies on the bleeding edge of innovation, and discuss which models may be the next set of winners in this area.

Let’s dive in.

Definitions

When we talk about “convenience stores” and “convenience store startup attempts,” we use a really broad definition.

Included in this definition are what you would normally think of as a convenience store, with players such as 7-Eleven and Circle K. But there’s also other stuff here, such as:

We also include in this space companies that sell products to convenience stores. There’s a bunch here — some startups, some not — and lots that haven’t worked out. To name a couple:

And we also consider companies that work on speedy delivery of food / grocery / convenience store items. Notable companies include Gopuff, Gorillas, or REEF.

So there’s a lot of stuff in this space.

Now, let’s take a look back at the history of startup attempts in and around convenience stores to get a better perspective on where we’re at today.

History

Phase 1 (starting in 1927)
The traditional convenience store

With origins dating back to the old-fashioned American general store and the British village shop, the first American “convenience store” was founded in 1927. It would eventually be known as 7-Eleven, the largest convenience store chain in the world. One of 7-Eleven’s biggest modern competitors, Circle K, was later founded in 1951.

The 1960s and 1970s were foundational periods for the traditional convenience store. The first 24-hour convenience store opened in 1963, hailing as a haven for shift workers and partygoers. Today, roughly 90% of the 150,000 U.S. convenience stores are 24-hour. In the 1970s, convenience stores began to combine with gas stations. Now, most convenience stores are paired with gas stations.

Today, traditional convenience stores have been exploring several strategic paths, such as:

  1. Shifting to more ready-made food (e.g., 7-Eleven with its lab store, Casey’s with its in-store pizza parlor, Circle K with food trucks)
  2. Exploring delivery options, either by 1) doing delivery in-house, 2) outsourcing ordering + delivery to 3rd party delivery apps (DoorDash, UberEats), or 3) doing online ordering in-house and outsourcing delivery to 3rd party apps.

Phase 2 (starting in 1950s)
The elevated convenience store

As gas stations began to be combined with convenience stores, two models began to emerge from the 1950s until the end of the century.

First, newer convenience store chains arose that offered a more elevated experience, such as Sheetz (founded in 1952), QuikTrip (founded in 1958), and Wawa (founded in 1964). All three of these businesses are known for clean convenience stores and strong food offerings — Sheetz and Wawa actually started as foodservice companies.

Second, a new category of convenience stores emerged: the truck stop, which served the more specialized needs of truckers (e.g., diesel fuel, large fuel bays, showers). Pilot was founded in 1958, Love’s was founded in 1964, and TravelCenters of America was founded in 1972.

Phase 3 (starting in 1998)
Speed is king

Kozmo.com was a rapid grocery delivery startup founded in 1998 in New York City. They raised ~$250M during the dot-com boom as one of the first incarnations of delivery startups focused on speed in the United States. However, they learned the same lesson that every other rapid delivery provider has since. The economics are tough — order sizes have to be high to make the economics ultimately work — and when they’re not, it spells trouble. They eventually went bankrupt in 2001.

The Gopuff founders didn’t learn these lessons. Founded by college friends, Rafael Ilishayev and Yakir Gola, Gopuff delivered a variety of convenience items (snacks, alcohol, sodas) using local warehouses, with the promise of 30-minute delivery. However, inflation and a poor venture capital environment have shed light onto the economics of the business.

In 2022, Gopuff closed 76 warehouses, raised delivery fees, and then laid off 3% of employees in March, 10% in July, and then another 250 employees in October. Their valuation has reportedly shrunk by over 50%. This is the type of business that could have only been built in the frothy venture market of the last 10 years. The bell is tolling — they didn’t learn the lessons of their Kozmo.com brothers.

Another approach in this category that has seen recent attempts has been delivery apps focused for college students, similar to the start of Gopuff. While there have been some more novel approaches in this space, such as Jetpack with its delivery out of backpacks, most of the players look similar and have struggled to gain significant traction (Duffl, Goody, Snag, Handle). Again the history lesson of Kozmo.com is rearing its ugly head.

Phase 4 (starting in 2016)
Modern convenience

Now that the Gopuff bubble has popped and the economics of speedy delivery have come into question during a more financially tenuous time, other models have sprung up that offer more promise.

One model that we especially like at Neighborhood Studios is startups developing delivery options using existing infrastructure. Some of our favorites include:

  1. Lula is working on a business-in-a-box solution for convenience stores to develop online menus and handle delivery orders. They have a partnership with Uber Eats to outsource the actual delivery itself.
  2. SWIPEBY is working on developing modern pickup software, both for restaurants and convenience stores.
  3. REEF, a Miami-based Unicorn and one of our favorite startups at the studio, is using unused parking lot space to build local delivery hubs. While they’re still building their own infrastructure, it’s in a much more cost effective way.
  4. Foxtrot has raised $167M for their hybrid upscale convenience store & warehouse for delivery. They’re somewhat building their own infrastructure, but in a smarter way by pairing it with profitable high-end convenience stores.
  5. Vroom Delivery has raised from NFX as the e-commerce solution for the convenience store industry. This one is still early.

Another model we have seen in the phase of “modern convenience” has been the trend toward autonomous convenience, both via 1) upscale vending machines and 2) fully autonomous convenience stores.

  1. Upscale vending machines: Some of the cooler and more notable attempts here are Farmer’s Fridge ($60M raised), Stockwell ($10M raised), and PopCom ($4.5M raised). Similar attempts for offices have also gained traction, such as NewStand and Garten.
  2. Autonomous convenience stores: Most venture startup attempts focused on actually building autonomous convenience stores have received little traction, except in Asia. The most interesting attempts in this space in the U.S. / Europe instead focus on software to turn existing retail locations into autonomous stores. Some of the bigger players in this space include Standard Cognition ($240M raised), Trigo ($200M raised), AiFi ($80M raised), Mashgin ($74M raised), Focal Systems ($42M raised), Accel Robotics ($35M raised), and Sensei ($6M raised).

Texture of the problem

There are several components of the problem that convenience store players face:

  • Shifting consumer food preferences: Younger consumers in the U.S. are choosing healthier options — taking them away from the traditional snacks / low quality food that convenience stores typically offer. Convenience stores must either adjust — as most large chains are trying — or lose this customer group.
  • Economics of (quick) delivery: As much as people may want rapid delivery, they haven’t shown a strong willingness to pay for it. Plus, on the business side, super quick delivery makes it a lot harder to batch orders, driving delivery costs super high. These businesses might theoretically be profitable at scale, but it’s a slog to get there.
  • Impulse purchases: A high percent of convenience store purchases are impulse purchases, rather than planned out purchases. Startups looking to disrupt convenience store pickup / delivery with online orders may have to come to terms with lower basket sizes, or find a way around this.
  • Cash cows on the decline: Gasoline and cigarettes have been cash cows for convenience stores for the last few decades. Adult per capita cigarette consumption has been steadily declining since 1980 and electric vehicles will have an effect on gasoline sales. Convenience stores owners are aggressively trying to find new replacements.
  • A blank technology slate: Technology has been impacting adjacent spaces (e.g. restaurants) for decades, but has yet to have much of an impact on convenience stores. As a result, this area is a much more open opportunity to build technology from the ground up.
  • Wholesale pricing power: Some smaller convenience stores don’t have much pricing power over large distributors such as UNFI or Sysco. They sell them wholesale goods not at wholesale prices (typically lower), but at above typical retail prices. They have a tight grip over prices / delivery schedules for smaller convenience stores.

Novelty

At Neighborhood Studios, we celebrate novel ideas to tackle these problems in all their forms. Here are the recent attempts that we find particularly novel.

  • Jetpack (founded in 2017): The first version of Jetpack was extremely novel. They offered on-demand on-campus delivery for college students, with the deliverers (“Jetpackers”) delivering items out of their backpacks. Like a ton of walking convenience stores all over campus. Since then, Jetpack has pivoted and rebranded to focus on apartment software.
  • Robomart and The Moby Mart (both founded in 2017): Forget delivery from convenience stores. What about delivery OF convenience stores? Robomart and The Moby Mart (now closed) are convenience store delivery concepts where the entire convenience store physically comes to you.
  • Upside (founded in 2016): Upside has raised $265M to help brands offer discounts at convenience stores (not easy before). Helpful to check out if you’re looking to save on gas.
  • REEF (founded in 2013): REEF, with $1.5B in funding in the bank, utilizes spare space such as parking lots to help restaurants and hospitality companies with micro-logistics.
  • Standard Cognition, Trigo, and AiFi (founded between 2016–2018): These companies develop software to help Amazon Go-ify your existing retail space. Their funding? Strong — $240M, $200M, and $80M, respectively.
  • Supply Drop (founded in 2019): Supply Drop offers delivery of everyday essentials (think toilet paper, trash bags) on a subscription plan, so you don’t have to think about re-ordering.
  • Focal Systems and Gimme (founded in 2015, 2014): These companies offer inventory management solutions through computer vision and AI.

So what’s next for convenience stores?

At Neighborhood Studios, we are always looking for what’s next in various hyperlocal spaces. Here are the parts of the problem we think are promising to explore:

  • Gas station 2.0: With the proliferation of electric vehicles, is it time to rethink the typical convenience store + gas station model? Could there be convenience store concepts paired with electric vehicle supercharging stations?
  • Healthy grab-and-go: Top convenience store chains (and consumers) are moving towards healthier food alternatives, yet smaller convenience store chains struggle with ready-to-eat food aside from hot dogs rolling on a grill. Could there be an easy business in a box that offers grab-and-go healthy meals for convenience stores?
  • Hybrid autonomy: Bite Ninja offers restaurants a “cloud labor” workforce that can take drive thru orders remotely via a video feed. Could a semi-autonomous convenience store be the right business model, rather than a fully autonomous solution?
  • Pickup for convenience stores: SWIPEBY offers pickup options for convenience stores. Are there any next-generation order-ahead solutions?
  • Local subscriptions: Supply Drop is doing subscription delivery of every essentials. Could there be a similar thing but fulfilled by convenience stores?
  • “Reverse franchising” for convenience stores: Slice Pizza and Broadlume offer a full stack suite of products (apps, branding, website, analytics tools) for their respective industries. We call it “reverse franchising”. Could this model be done for convenience stores?
Last updated on March 26, 2023